UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 40-F

 

or

For the fiscal year ended December 31, 2018

Commission File Number 001-37403

 

The Stars Group Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

200 Bay Street, South Tower, Suite 3205

Toronto, Ontario, Canada

M5J 2J3

+1 (437) 371-5742

(Address and telephone number of Registrant’s principal executive offices)

Stars Group Services USA Corporation

DCOTA Office Center

1855 Griffin Road, Suite C450

Dania Beach, FL 33004

+1 (437) 371-5742

(Name, address (including zip code) and telephone number (including area code)

of agent for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

For annual reports, indicate by check mark the information filed with this Form:

 

 

Indicate the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of the close of the period covered by this annual report.

The Registrant had 273,177,244 Common Shares outstanding as at December 31, 2018.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

Yes  ☒    No  ☐

 

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Indicate by check mark whether the Registrant is an emerging growth company, as defined in Rule 12b-2 of the Exchange Act. Emerging Growth Company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

 

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Cautionary Statement Regarding Forward-Looking Statements

Certain information and statements in this Annual Report on Form 40-F and the exhibits attached hereto (this “Annual Report”) of The Stars Group Inc. (the “Registrant”) may constitute forward-looking information and statements (collectively, “forward-looking statements”) within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws. Forward-looking statements are subject to risks, uncertainties and contingencies that could cause actual results to differ materially from those expressed or implied. Investors are cautioned not to put undue reliance on forward-looking statements. Applicable risks and uncertainties include, but are not limited to, those identified under the heading “Risk Factors and Uncertainties” in the Registrant’s Annual Information Form for the year ended December 31, 2018 (the “2018 AIF”) and “Risk Factors and Uncertainties” and “Non-IFRS Measures, Key Metrics and Other Data” in the Registrant’s Management’s Discussion & Analysis for the year ended December 31, 2018 (the “2018 MD&A”), attached as Exhibits 99.1 and 99.3 to this Annual Report, respectively, and in other filings that the Registrant has made and may make with applicable securities authorities in the future. Additionally, the safe harbor provided in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, applies to forward looking information provided pursuant to “Off Balance Sheet Arrangements and Related Party Transactions” and “Tabular Disclosure of Contractual Obligations” in this Annual Report. Please also see “Caution Regarding Forward-Looking Statements” in each of the 2018 AIF and 2018 MD&A. Each forward-looking statement speaks only as of the date hereof, and the Registrant undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

Disclosure Controls and Procedures

The disclosure provided under the headings “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Disclosure Controls and Procedures” and “—Limitations on Effectiveness of DC&P and ICFR” included in the 2018 MD&A is incorporated by reference herein.

Management’s Annual Report on Internal Control Over Financial Reporting

The disclosure provided under the headings “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Management’s Annual Report on Internal Control Over Financial Reporting”, “—Changes to Internal Control Over Financial Reporting” and “—Limitations on Effectiveness of DC&P and ICFR” included in the 2018 MD&A is incorporated by reference herein.

Attestation Report of the Registered Public Accounting Firm

The effectiveness of the Registrant’s internal control over financial reporting has been audited by its independent external auditor, Deloitte LLP, London, United Kingdom (“Deloitte”), the registered public accounting firm that also audited the Registrant’s audited consolidated financial statements for the year ended December 31, 2018, attached as Exhibit 99.2 to this Annual Report (the “2018 Financial Statements”). Deloitte’s attestation report on the Registrant’s internal control over financial reporting as of December 31, 2018 is included in the 2018 Financial Statements and is incorporated by reference herein.

Changes in Internal Control over Financial Reporting

The disclosure provided under the heading “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Changes to Internal Control Over Financial Reporting” included in the 2018 MD&A is incorporated by reference herein.

Identification of the Audit Committee and Audit Committee Financial Expert

The disclosure regarding the Registrant’s audit committee and audit committee financial expert provided under the heading “Directors and Officers—Audit Committee” included in the 2018 AIF is incorporated by reference herein.

Code of Ethics

The Registrant has adopted a “code of ethics” (as defined in paragraph (9) of General Instruction B to Form 40-F), known as its Code of Business Conduct (the “Code”), that applies to all directors, officers and employees, including its principal executive officer, principal financial and accounting officer, controller and persons performing similar functions, and has posted a copy of the same to its website at www.starsgroup.com. See also the 2018 AIF under the heading “Directors and Officers—Ethical Business Conduct”.

 

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To the extent the Registrant is required by paragraph (9) of General Instruction B to Form 40-F to disclose any amendments to or waivers of the Code, it may do so by providing the applicable information on its website at www.starsgroup.com within five business days following the date of the amendment or waiver, as permitted by the notes to paragraph (9) of General Instruction B to Form 40-F.

 

Principal Accountant Fees and Services

The disclosure regarding audit, audit-related, tax and all other fees billed to the Registrant in each of the last two fiscal years by the Registrant’s principal accountant and certain audit committee pre-approval policies and procedures provided under the headings “Directors and Officers—External Auditor Service Fees” and “Directors and Officers—Audit Committee—Pre-approval Policies and Procedures”, respectively, included in the 2018 AIF are incorporated by reference herein.

Off Balance Sheet Arrangements and Related Party Transactions

The disclosure provided under the heading “Off Balance Sheet Arrangements and Related Party Transactions” included in the 2018 MD&A is incorporated by reference herein.

Tabular Disclosure of Contractual Obligations

The tabular and certain other disclosure regarding the Registrant’s contractual obligations as of December 31, 2018 provided under the heading “Liquidity and Capital Resources—Long-Term Debt” included in the 2018 MD&A is incorporated by reference herein. For a discussion of the Registrant’s other contractual obligations, see the 2018 MD&A.

Corporate Governance Practices

The Registrant believes that its corporate governance practices are consistent in all material respects with the applicable requirements of the corporate governance guidelines established by the Canadian Securities Administrators, the applicable corporate governance rules of the Toronto Stock Exchange and the NASDAQ Stock Market LLC (the “NASDAQ Rules”) and the applicable rules and regulations of the SEC.  Disclosure of the NASDAQ Rules that the Registrant does not follow and a brief statement of the home country practices it follows in lieu of such NASDAQ Rules, in each case as permitted thereunder, are available on the Registrant’s website at www.starsgroup.com.

 

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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.  Undertaking

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

B.  Consent to Service of Process

A Form F-X signed by the Registrant and its agent for service of process was previously filed with the SEC on May 26, 2015, and amended on January 20, 2017, August 11, 2017 and December 21, 2018, in connection with the Registrant’s registration statement on Form 40-F with respect to its Common Shares.

 

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.

 

 

 

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EXHIBIT INDEX

 

 

 

 

 

Exhibit 99.1

 

 

 

 

 

 

 

ANNUAL INFORMATION FORM

FOR THE YEAR ENDED

DECEMBER 31, 2018

March 6, 2019

 

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TABLE OF CONTENTS

 

 

 

 

 

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Explanatory Notes

The information contained in this annual information form is as of December 31, 2018 unless otherwise indicated, and unless the context otherwise requires, references to “The Stars Group”, the “Corporation”, “it”, “its” or similar expressions refer to The Stars Group Inc. and its consolidated subsidiaries, or any of them. This annual information form should be read in conjunction with the information contained in The Stars Group’s audited consolidated financial statements and related notes for the year ended December 31, 2018 (the “2018 Annual Financial Statements”) and the Management’s Discussion and Analysis thereon (the “2018 Annual MD&A”).

All references in this annual information form to “dollars”, “US$” and “$” are to U.S. dollars, “CDN$” are to Canadian dollars, “€” are to Euros, “£” are to British pound sterling and “AUD” or “AUD$” are to Australian dollars. The Corporation has certain proprietary rights to certain company names, product names, trade names and trademarks used in this annual information form that are important to its business, including The Stars Group, PokerStars, Sky Bet, BetEasy and those brands listed under the heading “Business of the Corporation—Overview”. The Corporation has omitted the registered trademark (®) and trademark (™) symbols and any other related symbols for such trademarks and all related trademarks, including those related to specific products or services, when used in this annual information form. All other names and trademarks are the property of their respective owners. For purposes of this annual information form, unless context requires otherwise or otherwise defined, all references in this annual information form to “gaming” include all online gaming (e.g., poker, casino and bingo) and betting. As at the date of this annual information form, the Corporation has four major lines of operations: real-money online poker, real-money online betting (sometimes referred to herein as sportsbook or sports betting), real-money online casino and, where applicable, bingo (sometimes referred to collectively as casino and/or gaming), and other gaming-related revenues, including revenues from social and play-money gaming, live poker events, branded poker rooms, Oddschecker and other nominal sources of revenue.

Unless otherwise indicated, information contained in this annual information form concerning The Stars Group’s industry and the markets in which it operates, including its perceived trends and market position, opportunity and size, is based on information from various sources, on The Stars Group’s and its management’s assumptions and on its knowledge of the markets for its products and services. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. The Stars Group has not independently verified any third-party information and cannot assure you of its accuracy or information. While The Stars Group believes the industry and market information included in this annual information form is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of The Stars Group’s future performance and that of the industry in which it operates are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under the caption “Risk Factors and Uncertainties” in this annual information form. These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by The Stars Group.

Caution Regarding Forward-Looking Statements

This annual information form contains certain forward-looking information and statements (collectively, “forward-looking statements”) within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including statements relating to certain expectations, projections, growth plans, new or improved product introductions, market expansion efforts, and other information related to The Stars Group’s business strategy and future plans. Forward-looking statements can, but may not always, be identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “imply”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words and expressions and by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect The Stars Group, its subsidiaries and their respective customers and industries. Although the Corporation and management believe that the expectations reflected in such forward-looking statements are reasonable and are based on reasonable assumptions and estimates as of the date hereof, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate.  Forward-looking statements are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statements.

Actual results and developments are likely to differ, and may differ materially, from those anticipated by The Stars Group and expressed or implied by the forward-looking statements contained in this annual information form. Such statements are based on a number of assumptions and risks which may prove to be incorrect, including assumptions about:

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There can be no assurance that forward-looking statements will prove to be accurate as many factors could cause the Corporation’s actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressly or impliedly expected or estimated in such statements, including the factors discussed under “Risk Factors and Uncertainties”.  Shareholders and investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. Although the Corporation cautions that the foregoing list of risk factors, as well as those risk factors presented under the heading “Risk Factors and Uncertainties” and elsewhere in this annual information form and in the 2018 Annual MD&A, including under the headings “Caution Regarding Forward-Looking Statements”, “Non-IFRS Measures, Key Metrics and Other Data” and “Risk Factors and Uncertainties” therein, are not exhaustive, shareholders and investors should carefully consider them and the uncertainties they represent and the risks they entail. The forward-looking statements contained in this annual information form are expressly qualified by this cautionary statement. Unless otherwise indicated by the Corporation, forward-looking statements in this annual information form describe The Stars Group’s expectations as of March 6, 2019 and, accordingly, are subject to change after such date. The Corporation does not undertake to update or revise any forward-looking statements for any reason, except as required by applicable securities laws.

Corporate Structure

Name, Address and Jurisdiction of Incorporation

The Stars Group Inc. is a corporation governed by the Business Corporations Act (Ontario) (the “OBCA”). It was originally incorporated under Part IA of the Companies Act (Québec) on January 30, 2004 under the name 9138‑5666 Québec Inc., changed its name to Gametronix Systems Inc. on May 14, 2007, Amaya Gaming Group Inc. on November 2, 2007, Amaya Inc. on November 28, 2014 and The Stars Group Inc. on August 1, 2017, when it filed its current articles of continuance and was continued under the OBCA. Since its incorporation, the Corporation has amended its articles on numerous occasions, including to change its name as noted above, and on (i) May 14, 2007 to subdivide its Class A shares, (ii) May 11, 2010 to (A) create an unlimited number of common shares (the “Common Shares”) and an unlimited number of preferred shares, (B) re-designate Class A shares as Common Shares on the basis of 1.7756 Common Shares for each Class A share, (C) re‑designate Class G shares as Common Shares on the basis of 100 Common Shares for each Class G share, and (D) eliminate all classes of shares except for Common Shares, (iii) July 30, 2014 to replace the then current class of authorized preferred shares with a new class of non-voting convertible preferred shares, called Class A Convertible Preferred Shares (the “Preferred Shares”), none of which are outstanding as of the date hereof, and (iv) November 28, 2014 to add certain provisions affecting the Common Shares to facilitate the Corporation’s compliance with applicable gaming regulations.

The Corporation’s head and registered office address is 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario M5J 2J3, Canada, and the Corporation’s telephone number is +1 (437) 371-5742. The Corporation’s website address is www.starsgroup.com. The

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information contained on, or that can be accessed through, the Corporation’s website is neither part of nor incorporated by reference into this annual information form. The Corporation has included its website address in this annual information form solely as an inactive textual reference.

Intercorporate Relationships

The activities of The Stars Group are conducted either directly or through its subsidiaries. The table below lists the principal subsidiaries of The Stars Group as at December 31, 2018, as well as their jurisdiction of organization. Each of the principal subsidiaries is wholly owned, directly or indirectly, by The Stars Group.

 

The Stars Group has other subsidiaries, but the assets and revenues of such subsidiaries individually did not exceed 10%, and in the aggregate did not exceed 20%, of The Stars Group’s consolidated assets or consolidated revenues as at and for the year ended December 31, 2018.

Business of the Corporation

Overview

The Stars Group is a global leader in the online and mobile gaming and interactive entertainment industries, entertaining millions of customers across its online real- and play-money poker, gaming and betting product offerings. The Stars Group’s primary business and source of revenue is its online gaming and betting business. This currently consists of the operations of the Stars Interactive Group (as defined below), which it acquired in August 2014, the operations of Sky Betting & Gaming, or SBG (as defined below), which it acquired in July 2018, and the operations of BetEasy (as defined below), which it acquired an 80% equity interest in between February 2018 and April 2018. Stars Interactive Group is headquartered in the Isle of Man and operates globally with certain exceptions; SBG is headquartered in and primarily operates in the United Kingdom; and BetEasy is headquartered in and primarily operates in Australia.

Through these businesses, The Stars Group owns and operates gaming and related interactive entertainment businesses, such as online real-money poker, casino and betting (also sometimes known as sportsbook) and play-money poker, casino and sports prediction games, which are delivered through mobile, including iOS and Android, web and desktop applications. The Stars Group offers these products and others under several ultimately owned or licensed gaming and related consumer businesses and brands, including, among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, BetEasy, Sky Bet, Sky Vegas, Sky Casino, Sky Bingo, Sky Poker, and Oddschecker, as well as live poker tour and events brands, including the PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK. The Stars Group is one of the world’s most licensed online gaming operators with its subsidiaries collectively holding licenses or approvals in 21 jurisdictions throughout the world, including in Europe, Australia, and the Americas. The Stars Group’s vision is to become the world’s favorite iGaming destination and its mission is to provide its customers with winning moments.

The Stars Group has a customer-centric focus, which extends into its rewards and loyalty programs and initiatives. Understanding how to reward loyal customers and creating appropriate product offerings is critical to ensure a healthy product ecosystem. The Stars Group has made, and may continue to make, changes to its pricing and incentives to ensure that they align with its objectives to reward customers for loyalty and behavior that is positive to the overall customer experience and the particular product’s ecosystem. An example of The Stars Group’s innovative approach to player loyalty and rewards is the launch in July 2017 of its Stars Rewards program, which is an integrated cross vertical loyalty program focused on improving customer engagement, retention and the player experience.

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The Stars Group’s growth and innovation plans in its online gaming and betting business are supported by its technology strategy. Management believes that the proprietary technology of The Stars Group is highly scalable, customizable and resilient, and employs industry leading security and data integrity practices. Most elements of The Stars Group’s betting and gaming technology are proprietary and controlled in-house, with selected use of leading third-party technology providers for certain elements. The Stars Group’s robust and scalable proprietary technological ecosystem, such as its player account management system and suite of software products, allows it to operates in dozens of countries around the world, supporting approximately two dozen languages and five currencies. The Stars Group has invested significantly in its technology infrastructure since inception to provide a positive, best-in-class experience for its customers. This investment is focused on providing appealing product offerings to its customers, both in terms of the quality of the offerings and the user experience, and also with respect to data security and integrity across its offerings. The Stars Group dedicates nearly all its R&D investments to its online gaming business, which seeks to provide broad market applications for product offerings derived from its technology base, and it expects to continue investing significantly in R&D in an effort to constantly improve customer experience and engagement. To support its strong reputation for security and integrity, The Stars Group employs what it believes to be industry leading practices and systems with respect to various aspects of its technology infrastructure, including information and payment security, game integrity, customer fund protection, marketing and promotion, customer support, responsible gaming, and loyalty programs, rebates and rewards (i.e., incentives).

Online Poker

The Stars Group is the global leader in the online poker market and currently estimates that its PokerStars brand holds a significant majority of the market share of real-money poker player liquidity, or the volume of real-money online poker players, in regions where it offers real-money online poker and is among the leaders in play-money online poker player liquidity. While The Stars Group operates certain distinct poker brands, including PokerStars, Full Tilt and Sky Poker, the vast majority of its poker customers currently play on the same PokerStars platform. This means that a player using the Full Tilt client could be playing against a player using the PokerStars client. This improves liquidity and the range of games available, thus benefiting players, as well as having financial and strategic benefits for The Stars Group by increasing the scalability of its business model and allowing it to focus R&D and operational resources primarily on its PokerStars platform.

The Stars Group’s large poker customer base gives it unique access to customer data and insight (e.g., gameplay, social interactions and feedback), which when combined with its scalable proprietary technology platform, guides the creation of new and innovative content, features, games and game variants. For example, following the launches of Zoom in 2012, Spin & Go in 2014, Knockout Poker in 2016 and PokerStars VR in 2018, The Stars Group continues to focus on developing new and innovative poker products and variants to attract new audiences. The Stars Group believes that such innovation helps to attract new customers (including those who may not have previously considered playing real-money poker games, such as play-money or social players and the video gaming community), reactivate inactive players with exciting new games, and continuously engage and retain existing active customers. In addition, since the beginning of 2016, The Stars Group has introduced certain improvements in the poker ecosystem to benefit and attract high-value, net-depositing customers (primarily recreational players) and reduce incentives for high-volume, net-withdrawing customers (primarily professional or semi-professional players). These changes, among others, have the effect of balancing the poker ecosystem and broadening the appeal of The Stars Group’s poker offerings by creating more winning moments for its customers.

The Stars Group is pursuing growth opportunities in poker in existing and new markets, including through the innovation of new product features and enhancements, geographic expansion, improvements to the poker ecosystem and increased marketing campaigns in 2019.

PokerStars

PokerStars is The Stars Group’s flagship poker brand. Launched in 2001, it is the world’s largest online and mobile poker site and together with its related brands (including Full Tilt) have millions of registered customers globally. PokerStars’ online poker product offerings are currently varied among buy-in and limit amounts and types, as well as among numerous poker game variants (e.g., Texas Hold-‘Em, Omaha, Stud, Draw and mixed games). The wide variety of game types and stake sizes is supported by its leading liquidity and provides what management believes is a superior offering to its customers, allowing them to play their preferred game type at their preferred staking level. PokerStars also offers play-money and social poker, which are designed to create social interaction, engagement and competition, and allow customers to learn to play poker without the need to spend money.

The Stars Group believes that PokerStars is home to some of the largest online poker events and the biggest weekly tournaments, both in terms of dollar amount and number of players, and has greater player liquidity and offers more daily tournaments than any other online poker site. PokerStars has set many records, including the largest number of players in an online poker tournament, the largest prize pool awarded for a series of online tournaments and the largest ever single online tournament prize. PokerStars’ mobile applications are currently among the most popular real-money poker applications on the iOS and Android platforms according to App Annie and Apple’s iTunes App Store and based on the number of downloads and overall customer ratings.

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Other Online Poker Brands

The Stars Group also offers online poker through other brands such as Full Tilt and Sky Poker. Full Tilt launched in 2004 and quickly became a popular poker website for delivering what the Corporation believes was innovative and realistic online poker game play, which was based on input from some of the world’s leading poker players. The Stars Group migrated Full Tilt onto the PokerStars platform in May 2016. Similar to PokerStars, under the Full Tilt brand customers can play both ring games, including traditional games and its fast-fold variants, such as Rush, and tournament-style games, including scheduled multi-table games and sit and go variants, such as Jackpot Sit & Go. Sky Poker is one of the UK’s leading online poker rooms, with a mobile-friendly interface that enables an enriched experience that includes chat, tournaments and poker in contemporary formats that are played in Pounds Sterling.

Online Casino and Gaming

The Stars Group has leading online casino and gaming offerings, including PokerStars Casino, Sky Casino, Sky Vegas and Sky Bingo. The Stars Group first launched online casino games in January 2014, and has quickly grown to become one of the leading operators in the world. In 2018, a subsidiary of The Stars Group acquired SBG, which expanded its online casino and gaming offerings to include additional products and brands, such as including Sky Vegas, Sky Casino and Sky Bingo.

The Stars Group believes there are significant opportunities for further growth and diversification of revenues in the online casino and gaming vertical, including through direct customer acquisition, leveraging its brand awareness and cross-selling its new and existing product offerings to its customer base. The Stars Group continues to improve its online casino and gaming product offerings, expand the range of game content and enter into new markets. It also continues to invest in product enhancements, improving the user experience of its websites and mobile applications. These improvements are accompanied by external marketing campaigns for certain of The Stars Group’s brands to drive direct customer acquisition, improve cross-sell to existing customers, and expand the geographic reach of its offerings. In addition, The Stars Group currently intends to expand upon and explore other growth opportunities, including expanding upon its current social gaming offering and pursuing other interactive entertainment opportunities.

Casino and Gaming Brands

In January 2014, The Stars Group first began offering a variety of online play-money table and casino games through its Full Tilt brand, including a range of blackjack and roulette variations, online slots and live dealer games. In November 2014, The Stars Group introduced play- and real-money online casino games under the PokerStars brand to players in eligible markets, and in 2016 it introduced the PokerStars Casino brand, with its own standalone mobile application. PokerStars Casino currently offers a full suite of casino table games, blackjack, roulette, live dealer games and slot machines. Beginning in 2017, PokerStars Casino started production of in-house slot games, and it has and intends to continue to accelerate this in-house production. These in-house slot games are owned by The Stars Group and therefore are not subject to third-party revenue share obligations and other similar costs. A number of internal and external content studios are now producing bespoke exclusive slot games content for PokerStars Casino, which are integrated via The Stars Group’s Games Developer Kit (“GDK”), a tool set and application programming interface. Recently, Core Gaming, SBG’s wholly owned content development house, began delivering games to PokerStars Casino via GDK. In 2018, PokerStars Casino launched more than 350 new slot games from leading studios, and it expects to add a comparable amount in 2019, broadening the range of top-tier content available to its customers, and supplementing this with proprietary and exclusive games.

Through organic growth and acquisitions, The Stars Group has grown quickly to become one of the leading online casino operators. It estimates that in 2018 its combined online casino, including PokerStars Casino, was among the world’s largest and fastest growing online casinos and currently has one of the largest active player bases among its competitors. The main driver of this growth to date has been cross-selling to its existing poker customer base, with a single wallet and easy access to casino games, which are integrated within the poker interface. Currently approximately three quarters of The Stars Group’s aggregate real-money active unique poker customers are located in jurisdictions where its online casino offerings are available (primarily in Europe).

Sky Vegas, SBG’s flagship casino and gaming brand, was the largest casino brand in the UK by active customers for the fiscal year ending December 31, 2018. The Stars Group believes that exclusive content and effective promotions underpin Sky Vegas’ appeal, with 37 new exclusive games launched during 2018. Sky Casino, which primarily focuses on casino table games, has grown rapidly since its launch in August 2014. It is currently the third largest casino brand in the UK by active customers, with the majority of its revenues generated from mobile users. Sky Casino features what management believes to be a cutting-edge player interface, featuring a modern and stylish live dealer studio and a high-performance casino. Sky Bingo is one of the leading UK-facing online bingo operators.  It aims to provide the exciting and social feel of bingo and includes a chat function and competitions. SBG provides its customers with a seamless experience through its integrated account and wallet, and a single sign-on between its different mobile apps, including across its gaming, betting and poker offerings.

The SBG Acquisition (as defined below) has resulted in the integration of additional casino and gaming offerings into The Stars Group’s casino and gaming offerings, such as top performing slots, additional in-house developed games and online bingo. The Stars Group currently expects to continue product enhancements, such as enhancing its web casino and mobile applications and adding to its

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portfolio of unique and bespoke promotion tools. The Stars Group believes these promotional tools will enable improved promotions and loyalty, with ongoing investment in its Stars Rewards cross-vertical loyalty program and its VIP treatment program and the overall customer experience.

The Stars Group also offers play-money and social casino through its desktop client and mobile applications, including through PokerStars, Jackpot Poker by PokerStars and Casino Rush by PokerStars, which are available on various online, mobile, social and television platforms and applications, such as Facebook, Apple’s iOS and Apple TV, Google’s Android and Amazon’s Kindle. Play-money and social casino involve playing casino games for virtual currency through free websites, social networks, or other mobile or television applications. These offerings help drive brand awareness, promote the enjoyment of such games in a safe environment, and provide The Stars Group with additional customer data and insight, which it can then use to refine the user experience to further enhance players’ enjoyment.

Online Betting

The Stars Group is also a global leader in the online betting market, providing its betting offerings through Sky Bet, BetStars and BetEasy. Online betting is available to these customers in a seamless fashion, including, where applicable, through a single wallet and customer account. The Stars Group initially launched limited online betting during 2015 and later introduced its BetStars brand in December 2015. In 2018, The Stars Group expanded its online betting offerings through acquisitions to include Sky Bet, a leading online betting brand focused primarily on the UK, the world’s largest locally regulated online gambling market, and BetEasy, also a leading online betting brand focused primarily on Australia, the world’s second largest locally regulated online gambling market. The Stars Group believes that its betting offerings will attract new customers, through both cross-selling PokerStars customers to its betting brands, and directly through external marketing.

Through its betting brands, as applicable, The Stars Group offers a range of betting options such as pre-match and in-play odds across dozens of sports, including soccer, football, tennis, basketball, horseracing, golf, rugby and greyhound racing, as well as specialty offerings such as eSports, poker, politics, and TV and film. Its offerings also feature a range of in-play betting options (where permitted) and exclusive offers and promotions. Certain of The Stars Group’s offerings include accumulator bets, or parlays, which are particularly popular as customers can add together multiple different outcomes to increase the potential winnings for a given wager. Sky Bet features RequestABet, a particularly popular accumulator that it pioneered where customers request their own combination of items. To expand its offering in the future, The Stars Group intends to introduce innovative new betting products on its platforms to distinguish its brands from competitors. For example, BetStars introduced the Spin & Bet product in January 2016, which provides customers with the opportunity to potentially enhance their odds and potential pay-out. The Stars Group is also currently developing a proprietary global betting and trading platform to consolidate what it believes to be the best betting capabilities and features from Sky Bet, BetStars and BetEasy. The Stars Group believes that this global betting and trading platform will enable it to deliver faster product innovation, as well as leverage economies of scale in the business.

In addition to enhanced product features, a broader range of betting options and improved functionality, The Stars Group intends to expand into certain additional jurisdictions, including the United States, where in 2018 it launched its first sportsbook in New Jersey under the BetStars brand. The Stars Group also intends to continue focusing on increasing its cross-sell to poker players and developing sportsbook as a strong customer acquisition channel by, among other things, improving the localization of its offering in certain European markets, improving the user experience, closing product gaps, enhancing its mobile applications, increasing marketing initiatives and utilizing unique promotional programs.

Sky Bet

SBG’s betting brand, Sky Bet, and is one of the UK’s largest online betting operators by number of active customers. It offers a full range of pre-match and in-play odds in a wide range of markets, including soccer, horseracing, greyhound racing, golf, cricket, tennis, rugby, politics and TV and film. Sky Bet focuses on low-spending entertainment, with a mass-market customer base. Sky Bet features some of the UK’s most popular free-to-play sports games such as Soccer Saturday Super 6, where users predict the score of six selected soccer matches for a change to win up to £1 million, Sky Sports Fantasy Football, Sky Sports Fantasy Six-A-Side and ITV Pick 7. Through free-to-play games, its sponsorship of the English Football League and close links to Sky Sports, The Stars Group believes that Sky Bet has a leading position in the UK betting market. With a single wallet across the Sky Bet and other SBG brands, The Stars Group is able to use large data set computational analysis and data science (“big data”) and personalized offers to keep customers engaged across product verticals.

BetStars

The Stars Group introduced its BetStars brand in December 2015. This emerging offering has seen strong growth and focuses primarily on markets within the European Union. BetStars is a multilingual and multicurrency offering, supporting nine languages and four different currencies. It offers customers access to a full range of pre-match and in-play odds on a wide range of betting categories or sporting events (also known as markets). BetStars offers odds on both traditional betting sports such as soccer, tennis, horse racing

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and certain U.S. sports, as well as less traditional betting sports that are increasing in popularity throughout Europe such as handball, volleyball, futsal and e-sports.

BetEasy

BetEasy is based and primarily operates in Australia, the world’s second largest locally regulated online gambling market. As a leader in online and mobile wagering in Australia, BetEasy offers its customers a wide range of betting options across thoroughbred, greyhound and harness racing as well as sporting competitions, including the Australian Football League, National Rugby League and overseas competitions such as the National Basketball Association and English Premier League. It offers customers what management believes to be innovative and exciting promotions, which are increasingly being personalized to meet individual customers’ needs, and is the only corporate bookmarker to provide its customers with access to the popular Sky Racing channels.

The BetEasy platform is proprietary, cloud-based, reliable and highly scalable, which BetEasy believes is a competitive advantage over other online gaming operators in the Australian market. Its mobile-first strategy offers customers an easy-to-use, engaging and exciting betting experience on its mobile app.

The current BetEasy brand was launched in August 2018 following BetEasy’s acquisition of William Hill Australia. Shortly after that acquisition, BetEasy successfully migrated the customers of William Hill Australia onto its platform. BetEasy is the official wagering partner of the Australian Football League, premier wagering partner of thoroughbred broadcaster Racing.com and is a founding member of Responsible Wagering Australia, which advocates for enhanced consumer protection and sporting integrity outcomes in the Australian wagering industry.

Other Gaming-Related Offerings – Oddschecker

The Stars Group offers other gaming-related offerings such as Oddschecker, the UK’s leading odds comparison website. Established in 1999, Oddschecker provides its customers with easy access to some of the best odds in the market, as well as tips and other information. Oddschecker operates websites in the UK, Ireland, Italy, Germany, Australia, Denmark and Spain.

Oddschecker provides new customer leads, brand exposure and returning traffic to certain betting operators, including Sky Bet, and offers users a full range of information, news and odds to help with betting and allows those users to easily access that information on SBG’s platform to place bets. Oddschecker also provides an app called “BetHub”, which allows users to place bets with different bookmakers directly from within the app. It also allows users to monitor various betting accounts, deposit and withdraw funds, and monitor prices and offers. Oddschecker also has another app, “Oddschecker Connect”, which allows the distribution of aggregated services (odds, betting, data) to third parties’ content.

Revenue Model

The Stars Group’s revenue model for its core product offerings is based primarily on two main offerings, real-money games and play-money games. Nearly all of The Stars Group’s revenues during the year-ended December 31, 2018 were, and it expects its revenues to continue to be, generated by its real-money online gaming offerings. As a result of the SBG Acquisition and Australian Acquisitions (as defined below, and collectively, the “Acquisitions”), on a proforma basis assuming that The Stars Group owned SBG and BetEasy since January 1, 2018 (but excluding William Hill Australia before it was acquired in April 2018), during the year ended December 31, 2018, The Stars Group’s consolidated revenues were generated fairly evenly among its real-money online poker, betting and gaming (casino and bingo) offerings. These revenues were derived entirely by The Stars Group’s subsidiaries and affiliates based outside of Canada and predominantly from customers based in the European Union and Australia. For additional information regarding The Stars Group’s revenues, see the 2018 Annual Financial Statements and the 2018 Annual MD&A.

The Stars Group’s revenues can be influenced by numerous factors, many of which it is unable to predict or are outside of its control, including the impact of seasonality and sporting results, as described below under “—Seasonality and Other Factors Impacting the Business” and the other risks and uncertainties set forth in this annual information form under the heading “Risk Factors and Uncertainties—Risks Related to the Business”.

Real-Money Games

The Stars Group’s current core real-money online gaming offerings are poker, gaming (casino and bingo), and betting, each with its own revenue model.

Poker is a peer-to-peer game where individuals play against other individuals, not against the “house”. In contrast to other types of house-banked gaming, such as slots, blackjack or sportsbook, where individuals play against the operator, poker operators are generally not exposed to the risks of game play or the outcome of the game. As a peer-to-peer game, liquidity, or the number or volume of players with an operator, is critical to the success of the game, with a greater number of players supporting a wider range and greater

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volume of games and larger tournaments, increasing the quality of the offering to the consumer. As a result, larger scalable poker operations will benefit from superior liquidity in their systems, which in turn improves their offering to customers, creating a positive feedback loop effect.

Typically, poker game operators generate revenue by charging a fee from ring games (i.e., games for cash on a hand-by-hand basis), known as “rake”, or by charging entry fees for tournaments (i.e., where players play against each other for tournament chips with prize money distributed to the last remaining competitors), or variations thereof. The Stars Group collects the rake up to a capped amount in ring games and a tournament entry fee for scheduled tournaments and sit and go tournaments, and does not generally have any of its own capital at risk (with an exception being the Spin & Go product where the tournament prize pool is a randomly determined multiple of the buy-in). These amounts are then reduced by applicable VAT in certain jurisdictions and offsets (as described below) to arrive at revenue.

Online casino offerings typically include the full suite of games available in land-based casinos, such as blackjack, roulette and slot machines. For these offerings, The Stars Group functions similarly to land-based casinos, generating revenue through hold, or gross winnings, as players play against the house, and then these amounts are reduced by applicable VAT in certain jurisdictions and offsets to arrive at revenue. In online casino, The Stars Group believes there is typically lower volatility from the statistical norm versus land-based casinos as there is generally a larger number of bets placed at small denominations.

Betting involves customers wagering on certain sporting and non-sporting events, also referred to as turnover or stakes. Like casino offerings, customers “play”, or bet, against the house, thus The Stars Group is exposed to risk with respect to these bets. The Stars Group attempts to set odds such that there is built-in theoretical margin into each set of odds, and each market. Over the long term this usually delivers a fairly stable betting win margin, but given the variance in sporting results, this can be volatile in the short term. These amounts are reduced by applicable VAT in certain jurisdictions and offsets to arrive at revenue.

In addition to the above-noted revenues, revenues from real-money games also includes revenue earned on the processing of real-money deposits and cash outs in specific currencies, which is sometimes referred to as conversion margins.

Offsets for each line of operation are the portion of gross revenue that The Stars Group allocates to rebates, incentives and promotions, which it awards as a result of game play or at its discretion through loyalty programs, free plays, sign-up bonuses, discounts, rebates, other rewards and incentives, and tournament overlays. Offsets are generally used to acquire new customers and retain and reactivate existing customers.

Play-Money Games

Play-money gaming involves players receiving virtual currency for free, or paying a fee to receive additional virtual currency, which can be used to play certain gaming offerings. Play-money gaming is permitted in various jurisdictions that may not otherwise permit real-money gaming, including most of the states in the United States. In addition to the sale of virtual currency, in the future, The Stars Group may also generate revenue from advertising through its play-money gaming offering. The Stars Group’s current play-money game offering primarily consists of poker, including on PokerStars.net and FullTilt.net and through the social gaming brands PokerStars Play, Jackpot Poker by PokerStars and Casino Rush by PokerStars. In these circumstances, there are no cash prizes or other prizes for monetary value, and in most cases, all the player fees are passed to The Stars Group as revenue, unless the games are played through social platforms, in which case the platform operator retains a certain percentage for distributing the offering. The Stars Group’s play-money games may be played through the desktop client interface or through online, television and mobile platforms, including on social gaming platforms. The revenue for play-money is the sum of fees paid by customers (net of any percentage of the same retained by the particular platform operators), less applicable VAT in certain jurisdictions and certain promotional costs. The Stars Group includes such revenue in its “other” revenues.

Other Sources of Revenue

As described below, The Stars Group sponsors certain live poker tours and events, uses its industry expertise to provide consultancy and support services to the casinos that operate the events, and has marketing arrangements for branded poker rooms at various locations around the world. The Stars Group generates revenue from these sponsorships and marketing arrangements, which it includes in “other” revenue.

The Stars Group also derives revenues from certain of its other gaming-related offerings such as Oddschecker and its other media and affiliate businesses, with revenue generated primarily through affiliate commissions, revenue share arrangements and advertising income, as applicable.

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Business Strategy of the Corporation

The Stars Group focuses on creating long-term shareholder value by building upon its existing strengths and expanding and strengthening its portfolio of products and services that it expects will deliver sustainable, profitable long-term growth. The Stars Group places great emphasis on the customer and its goal is to become the world’s favorite online gaming destination, which it believes it can achieve by creating a fun and positive experience.

To do this, management seeks certain ongoing, principal strategic initiatives, including:

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Marketing and Customer Acquisition Strategy

The Stars Group markets its brands and product offerings through various platforms and channels, including, various media outlets, free-to-play games, sponsored live poker tours and branded poker rooms (which also generate nominal revenue), and endorsement and sponsorship agreements. Below is a general description of such platforms and channels. Although The Stars Group’s primary focus has been on online poker, it has begun increasing its focus and attention on marketing its online casino and betting offerings, a process that has been accelerated by the Acquisitions, which have a history of marketing online betting and casino offerings and have already developed them as separate acquisition channels. The Stars Group intends to continue maintaining and strengthening its brands and customer appeal in order to help it maintain or establish leading positions in the jurisdictions where its product offerings are available.

Together with product development, marketing is a key investment to drive growth in the business. The Stars Group has a return-on-investment based approach to marketing costs, investing in brand awareness and customer acquisition and retention. The Stars Group believes that strong branding and marketing is necessary to maintain and continue growing its business. The Stars Group strives to be consistent in its marketing, ensuring that its brand messages reinforce its values of quality, speed, ease of use, innovation and fun.

Media and Cross-Selling

The Stars Group has a multimedia and cross-selling approach that focuses on acquiring and retaining customers both online and offline for its brands and product offerings, and capitalizing on network effects and cross-selling among its online poker, gaming and betting offerings to both existing and new customers. This multimedia approach includes, among other things, television programming and advertisement campaigns, affiliate partnerships, sponsorships, digital advertisements and online campaigns, paid search engine optimization, including live-streaming, and other productions, content and incentives, including those in partnership with Sky Sports. The Stars Group employs programmatic marketing techniques to target appropriate messages, offers and promotions to individuals based on their browsing and player history.

In particular, with respect to SBG, management believes that SBG’s model and its symbiotic relationship with Sky, including Sky Sports, helps it acquire and retain customers, driven primarily by integrated marketing campaigns, targeted cross-selling and a single customer login across SBG product offerings. SBG’s model leverages its shared values and heritage with Sky and highlights the entertainment, trust and quality values inherent in the Sky name. Management believes that, through a combination of the Sky digital assets and SBG’s other digital assets, SBG interacts with the majority of active UK online gamblers, giving SBG significant insight into customer behavior and preferences. See “—SBG’s Relationship with Sky”.

The Stars Group broadcasts various televised poker programs and advertisement campaigns that run throughout the year at different intervals. Live poker tournaments are also filmed at various PokerStars sponsored events, including The Stars Group’s PokerStars sponsored tours, and broadcast as television shows in several countries. These sponsored live events are also broadcast online on various sites, including YouTube, Facebook, Twitch and PokerStars.tv. Other forms of television programs that The Stars Group broadcasts include reality shows and poker-based dramas, which are developed and produced together with various production companies.

The Stars Group has various sponsorship arrangements that it believes helps expose its brands to potential customers. For instance, in December 2018, The Stars Group and the National Basketball Association (the “NBA”) announced a multiyear partnership that made The Stars Group an authorized gaming operator of the NBA in the United States. In addition to enterprise-wide sponsorships, The Stars Group’s subsidiaries and brands also enter into sponsorship arrangements. For example, in November 2017, SBG and the English Football League signed a new five-year headline sponsorship deal, extending the current sponsorship through to the end of the 2023/2024 season and taking the total sponsorship up to 11 years, making SBG an integral part of English football. It gives the Sky Bet brand continuous visibility within the target audience. In addition to football, Sky Bet sponsors a wide range of British horse races, including the flagship multi-year sponsorship of the York Ebor (the second most valuable meeting for prize money of the season). Additionally, Sky Vegas is the sponsor for the award-winning UK TV show, Celebrity Juice. The sponsorship is fully integrated, including a range of bespoke games designed around the show and its host.

The Stars Group also engages third-party search engine and online traffic optimization companies to increase The Stars Group’s online presence and traffic to its websites. In addition, The Stars Group employs various digital campaigns through banner

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advertisements, social media campaigns, and paid-for placements in search engines. These campaigns are directed at both existing and new customers across all The Stars Group’s platforms.

Free-to-Play Games

As part of its relationship with Sky, SBG is the exclusive digital betting partner for Sky Sports and all of its media assets. One way SBG acquires and retains customers is through customer interactions with Sky and its subsidiaries and affiliates, such as through Sky Sports. For example, SBG operates and promotes a number of free-to-play games either independently or in partnership with Sky or others. Each of these games have SBG odds, content and offers integrated within them.  These free-to-play games include Soccer Saturday Super 6, Sky Sports Fantasy Six-A-Side, Sky Sports Fantasy Football and ITV Pick 7, each of which is a free-to-play sports prediction game where customers have the chance to win real-money prizes, as well as others such as the “Prize Machine”, which is a free-to-play daily prize draw that gives customers the opportunity to win free spins on slots, free bets with Sky Bet or cash.

Poker Tours and Events

In addition to providing online and mobile gaming product offerings, The Stars Group, through Stars Interactive Group, also sponsors some of the world’s largest live poker tours and produces televised or streamed coverage of such poker events.

PokerStars’ primary sponsored global live tours in 2018 included PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Brazilian Series of Poker, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK, and PokerStars may continue some or all of these live tours in 2019 or beyond. As the sponsor, PokerStars promotes the brand through each tour’s widespread television or other multimedia distribution. The live poker tours consist of a number of events operated by local casinos and are largely marketed through various media sources and news coverage. In 2018 alone, PokerStars sponsored tours included more than 800 tournaments, with more than 200,000 player entries, representing over 130 different countries and awarding more than $330 million in prize money, increasing the total prize money awarded at PokerStars sponsored live events since inception to more than $2.0 billion. In 2019, The Stars Group expects the sponsored tours and events to visit various cities and countries, including Barcelona, Madrid, Dublin, London, Macau, Manila, Monte-Carlo, Nassau and Sochi.

Founded in 2004, the European Poker Tour is known in the industry as Europe’s most popular poker tour, with some of its tournament series being widely televised and streamed across Europe. The Asia Pacific Poker Tour, which hosts events at luxury casinos throughout Asia, started in 2007 and The Stars Group believes it helped expand the popularity of poker in Asia, including by bringing the first major government-sanctioned real-money “Texas Hold-’em” poker tournaments to certain Asian countries, including South Korea. Founded in May 2008, the Latin America Poker Tour brought world-class poker tournaments to locations in Latin America such as Chile, Panama, Brazil, Peru and Uruguay. Founded in 2006, the PokerStars-sponsored Brazilian Series of Poker is one of the world’s largest live poker tournament series, with events held in some of Brazil’s and Latin America’s major cities and most popular tourist destinations, including Puerto Iguazu, Argentina in 2019. The PokerStars Caribbean Adventure, which was founded in 2004, has historically been held at the Atlantis Resort & Casino on Atlantis Paradise Island in the Bahamas, and it is considered in the industry as one of the most popular poker events in the world.

In 2017, The Stars Group introduced PokerStars MEGASTACK, which provides players with a more professional experience at entry-level tournaments with low buy ins held at live venues around Europe and the United States. In addition, in December 2017, The Stars Group launched the PokerStars Players No Limit Hold’em Championship, a $25,000 buy-in poker tournament that was held in the Bahamas in January 2019 as part of the PokerStars Caribbean Adventure and included $8 million in free tournament packages that The Stars Group awarded to players throughout 2018 and an additional $1 million added by The Stars Group to the tournament winner. In January 2019, the PokerStars Players No Limit Hold’em Championship became the largest $25,000 buy-in poker tournament in history.

Branded Poker Rooms

The Stars Group also has marketing arrangements for branded live poker rooms under the PokerStars LIVE name at popular casinos in major cities around the world, including at the Hippodrome Casino in London and the Okada Manila in Manila. From time to time, The Stars Group may enter into marketing arrangements for branded poker rooms at premier leisure and entertainment destinations around the world, particularly those that it believes have thriving gaming communities. These PokerStars LIVE branded rooms are operated by the local casino and adhere to the same global design concept but are tailored to the specific location, which is intended to provide a strong brand presence through common elements across each location.

Endorsement Agreements, Partnerships and Affiliates

The Stars Group endorses several ambassadors to promote its product offerings, both at global and regional levels. These ambassadors include some of the most prominent professional poker players in the industry, sports stars and professional athletes, global celebrities, and friends of the brand who have a personal connection to or interest in poker, gaming, betting or The Stars Group’s brands

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in general. Each category is generally engaged to generate new customer participation and vertical growth as well as to enhance the customer experience and customer retention.

The Stars Group also has numerous partnerships and affiliates that it relies on to promote its product offerings. These include Sky, Sporting Life and Oddschecker. Sky is one of Europe’s leading entertainment brands and SBG has an arms-length commercial relationship with it, which allows SBG to utilize the Sky brand and integrate with Sky’s commercial and advertising platforms pursuant to several contractual agreements. Sporting Life is a leading source of online content for sporting news, results, cards and fixtures. Its users gain access to premium content such as UK and Irish racing replays for free. Users can place bets with SBG directly within the Sporting Life site and app. Oddschecker is the UK’s leading source for odds comparison, previews and sporting information. Users can bet directly with SBG and other bookmakers through the Oddschecker site and app.

Competition

The industries in which The Stars Group currently operates are highly competitive, constantly evolving and subject to regulatory and rapid technological change. The Stars Group faces significant competition in all aspects of its business and competes for customers with other online (including mobile) and land-based gaming and interactive entertainment developers and operators based on many factors, including the quality of the customer experience, brand awareness, reputation, security, integrity and access to other distribution channels. Although The Stars Group believes that it competes favorably, its competitors could develop more compelling product offerings, services or content, which could adversely affect The Stars Group’s ability to attract and retain customers. As The Stars Group introduces new product offerings, its existing products evolve, or other companies introduce new product offerings or merge with competitors into larger entities, The Stars Group may become subject to additional and/or more intense competition. The Stars Group’s competitors, whether known or unknown, may also take advantage of large user and customer bases, networks through social networks, and third-party relationships to grow rapidly. See also “Risk Factors and Uncertainties—Risks Related to the Business”.

Many competitors specialize in offering online gaming and interactive entertainment products, including developers for online, mobile and social networks, operators of regulated and unregulated online real-money gaming, live poker tournaments, developers for consoles and other platforms, and other forms of media, content and entertainment. For example, although The Stars Group has and continues to be a significant market leader in online poker, it has only recently, including through the Acquisitions as well as organic growth, become a more substantial market leader in online casino and betting, where competition is significant and formidable. The Stars Group’s competitors range from small, localized companies to large multinational corporations. These competitors include, among others, bet365, William Hill, GVC (including bwin.party and Ladbrokes Coral Group), Paddy Power Betfair (including FanDuel), 888 Holdings, Kindred Group, Betsson, Winamax, Jackpotjoy, Cherry, Mr. Green, LeoVegas, DraftKings and certain government operators and smaller operators in specific regions. There is also increasing competition with social and video gaming companies, such as Zynga, Playtika, the social gaming divisions of Sony, IGT, Scientific Games, Tencent, Penn National Gaming, PlayAGS, Aristocrat, Activision Blizzard (including King), and Riot Games, as well as interactive content and media companies, such as Netflix, which provide monetized interactive entertainment offerings that compete with real-money online gaming companies for time and wallet share of consumers.

The Stars Group’s ability to compete effectively with its competitors is based on a number of factors, including its ability to (i) maintain its strong reputation among its customers and global brand awareness, (ii) maintain appropriate liquidity in online poker, and continue to grow its large customer base and customer engagement across existing and new lines of operation, (iii) provide comprehensive and varied gaming and entertainment offerings at competitive prices, (iv) provide a superior customer experience, including through appropriate responsible gaming policies and related customer support tools, promotions, incentives, features, customer protections, and best-in-class software development and back-office infrastructure, customer service, payment processing, security and integrity, as applicable, (v) develop product offerings designed for distribution across multiple channels and to new, large audiences with superior functionality and efficient implementation, including through the use of innovative architecture and technologies that The Stars Group believes will result in a higher degree of customer acceptance and player preference, (vi) successfully promote the regulation of online gaming, and maintain its existing and obtain new licenses or approvals to operate and offer online gaming in existing and new jurisdictions, as applicable, and (vii) maintain a strong culture of environmental, social and corporate responsibility.

SBG’s Relationship with Sky

Management believes that SBG benefits from its association with Sky, one of Europe’s best known entertainment brands, with a shared heritage of innovation, quality and customer focus. Sky is Europe’s leading media and entertainment brand, with more than £6 billion in annual content acquisition and development. According to WPP plc, Sky is the sixth most valuable UK brand and, according to Forbes, Sky Sports is the fourth most valuable global sports brand. In addition to high brand recognition, Sky has a large customer base in many European markets, with 13.0 million retail subscribers in fiscal year ended June 30, 2018 in the UK and Ireland, 4.8 million in Italy and 5.2 million in Germany. Sky also has a presence in Austria, Spain and Switzerland.

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The Stars Group considers SBG’s symbiotic relationship with Sky Sports a key strength, and SBG has developed a strong, collaborative relationship with Sky that The Stars Group believes will continue to drive its value. In addition to commercial agreements, benefits of SBG’s relationship with Sky include customer recognition of the Sky brand, integrated marketing campaigns and cross promotion across Sky Sports channels and platforms, as well as the free-to-play games operated by SBG and jointly promoted by SBG and Sky, which provides multiple customer touchpoints and lowers the cost of customer acquisition. SBG leverages Sky’s entertainment heritage to appeal to a large mass-market customer base. SBG operates using the Sky brand in jurisdictions such as the UK, Ireland, Italy (as a part of The Stars Group platform) and Germany, with the opportunity to extend to other jurisdictions.

The commercial arrangements with Sky and one or more subsidiaries of The Stars Group include a long-term commercial relationship providing digital exclusivity to SBG on the UK Sky Sports platforms and an advertising services agreement. Sky also agreed not to use the Sky brand or any of the licensed intellectual property in respect of betting or gaming, or to allow anyone else to, anywhere in the world. The primary commercial agreements between Sky and one or more subsidiaries of The Stars Group are outlined below.

Brand License Agreement

A subsidiary of The Stars Group is a licensee under a brand license agreement with the Sky group (the “Brand License”). The Brand License grants one or more subsidiaries of The Stars Group exclusive brand IP rights in relation to betting and gaming products and non-exclusive rights in connection with certain other entertainment activities such as free-to-play games. The Stars Group has secured certain limited rights to utilize the SBG brands in conjunction with the brands of The Stars Group in the approved territories where the use of the Sky brand is permitted. The license is currently limited to the UK, Ireland, Italy, Germany, Channel Islands and Isle of Man, however, there is a contractual process to extend the license to new jurisdictions with Sky’s consent.

The Brand License has an initial term of 25 years from March 19, 2015 and may be extended for any additional period if agreed between the parties. Each of The Stars Group and Sky possesses termination rights in respect of certain triggering events, such as material breach by the other party, which are generally subject to applicable remedy periods and escalation procedures. On expiry of the initial term, each party must use reasonable endeavors to agree to an extended term. Post-termination or on expiry, Sky is not entitled to use the brand or grant any third party the right to use the brand for betting or gaming for five years from expiry and three years from the date of termination if Sky terminates. There is no such restriction on Sky if The Stars Group terminates the agreement.

Commercial Relationship Agreement

SBG is party to a commercial relationship agreement with Sky (the “Commercial Relationship Agreement” or “CRA”), pursuant to which Sky appointed SBG as its exclusive partner for betting and gaming activities on the Sky Sports platforms in, among other jurisdictions, the UK and Ireland, and both parties have agreed to continue to undertake certain marketing and cross-promotional activities on such platforms. Under the CRA, the parties have agreed to cooperate in good faith to maximize the value of their commercial relationships, including, but not limited to, their broadcasting relationship, free-to-play games, platforms relationship, further future developments, joint initiatives and personality promotions.

The CRA includes an initial five year exclusivity period commencing on and from the date on which The Stars Group acquired SBG (with SBG’s option to renew for an additional five year period) where Sky exclusively supplies to SBG in the relevant territories exposure across its platforms, including digital integration and inventory, promotional opportunities, screen space, access to personalities, personnel, assets and services and rights in relation to betting and gaming activities. The CRA will continue in force until the expiry or termination of the Brand License for each relevant territory.

Advertising Agreement

SBG is party to an advertising services agreement with Sky (the “Advertising Agreement”). The Advertising Agreement relates to the purchasing of advertising across all Sky platforms, consistent with the rights granted under the CRA. Under the Advertising Agreement, SBG commits to spending advertising revenue with Sky in return for certain discounts for fixed periods of time. If SBG fails to meet the minimum spend requirement, SBG forgoes any rights to the discount for the remainder of the contractual term.

Under the Advertising Agreement, SBG has the exclusive right to advertise for betting and gaming on Sky Sports digital platforms until the expiration of the exclusivity period under the CRA, provided SBG’s minimum qualifying spend is achieved. SBG has non-exclusive rights on other digital Sky platforms (i.e., non-sports). SBG also benefits from annual digital advertising discounts in consideration for meeting the minimum annual spend commitments. This discount agreement relating to digital advertising expires on the earlier of 25 years from March 19, 2015 and the date when the CRA terminates or expires. Sky may terminate the Advertising Agreement for material breach by SBG, subject to a remedy period and certain escalation procedures.

The Advertising Agreement also covers airtime advertising which may be procured by SBG on a non-exclusive basis. Similar to digital advertising, SBG also benefits from an annual airtime discount in consideration for meeting the minimum annual spend commitments. This discount agreement relating to airtime advertising expires June 30, 2022.

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The Stars Group has also secured rights to utilize the benefits of the Advertising Agreement in relation to the promotion of the brands of The Stars Group in the UK and the Republic of Ireland in certain circumstances in substitution for the brands of SBG, subject to Sky’s prior approval.

Technology Infrastructure, Supply Chain Management and Research and Development

The Stars Group believes its continued focus on and investment in its technology is important to its future, supporting its plans to grow its active customer base and increase the monetization of customers through investment in new products, content and personalization. It believes that its investment to date has yielded a scalable infrastructure with a robust, high-performing platform that gives it the ability to replicate its offerings across multiple jurisdictions. The Stars Group’s product development philosophy is focused on the customer with continuous innovation in creating and improving its product offerings.

Investment in, and development of, proprietary technology is a key focus for The Stars Group. While The Stars Group and certain of its subsidiaries, in particular SBG, leverage third-party technology where appropriate, The Stars Group continuously develops its proprietary platforms and key elements of its technology, as well as certain games and content using in-house resources. The Stars Group has invested significantly in its technology to support what it believes to be excellence in key areas such as platform infrastructure, product, content, security and integrity.

The Stars Group’s proprietary player account management system currently forms the core of its technology plan. This flexible, scalable and robust management system enables The Stars Group to optimize the player experience by using real-time data to enhance the personalization, incentives and rewards that each customer enjoys.

The Stars Group is currently increasing its investment in proprietary content. During 2018, The Stars Group launched a total of 350 new in-house casino games, with game design and content tailored towards its customer base. The Stars Group expects this increased investment to lead to additional content launches during 2019. In July 2018, as part of the SBG Acquisition, The Stars Group acquired Core Gaming, an England-based content development house that is a leading developer of HTML5 gaming offerings. HTML5 programming helps ensure games are compatible across all devices (including mobile, web and desktop), creating a more consistent and secure user experience. Core Gaming is expected to enable The Stars Group to accelerate the development of bespoke and exclusive games that are tailored towards its customer base. Core Gaming also licenses some of its content on a B2B basis to third-party operators. The Stars Group believes that differentiated gaming content is important to its success in the online gaming industry, offering unique, proprietary games alongside the most popular games from third parties. As commercially feasible and appropriate, The Stars Group seeks to negotiate competitive pricing with its third-party providers and generally believes that the availability of software, components and other supplies that it uses are adequate and can be sourced from more than one provider or supplier.

The Stars Group believes that investment in differentiated products helps attract and retain customers. Innovative betting products such as RequestABet allow The Stars Group or its subsidiaries to differentiate their product offerings within the market. The Stars Group primarily develops and produces its product offerings internally through, among other resources, internal engineering teams, software architects, network operations teams and production operations staff. The Stars Group’s development and production includes software development and quality assurance, software hosting within its data centers and transit points of presence, development of network infrastructure and operations monitoring and maintenance of its product offerings. The Stars Group also engages third parties to assist in development and production on an as-needed basis. For instance, SBG currently contracts with several development and production providers, including betting and gaming platform providers, for certain of its front- and back-end technology that is currently used in its product offerings.

SBG uses a flexible approach to technology. While SBG believes that it uses appropriate technology and components for each of its products and services, a common theme of using open-source technology and modular development runs across its products and underlying platform choices. Where regulation allows, SBG uses cloud technology across elements of its technology stack. Its most prominent use of cloud technology is in its free-to-play games, such as Soccer Saturday Super 6 and Sky Sports Fantasy Six-A-Side, with other products being migrated to the cloud as a key principle of the technology strategy. Going forward, The Stars Group plans to integrate certain aspects of its current technology with SBG’s, which it expects will allow SBG to take more control of customers’ accounts and wallets, adding functionality around the SBG’s existing player platform.

Investment in mobile technology is important for SBG, which was an early adopter of mobile technologies, with the majority of its revenues being generated from mobile devices. For most of SBG’s products, a single technology stack is shared across mobile and desktop, meaning new products and features can be rolled out across both channels simultaneously. In 2015, SBG switched from Adobe Flash to HTML5 to ensure compatibility of games across all devices, creating a more consistent and secure user experience.

The Stars Group is currently developing a proprietary global betting and trading platform to capture certain elements, features and capabilities of Sky Bet, BetStars and BetEasy technology. The Stars Group believes that this will permit it to develop new products quicker and deploy them globally but in a localized format. In addition to accelerating new product innovation and delivery, The Stars

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Group expects its global betting and trading platform to deliver cost efficiencies through global risk management and pricing, and streamlined product development.

In addition to supporting a superior customer proposition, investments in technology are also vital for game integrity and responsibility. The Stars Group’s proprietary player account management system helps ensure a positive experience for its customers, not only from an entertainment perspective, but most importantly with respect to security, integrity and responsibility. The Stars Group believes that investments in technology support game integrity. To support The Stars Group’s strong reputation for security and integrity, it employs what it believes to be industry leading practices and systems. These include machine learning based real-time data analytics, led by an internal information security group with respect to various aspects of its technology infrastructure. Through several of its internal teams, including its security, customer operations, game integrity, fraud teams and data protection, The Stars Group monitors application level security, information and payment security, game integrity, customer fraud, information and data protection. This includes implementing policies and controls over the use of abusive technological tools and software, assessing pricing and incentives, and introducing improvements to product ecosystems. In particular, The Stars Group has implemented and continues to implement, policies and controls to significantly reduce or eliminate the use of certain sophisticated technology that may provide an artificial competitive advantage for certain customers over others. The Stars Group is also increasingly using data science to improve the player experience and player protection. For instance, in 2017, SBG rolled out the first stages of its in-house, real-time promotions platform, which provides a real-time view of customer interactions, enabling the creation of innovative personalized products and promotions based on game play and customer success. For example, a customer with an unusually unlucky run on roulette might receive an instant real-time bonus, delivered within seconds inside the game itself, but the same technology is also used to suppress marketing to a similar customer who is showing signs of potential problem gambling or harm. The segmentation, decision-making and fulfilment mechanics all occur within the window of a game spin. A customer deemed to be at risk will instead receive safer gaming messages and prompts to use the self-help tools such as deposit limits and self-exclusion.

In addition to its internal resources and personnel such as its information security group, The Stars Group also uses third parties to provide cyber security, including anti-virus software, network monitoring software, firewalls, penetration testing and similar protection. These security and integrity systems routinely review and evaluate attempted breaches of The Stars Group’s infrastructure.

The Stars Group also has integrity systems comprised primarily of in-house resources, which routinely review and evaluate customer backgrounds, game play, financial and transactional activity and related risks through a variation of management systems, including “know your customer” and related background screening (which collects age and identity information, as well as monitoring against certain prohibited persons and other watch lists), location screening through geolocation and other software, deposit screening, abnormal game play and funds movement detection, withdrawals screening, collusion detection, bots and artificial intelligence detection (which detects artificial intelligence-driven game play) and prevention (including through changing aspects of or enhancing current product offerings or innovating new variants), multiple account alerts, account restriction and ban detection and a safe mode system (which is based on a customer’s risk profile and limits access to high risk deposit methods). These systems also include controls that, among other things, (i) restrict the use of third-party software components, also known as third-party tools (such as “heads-up displays” and “seating scripts”), for the purpose of collecting additional gameplay information or selecting specific opponents and (ii) prohibit data-mining of certain products (or the practice of accumulating a large set of information, such as poker hand histories, through the use of software as opposed to actual gameplay) for the purpose of analyzing and exploiting another customer’s activity, playing styles and tendencies. The Stars Group’s technology infrastructure and software is also subject to rigorous management and certification process testing and meets applicable compliance and regulatory requirements in numerous jurisdictions. See also “Risk Factors and Uncertainties—Risks Related to the Business”.

The Stars Group’s R&D strategy seeks to provide broad market applications for product offerings derived from its technology base. The Stars Group’s R&D efforts are focused primarily on: (i) developing and delivering its pipeline of new product offerings; (ii) revitalizing its existing product offerings through continued innovation; (iii) developing core technology and platforms for existing and future verticals; (iv) evolving the functionality, security and performance of its offerings and platforms; (v) continuously developing and extending the number of supported client platforms; (vi) developing infrastructure systems to provide the underlying support for its offerings, systems and platforms; (vii) providing a platform and tools for operations and marketing; and (viii) improving development and testing technologies. The Stars Group also engages from time to time in longer term fundamental research and may do so in the future either directly or through the funding of third-party projects. The Stars Group currently dedicates nearly all of its R&D investments to its online gaming business.

Markets and Customers

The gaming industry in general operates in a large, dynamic and growing global market with a variety of segments, including online (including mobile) and land-based poker, betting, casinos, bingo rooms and other gaming mediums. According to gaming industry consultants, H2 Gambling Capital (“H2GC”), from 2003 to 2018, the combined global (including markets where The Stars Group does not currently operate real-money online gaming) interactive gaming verticals, including online real-money poker, casino, sports betting, horseracing, bingo and skill-based and other games, have grown from approximately $7.6 billion to $46.2 billion in gross gaming

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revenues (“GGR”), defined as wagers or rakes plus bonuses, promotions, overlays and loyalty rewards, less prizes or winnings. Of this total, H2GC estimates that in 2018 alone, betting, i.e., racing and sports betting, comprised 55%, gaming (including bingo, skill and other gaming but excluding poker) comprised 39% and poker comprised 6%. H2GC estimates that the combined global interactive gaming GGR will grow to approximately $55.0 billion in 2021 (data as at February 7, 2019). This reflects a compounded annual growth rate (“CAGR”) of 6.7% from 2017 to 2021.

Online gaming operators take advantage of scale and technology to provide gaming to large networks of customers. Originating in the mid 1990’s, online gaming has grown steadily over time with improvements to technology, security and public sentiment coinciding with growth in national and local regulation of online gaming.

Set forth below is a general overview of the current market for The Stars Group’s core lines of operation, i.e., real-money online poker, casino and betting.

Online poker saw a rapid rise in popularity beginning in 2003 when Tennessee accountant Chris Moneymaker won $2.5 million at the World Series of Poker’s main event, after winning his entry in a low buy-in online satellite tournament on PokerStars. This rise in popularity saw global online poker grow significantly, notably in Europe and North America, until 2010. In 2011, two of the industry’s largest brands, PokerStars and Full Tilt, exited the U.S. market, where they held a significant majority of the online poker market share, impacting global poker player liquidity. The Stars Group’s primary markets for its real-money online poker offerings include the European Union, certain other jurisdictions in the rest of Europe and the Americas (excluding the United States). Various industry data sources currently estimate that the United States still represents a potential growth opportunity for real-money online poker between 2019 and 2022, subject to more U.S. states regulating online poker, or online gaming or betting more broadly. Currently, only New Jersey, Nevada, Delaware and Pennsylvania have, or recently passed legislation regulating online poker or online gaming. However, in recent years multiple states have considered or are currently considering proposed legislation to regulate online poker or online gaming, including Illinois, Michigan, New York, Massachusetts and California. While The Stars Group currently believes more states will regulate online poker or online gaming in the future, there can be no assurance when this will happen, if at all.

Online gaming (excluding poker) has also seen rapid growth over the past decade, with GGR from the global market growing from $2.1 billion in 2003 to $17.9 billion in 2018 according to H2GC (such estimates include markets where The Stars Group does not currently operate real-money online casino). As online casino operators continue to expand content and increase product offerings, and more markets regulate online casino, H2GC forecasts GGR to grow to $21.2 billion in 2021, or at a CAGR of 6.5% from 2017 to 2021. According to H2GC, the majority of this growth is currently expected to come from Europe. The primary market for The Stars Group’s combined online casino offerings is Europe, which comprised approximately 59% of the global online casino market in 2018 according to H2GC.

According to H2GC, online betting, comprising racing and sports betting, makes up the largest segment of the online gaming market at approximately $25.6 billion in GGR in 2018. As with online poker and online casino, according to H2GC, online sports betting saw significant growth of $20.6 billion from 2003 through 2018 as technology improved, e-commerce became more mainstream and national and local regulation of online betting grew (such estimates include markets where The Stars Group does not currently operate real-money online betting). H2GC estimates online betting will continue to grow, with GGR reaching $31.0 billion in 2021, or at a CAGR of 7.4% from 2017 to 2021. The primary markets for The Stars Group’s online betting offerings are currently in Europe and Australia, which together comprised approximately 51% of the global online betting market in 2018 according to H2GC. See below under “—Regulatory Environment—Regulation of The Stars Group’s Business—Local Licenses and Approvals” regarding the potential future of betting in the United States.

For detailed information regarding the regulatory environment in which The Stars Group currently operates, The Stars Group’s current gaming licenses, and The Stars Group’s current regulatory strategy, see “—Regulatory Environment” below.

Seasonality and Other Factors Impacting the Business

The Stars Group’s business can fluctuate due to seasonal trends, sporting fixtures and results and other factors. The Stars Group believes that the climate and weather in geographies where its customers reside tend to impact, among other things, revenues from operations, key metrics and customer activity, and as such, historically those have been generally higher in the first and fourth quarters than in the second and third quarters. The betting operations (and thus the financial performance) of The Stars Group are also subject to the seasonal variations dictated by various sports calendars. A significant portion of The Stars Group’s betting revenue is and will continue to be generated from bets placed on soccer, which has an off-season in the summer that can cause a corresponding temporary decrease in its betting revenues. The Stars Group’s revenues may also be affected by the scheduling of major sporting events that do not occur annually, such as the FIFA World Cup (the “World Cup”) and the UEFA European Championships. In addition, certain individuals or teams advancing or failing to advance and their scores and other results within specific tournaments, games or events may impact The Stars Group’s financial performance. Also, the cancellation of sporting events (most commonly seen in horse racing due to adverse weather conditions) could negatively impact amounts wagered and revenues.

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With respect to online betting, revenues generally fluctuate in line with wagering levels and associated win margins (or the total customer wagers less customer winnings as a proportion of the total amount wagered). However, the impact on revenues may be mitigated by the impact of win margins on amounts wagered, which can fluctuate inversely with such margins. As a result, prolonged periods of high win margins can negatively impact customer experience, enjoyment and engagement levels, thus resulting in lower customer betting and/or gaming activity levels. Conversely, while periods of low win margins tend to negatively impact revenues, this may be partially mitigated by increased customer wagering volume (generally referred to as recycling of winnings) due to the positive impact of customer-favorable results on customer experience, enjoyment and engagement. Further, changes to The Stars Group’s use of various offsets to revenues including free bets, bonuses and promotions, and/or loyalty program rewards impact reported revenue, which could also cause fluctuations. As such, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full fiscal year. There can be no assurance that the seasonal trends and other factors that have impacted The Stars Group’s historical results will repeat in future periods as it cannot influence or forecast many of these factors.  For other factors that may cause its results to fluctuate, including market risks, such as foreign exchange risks, see “Risk Factors and Uncertainties—Risks Related to the Business”.

Intellectual Property

The development and protection of intellectual property is a core part of The Stars Group’s business strategy and a key element to its success. The Stars Group believes that its intellectual property rights currently provide broad and comprehensive coverage for its product offerings. The Stars Group’s policy and practice is to protect its intellectual property rights in its core business areas through a combination of patents, copyrights, trademarks and trade secret laws, and generally through contractual provisions with third parties who have access to or are otherwise involved in the creation, development or use of its intellectual property. The Stars Group actively seeks to protect and enforce its intellectual property rights to prevent unauthorized use by third parties, including through applications for injunctive relief and pursuing further litigation, as necessary.

In addition, The Stars Group seeks to preserve the integrity and confidentiality of its data, trade secrets and know-how by maintaining the physical security of its facilities and the electronic security of its information technology systems. While The Stars Group has confidence in its systems in place, The Stars Group’s security measures may be breached, and legal recourse may not provide adequate remedies for any such breach.

The Stars Group’s active intellectual property portfolio currently contains, among other rights, approximately 77 granted patents, 35 patent applications, 1122 registered trademarks, 574 trademark applications, 6 industrial designs, 11 copyright registrations and 1 copyright applications. In addition, it currently owns approximately 7,500 domain names, as well as unregistered intellectual property, which includes copyright works, such as source codes, software codes, logos, audio-visual elements, graphics, original music, story lines, interfaces, advertisements, films and videos, copyrights and databases (including customer lists), unregistered trademark rights, confidential information and trade secrets. Issued and registered rights (and applications for such rights) are held directly or indirectly by The Stars Group in numerous jurisdictions around the world, including the United States, Canada, Europe, Russia, certain Latin American countries, China and certain Australasian countries. The terms and extent of protection afforded under The Stars Group’s issued and registered rights or unregistered rights vary depending on the jurisdiction and, as applicable, the date of filing.

The Stars Group’s patent strategy focuses on protecting novel elements of its technology design covering the principal jurisdictions where The Stars Group currently carries on business and where it believes filing for such protection is strategically, commercially, technologically or otherwise appropriate and beneficial. In addition to the granted patents mentioned above, The Stars Group has pending patent applications in the United States and certain other key commercial jurisdictions, such as Canada and Europe, and files new patent applications as and where it deems appropriate. The actual protection afforded by a patent depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable jurisdiction.

In addition to patent rights, The Stars Group has registered trademarks or trademark applications for, among other things, its primary brands, including The Stars Group, PokerStars, BetStars, Full Tilt, BetEasy, Oddschecker and related sub-brands, as well as its live poker tours in more than 40 jurisdictions worldwide where The Stars Group believes there is a commercial benefit for having such registrations. The Stars Group continuously monitors its trademark portfolio and files new registration applications as and when it deems appropriate.

To complement The Stars Group’s owned intellectual property, The Stars Group enters into brand licensing agreements with third parties, such as those entered into with Sky, to develop product offerings based on their respective marks, characters and themes. The Stars Group believes that its use of licensed brand names and related intellectual property may contribute to the appeal and success of its products. These licensing agreements may be subject to various conditions and typically involve The Stars Group paying royalties to each licensor. Licensors also typically have the right to inspect and approve the use of licensed property.

The source code for The Stars Group’s software is generally protected under trade secret and confidential information laws, as applicable in a particular jurisdiction, as well as applicable copyright law. The Stars Group recognizes, however, that effective protection

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may be limited or not available in some jurisdictions in which it offers its product offerings. The Stars Group licenses the use of its software to end-users, and these licenses contain, among other restrictions, customary provisions prohibiting the unauthorized reproduction, disclosure, reverse engineering and transfer of The Stars Group’s licensed software and related intellectual property. Moreover, any licensing of The Stars Group’s core intellectual property and brands is on what it believes to be strict licensing terms, with licenses being non-exclusive and limited in duration and scope.

The Stars Group also seeks to protect its copyright works through either or both the registration of such works with applicable governmental authorities (where available and it deems registration strategically beneficial) and reliance on international treaties. It believes that such protection is adequate for its purposes in the jurisdictions in which it operates, or currently expects to operate in the near term. Similar to its other intellectual property rights, The Stars Group continuously monitors its copyright portfolio and updates its policy regarding the registration of copyrights to seek the appropriate protection available under applicable laws.

In addition, The Stars Group also enters into various types of licensing and transfer agreements related to technology and intellectual property rights to obtain rights that may be necessary to produce and offer its product offerings. The Stars Group may also license its technology and intellectual property to third parties through licensing agreements.

Notwithstanding The Stars Group’s efforts to protect its intellectual property, it may not be successful in obtaining the protections for which it has applied. The Stars Group’s granted and registered intellectual property rights and those that may be granted or registered in the future, may be challenged, narrowed, circumvented or found to be invalid or unenforceable, which could limit The Stars Group’s ability to stop competitors from marketing related products or services or limit the protection period that The Stars Group may have for its products or services. Despite efforts to protect The Stars Group’s proprietary rights, third parties may infringe on its intellectual property rights and in such situations The Stars Group may be required to defend such rights. Defending such rights may divert management’s attention to the business and involve a significant expense, and The Stars Group may not be successful in defending its rights. In addition, others, including The Stars Group’s competitors, may be able to independently develop substantially equivalent intellectual property, and the rights granted to The Stars Group under any of its granted or registered intellectual property, or future rights, may not provide it with any meaningful competitive advantages against these competitors. See also “Risk Factors and Uncertainties—Risks Related to the Business”.

Regulatory Environment

General

The development and operation of online real-money betting and gaming in jurisdictions with a legal and regulatory framework covering those activities is typically subject to extensive regulation and approval by various federal, state, provincial and foreign authorities (collectively, “gaming authorities”). Applicable gaming laws generally require The Stars Group to obtain licenses or a determination of suitability from the responsible gaming authorities. This typically covers each of The Stars Group’s subsidiaries engaged in the regulated activities, certain of The Stars Group’s directors, officers and employees and, in some instances, significant shareholders (typically, beneficial owners of more than 5% of a company’s outstanding equity, or lower in certain jurisdictions, such as Great Britain, where the threshold is 3% or more).

The term “gaming license” for the purposes of this annual information form refers collectively to all the different licenses, consents, permits, authorizations, and other regulatory approvals that are necessary to be obtained in order for the recipient to lawfully conduct (or be associated with) gaming in a particular jurisdiction.

The criteria used by gaming authorities to make determinations as to the suitability of an applicant to conduct gaming varies among jurisdictions, but generally requires extensive and detailed application disclosures followed by a thorough investigation. Gaming authorities have broad discretion in determining whether an applicant should be found suitable to conduct gaming. When determining to grant a gaming license to an applicant, gaming authorities generally consider: (i) the financial stability, integrity and responsibility of the applicant (including verification of the applicant’s sources of funding); (ii) the quality and security of the applicant’s online real-money gaming platform, hardware and related software, including the platform’s ability to operate in compliance with local regulation, as applicable; (iii) the applicant’s past history; (iv) the applicant’s ability to operate its gaming business in a socially responsible manner; and (v) in certain circumstances, the effect on competition.

Gaming authorities may, subject to certain administrative proceeding requirements, (i) deny an application, or limit, condition, revoke or suspend any gaming license issued by them, (ii) impose fines, either on a mandatory basis or as a consensual settlement of regulatory action, (iii) demand that named individuals be disassociated from a gaming business, and (iv) in serious cases, liaise with local prosecutors to pursue legal action, which may result in civil or criminal penalties. Events that may trigger revocation of a gaming license or another form of sanction vary by jurisdiction. However, typical events include, among others: (i) conviction in any jurisdiction of certain persons with an interest in, or key personnel of, the licensee of an offense that is punishable by imprisonment or may otherwise cast doubt on such person’s integrity; (ii) failure without reasonable cause to comply with any material term or condition of the gaming license; (iii) declaration or otherwise engaging in certain bankruptcy, insolvency, winding up or discontinuance activities, or an order

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or application with respect to the same; (iv) obtaining the gaming license by a materially false or misleading representation or in some other improper way; (v) violation of applicable anti-money laundering or terrorist financing laws or regulations; (vi) failure to meet commitments to players, including social responsibility commitments; (vii) failure to pay in a timely manner all gaming or betting taxes or fees due; or (viii) determination by the gaming authority, in its sole discretion, that there is another material and sufficient reason to revoke or impose another form of sanction upon the licensee.

Gaming authorities also have the right to investigate any individual or entity having a relationship or involvement with The Stars Group or any of its subsidiaries, to determine whether such individual or entity is suitable as a business associate of The Stars Group. If any director, officer, employee or significant shareholder of The Stars Group fails to qualify for a gaming license or is found unsuitable (including due to the failure to submit required documentation) by a gaming authority, The Stars Group may deem it necessary, or be required, to sever its relationship with such person, which may include terminating the employment of any such person or divesting any such person of any interest in The Stars Group, as permitted under the redemption provision in The Stars Group’s articles.

In addition, certain gaming authorities monitor the activities of the entities they regulate in jurisdictions other than their own to ensure that such entities are not conducting business elsewhere in a manner that might adversely affect their financial stability, integrity and responsibilities to comply with local laws.

As a regulated entity, The Stars Group is subject to various conditions and requirements under its gaming licenses. Conditions of these gaming licenses vary by license type and jurisdiction. Typical conditions generally include (i) adherence to the various laws and regulations to which The Stars Group’s licensed entities are subject, (ii) maintenance of strong corporate governance standards, (iii) filing periodic reports with gaming authorities, and (iv) reporting material adverse events affecting The Stars Group’s business, including suspicious activity reports related to anti-money laundering and terrorist financing. The requirement to file periodic reports, as well as the contents and frequency of such reports, varies by gaming license. If required, periodic reports generally must be filed quarterly or annually, and must contain certain information, metrics, details or audit findings related to revenues and other financial information, specific games or activities, anti-money laundering and terrorist financing activities, and information and data security. Certain gaming licenses also require licensed companies to implement a system that grants the gaming authority real-time access to certain player-related data of the licensed company, thus enabling the gaming authority to perform audits or analysis at its discretion. For example, the Italian regulator requires a real-time interface to enable it to assess gaming duties. Additionally, certain regulators, such as the Gambling Commission of Great Britain (the “Gambling Commission”), require licensed companies to file an annual assurance statement with them, which provides information regarding matters such as significant changes in control systems, risk management and governance since the last assurance statement, how the licensed company is addressing problem and at-risk gambling, and any improvements that the licensed company plans to implement to its control systems, risk management and governance and/or its approach to addressing problem and at-risk gambling.

In addition, there are various other factors associated with its gaming operations that could burden The Stars Group’s business, including compliance with multiple, and sometimes conflicting, regulatory requirements, jurisdictional limitations on contract enforcement, foreign currency risks, certain restrictions on gaming activities, potentially adverse tax risks and tax consequences, including the imposition of new or additional taxes, such as additional corporate tax, VAT payable on The Stars Group’s costs or chargeable on a point of consumption basis on its revenue (which commercially cannot be passed onto the consumer), turnover taxes and gaming duties, and changes in the political and economic stability, regulatory and taxation structures and the interpretation thereof in the jurisdictions in which The Stars Group and its licensee subsidiaries operate or otherwise offer their product offerings. Any or all of such factors could have a material adverse effect on The Stars Group’s business, operating results and financial condition. See also “Risk Factors and Uncertainties—Risks Related to the Business”. Further, as a public company The Stars Group is required to, among other things, maintain effective internal controls over its financial reporting and disclosure controls and procedures, maintain systems for accurate record keeping and maintain strict compliance with applicable laws and regulations.

Regulation of The Stars Group’s Business

The Stars Group, through certain of its subsidiaries, is licensed or approved to offer, including under third-party gaming licenses, its gaming product offerings in various jurisdictions worldwide, including in Europe, both within and outside of the European Union, which is currently its primary market, Australia, North America and elsewhere. In particular, and as of the date hereof, The Stars Group, through its subsidiaries, holds gaming licenses in 21 jurisdictions, and PokerStars is the world’s most licensed online gaming brand, holding 18 of such licenses.

The Stars Group views its gaming licenses in two categories: (i) jurisdictions where The Stars Group’s relevant operating subsidiary has either obtained a local gaming license directly from the local gaming authority or where it offers The Stars Group’s product offerings under a third-party gaming license through a third-party relationship (for example, Belgium); and (ii) jurisdictions where its real-money online gaming product offerings are offered pursuant to a “multi-jurisdictional” gaming license.

See also “—Regulatory Environment—Regulatory Strategy” below.

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Local Licenses and Approvals

Set forth below is an overview of certain of The Stars Group’s local gaming licenses (including arrangements with third parties) covering the operation of its real-money online product offerings. Poker customers in certain jurisdictions, however, are permitted to participate in The Stars Group’s shared-liquidity global player pool on its .com and .eu sites. Applicable gaming duty and/or VAT is payable on The Stars Group’s revenue from online gaming offered through these local gaming licenses.

Australia

The Northern Territory Racing Commission (“NTRC”) is responsible for licensing, regulating and supervising gambling activities authorized under the Racing and Betting Act 1983 (NT) (“Racing and Betting Act”), including the conduct of a sports betting business. Holders of sportsbookmaker licenses issued by the NTRC are permitted to provide sports betting services over the Internet to customers throughout Australia.

The NTRC conducts ongoing suitability and due diligence investigations in relation to its license holders, their shareholders and key management personnel. NTRC license holders are also required to comply with all relevant Australian state and territory laws as well as applicable federal legislation, including the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth).

The applicable Australian subsidiaries of The Stars Group hold licenses to conduct sports betting issued by the NTRC under the Racing and Betting Act. These licenses issued are valid through June 30, 2024 and June 30, 2020. Other than as described above, The Stars Group’s online real-money gaming product offerings are not offered to persons physically located in Australia.

Belgium

The Belgium Gaming Commission (the “Belgian Commission”) is responsible for issuing gaming licenses for the operation of games of chance in Belgium, ensuring the proper supervision of these games and implementing any regulations promulgated under applicable law. Belgian law generally prohibits the operation of a gaming establishment or the offering of gaming in any form, in any place, or in any direct or indirect way, unless a license is granted by the Belgian Commission in accordance with Belgian law. The Belgian licensing regime provides that only land-based licensees may offer online gaming as a supplementary product to the land-based gaming offerings, meaning that an online gaming operator that does not also operate a land-based gaming business in Belgium typically needs to enter into an arrangement with an existing land-based licensee.

Gambling Management S.A., the owner and operator of Casino de Namur in Belgium, has a license to offer online gaming operated by a Maltese subsidiary of The Stars Group through one of The Stars Group’s domain names. The Maltese subsidiary, which received a Class E gaming license on April 20, 2011, provides online gaming to Casino de Namur, which in turn offers such gaming to its customers in Belgium. So long as the applicable license fees are paid, the Maltese subsidiary remains compliant with applicable licensure requirements and the license is not suspended, revoked or otherwise surrendered, The Stars Group expects that the license will remain valid for 10 years with a renewal procedure available no later than 5 months prior to its expiration.

Bulgaria

In Bulgaria the State Commission for Gambling (“Bulgarian Commission”) issues and maintains licenses for “gambling games” including online casino games. A license for organizing online gaming must explicitly state the intended gaming activity by the holder. Bulgaria requires that the licensee be registered in a European Union member state, another state signatory to the European Economic Area Agreement or in the Swiss Confederation. The licensee must also appoint an authorized representative with an address in Bulgaria, with the authority to represent the licensee before state authorities or Bulgarian courts. The Bulgarian Gambling Act also requires that certain communication equipment be located in Bulgaria for reporting purposes.

On February 18, 2014, one of The Stars Group’s subsidiaries was awarded a license to offer online poker and casino to Bulgarian residents. The license is valid for 10 years and may not be transferred.

Czech Republic

Under the Act on Gambling Coll. 186/2016, the State Supervision of Gambling and Lotteries Department of the Ministry of Finance of the Czech Republic (the “MFCR”) maintains the licensing procedure for individuals and entities seeking to provide betting and online casino services to customers in the Czech Republic. The MFCR defines online casino services as “an internet game, the gambling participant shall play against the operator’s software-based gaming system or against another person mediated by that system.” Online casino games can include “Technical Games”, which are games of chance operated via a technical device directly handled by the bettor, such as slot reel games, and “Live Games”, which include roulette, card games and games operated in the form of a tournament.

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On January 28, 2017, one of The Stars Group’s subsidiaries was granted a six-year license to provide online casino and poker games to customers in the Czech Republic, which will expire on January 27, 2023. On October 4, 2017, the MFCR granted approval to this same subsidiary to provide sports betting to customers in the Czech Republic, which will expire on October 3, 2023.

Pursuant to Czech anti-money laundering requirements, in order for customers to establish an online gaming account, customers must perform a face-to-face verification, which can be done at authorized “CzechPoints”, such as post offices in the Czech Republic.

Denmark

Under the Danish Gambling Act, the Danish Gambling Authority (the “DGA”) maintains the licensing procedure for individuals and entities looking to provide betting and online casino services to customers in Denmark. The DGA defines online casino services as “those where the player and operator do not meet physically, for instance where games are sold via the internet, telephone or television.” Online casino games can include roulette, blackjack, baccarat, punto banco, poker and “combination games.” A license to operate online casino services is valid for a term of five years. If the applicant has not yet obtained the required certifications for its gaming system through testing, the DGA will issue a fixed-term one-year license until such certifications are complete.

One of The Stars Group’s subsidiaries renewed a five-year license to provide online casino and poker games that will expire on December 31, 2021 and was granted a five-year license to provide online sports betting that will expire on November 30, 2020.

Estonia

The Estonian Tax and Customs Board maintains responsibility for the issuance of “activity licenses” and “operating permits” for the supply of gaming and lotteries to customers in Estonia, and also acts as the gaming supervisory agency in Estonia.

The Estonia Gambling Act, RT I 2008, 47, 261 (the “Estonia Gambling Act”) was enacted to establish strict requirements for gaming operators, provide measures for the protection of players and reduce the negative consequences of gaming and its impact on society. “Remote gambling” under the Estonia Gambling Act is defined as “the organisation of gambling in a manner where the outcome of the game is determined by an electronic device and the player can participate in the game by electronic means of communication, including telephone, Internet and media services.”

On August 18, 2010, one of The Stars Group’s subsidiaries was awarded an activity license, which became effective on August 23, 2010. Activity licenses are generally valid for an unspecified period of time. On September 20, 2010, that subsidiary was further awarded an operating permit for the organizing of games of chance in the form of remote gambling concerning one of The Stars Group’s domain names. This operating permit, which was subsequently renewed in September 2015, is valid through September 21, 2020.

France

The Collège de l’Autorité de régulation des jeux en ligne (the “ARJEL”) oversees gaming licensing with respect to customers in France. Act No. 2010-476 of 12 May 2010 authorized online gaming with respect to customers in France for poker and betting on sports, horse races and circle games. Each type of online gaming requires a separate gaming license. Government decrees and orders are also a part of the French regulatory system. The decrees and orders that The Stars Group believes are relevant to its business, address, among other topics, changes of control, customer accounts and the licensing process. French regulation requires the submission of an annual certification audit, which is a technical and security audit relating to the hosting platforms that power the services provided under the applicable ARJEL gaming license. Additionally, licensees are required to submit weekly financial reports to the ARJEL.

One of The Stars Group’s subsidiaries renewed a five-year license granted by ARJEL for online poker games that will expire on June 24, 2020. On June 7, 2016, one of The Stars Group’s subsidiaries was granted a five-year license by ARJEL for sports betting, which will expire on June 6, 2021.

On July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement in Rome providing for online poker liquidity to be pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local clearance for its players to take part. On December 14, 2017, The Stars Group’s subsidiary licensed by ARJEL received authorization to include French players into the merged player pools. On January 15, 2018, the Spanish gaming regulator, Dirección General de Ordenación del Juego (the “DGOJ”), granted an authorization to a subsidiary of The Stars Group to include Spanish players in the merged player pools. The Stars Group’s relevant subsidiaries therefore inaugurated pooled Franco-Spanish poker gameplay on January 16, 2018 and added Portuguese players on May 23, 2018. The Stars Group anticipates the necessary local authorization from the gaming authority in Italy to permit players from that jurisdiction to join the pooled liquidity in the near future. See “—Italy”, “—Portugal” and “—Spain”, below.

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Germany—Schleswig Holstein

The German state of Schleswig Holstein issued a gaming license to a Maltese subsidiary of The Stars Group pursuant to a state law adopted in 2012 that regulated and licensed online gaming. Although the law has since been repealed and the gaming license expired on December 21, 2018, the Schleswig Holstein Ministry of Interior issued an order permitting the Maltese subsidiary to continue operating under the gaming license until such time as the Ministry of Interior deems otherwise. Under such gaming license and order, and only until the expiration of the order, the Maltese subsidiary is permitted to offer poker games and certain casino games to customers in Schleswig Holstein.

Greece

In Greece, the Hellenic Gaming Commission (the “HGC”), in partnership with the Greek Ministry of Finance (the “Greek Ministry”) is responsible for regulating and supervising the online gaming industry. In 2011, the Greek government enacted new legislation relating to all forms of gaming (the “Greek Gambling Act”). Under the Greek Gambling Act, companies that have been licensed by the Greek Ministry through public tenders are authorized to offer online gaming. The Greek Gambling Act also allows for companies that hold gaming licenses in other member states of the European Union to apply for interim temporary licenses, which will remain valid until the formal licenses are awarded. The HGC issued twenty-four temporary gaming licenses under the Greek Gambling Act. Greek authorities have announced regulations that would make permanent the Greek temporary regime and the consultation on those regulations concluded in February 2019. Currently, the political situation in Greece is volatile and it is unclear whether, when and in what form, the permanent licensing framework will finally be implemented in that jurisdiction.

In November 2013, The Stars Group partnered with Diamond Link Ltd. (“Diamond Link”) to allow Greek customers to utilize The Stars Group’s online gaming products. Diamond Link is one of the twenty-four temporary gaming license holders in Greece, and through The Stars Group’s partnership, two of The Stars Group’s websites operate under that authorization utilizing Diamond Link’s Maltese gaming license. In May 2017, a subsidiary of The Stars Group purchased all the outstanding interests of Diamond Link and maintains the temporary gaming license that allows Greek customers to utilize The Stars Group’s online gaming products.

Ireland

In Ireland, sports betting services are regulated by the Betting Acts 1931—2015 and licensed through the Irish National Excise Licence Office. The primary suitability and probity requirement of the Irish authorities is that individual applicants for betting licenses as well as officers of corporate applicants must hold a “Certificate of Personal Fitness” issued by the Department of Justice and Equality as well as a “Tax Clearance” certificate.

In July 2015, a subsidiary of The Stars Group received an online betting license from the Irish National Excise Licence Office to provide online sports betting to customers in Ireland, and as a result of the SBG Acquisition, another subsidiary of The Stars Group also holds an online betting license. All Irish online betting licenses are valid for two years and commence and expire on the same dates, having been renewed as a class in June 2017 and are therefore currently valid through June 30, 2019.

In addition, as a result of the SBG Acquisition, another subsidiary of The Stars Group also holds an online betting license from the Irish National Excise Licence Office to provide online sports betting to customers in Ireland, which is currently valid through June 30, 2019.

Poker and casino games are made available to persons in Ireland through either The Stars Group’s Maltese or Alderney multi-jurisdictional gaming license (discussed below in more detail) pending the Irish government’s enactment of the more comprehensive gaming licensing regime based on the “General Scheme of the Gambling Control Bill’ that has been stalled in the Irish legislature since 2013.

Italy

Currently, the Agenzia delle Dogane e dei Monopoli (the “ADM”) regulates gaming in Italy. All operators, both foreign and domestic, are required to obtain a gaming license from the ADM to provide online gaming products to residents in Italy. Applicants based in the European Economic Area (“EEA”), or those with their registered office within the EEA, are eligible for a license.

On December 17, 2010, the ADM amended a concession to operate, among other things, poker, casino and sports betting in Italy to one of The Stars Group’s subsidiaries. Under a new tender process announced by the ADM in January 2018, the ADM will award 120 gaming licenses, which will be valid until December 31, 2022. On February 11, 2019, The Stars Group was informed that it will receive one of such licenses.

In addition, as a result of the SBG Acquisition, another subsidiary of The Stars Group also holds a gaming license covering poker, casino and sports betting in Italy, which is currently valid through February 3, 2022, although with the permission of the ADM the

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relevant subsidiary voluntarily suspended its poker operations under this license in December 2018.As noted above, on July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement providing for online poker liquidity to be pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local clearance for its players to take part. The relevant subsidiaries of The Stars Group commenced shared poker liquidity involving French and Spanish players on January 16, 2018 and added Portuguese players on May 23, 2018 but the necessary ADM authorization for the addition of Italian players has not yet been finalized.

Portugal

Under the Online Gambling and Betting Legal Regime, approved by Decree Law No. 66/2015, the Regulação e Inspeção de Jogos, or the Gambling Inspection and Regulation Service, is responsible for the control, inspection and regulation of gambling activities, including through any electronic, computer-based, telematic or any other interactive means (i.e., online gaming). Portuguese regulation requires the submission of monthly financial reports regarding, among other things, customer liability information and gaming duty reporting.

On November 25, 2016, one of The Stars Group’s subsidiaries was granted a three-year license to offer certain online poker and casino games to customers in Portugal, which will expire on November 24, 2019.

As noted above, on July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement providing for online poker liquidity to be pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local clearance for its players to take part. The relevant subsidiaries of The Stars Group commenced shared poker liquidity involving French and Spanish players on January 16, 2018 and added Portuguese players on May 23, 2018.

Romania

In Romania, the Oficiul National pentru Jocuri de Noroc (the “ONJN”) issues and maintains licenses for online gaming. In August 2015, one of The Stars Group’s subsidiaries was awarded an interim gaming license by the ONJN to offer online casino, poker and sports betting to customers in Romania. The interim gaming license was valid for one year and on August 12, 2016, the ONJN awarded The Stars Group’s relevant subsidiary a full license for organizing remote gambling games, which is valid for ten years and allows such subsidiary to provide online poker, casino and sports betting to customers in Romania. The gaming license is subject to an annual reauthorization by the ONJN, which is based on a review of the licensee’s compliance with the applicable license terms.

Spain

In Spain, gaming is traditionally regulated by each of the seventeen autonomous regions. Spain’s Gambling Act (the “Spanish Gambling Act”) became effective on May 29, 2011, in order to, among other things, regulate online gaming nationwide. The Spanish Gambling Act covers “gaming operations through electronic, interactive, and technological means” including the internet, television, mobile phones and land lines. The types of gaming activities controlled under the Spanish Gambling Act include sports betting, horse racing betting, raffles, competitions and “other games”, which includes poker and casino games. The DGOJ is responsible for enforcing the Spanish Gambling Act and has sanctioning authority.

The Spanish Gambling Act establishes two categories of gaming licenses: general and single, as well as a permit for offering occasional games. A “general license” is required to offer certain types of betting games, raffles and games categorized as other games. General licenses are valid for a ten-year term, and may be renewed for additional ten-year periods. The DGOJ offers general licenses through a competitive and public tendering process. The Gambling Act requires applicants to apply for provisional registration in the General Register of Gambling Licenses prior to requesting a call, or public notice of application, for a general license. The Gambling Act grants the DGOJ the authority to restrict the number of licenses awarded for each type of game based on public interest and whether a company requests a call, in each case allowing the DGOJ to control the license review and authorization process. If the number of licenses for a particular type of game is restricted, the licenses offered during that call are not automatically renewable.

On June 1, 2012, one of The Stars Group’s subsidiaries was granted a general license to develop and operate games in the other games category and a singular license to offer online poker. The same subsidiary is also authorized to advertise, sponsor and promote the games authorized by the gaming licenses. The general license is valid for a ten-year term, and the singular license is valid for a five-year term and has been renewed through June 1, 2022. This subsidiary has also been granted singular licenses for blackjack, roulette and sports betting and a general license for sports betting. The gaming licenses for blackjack and roulette expire on February 2, 2021. The singular and general sports betting licenses expire on June 2, 2025 and June 2, 2020, respectively.

On January 15, 2018, The Stars Group’s subsidiary licensed by the DGOJ received authorization for shared liquidity, permitting it to offer merged player pools comprising players from Italy, Portugal and France. Pooled liquidity between Spanish and French players launched on January 16, 2018 and Portuguese players were added on May 23, 2018. The Stars Group is awaiting the necessary local authorizations to include Italian players. For additional information, see “—France”, “—Italy” and “—Portugal” above.

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Sweden

Prior to January 1, 2019, in Sweden the Lotteries Act 1994 (Sw: Lotterilagen 1994:1000) (the “Lotteries Act”) was the primary legislation with respect to gambling and governs all categories of gambling offered to the public in Sweden. The Lotteries Act prohibited the arrangement of unlicensed lotteries and the promotion of participation, in commercial operations or otherwise for the purpose of profit, in unlawful domestic lotteries or foreign lotteries. The definition of “lottery” was broad and explicitly included betting, bingo, casino games and other similar games. The Lotteries Act did not in any material way distinguish between land-based gambling and online gambling. Under the Lotteries Act regime it was not possible for a private commercial entity to obtain a license to provide online gambling services to Swedish customers. It was however, not illegal for private operators established in another European Union member state to offer gambling services to Swedish customers. On October 16, 2014, the European Commission took two separate decisions to bring infringement proceedings against the Swedish government to the CJEU in relation to the Swedish legislation for gambling services.

In Sweden, court cases have found that the only activity covered by the Lotteries Act was local advertising carried out by local media companies. These cases are against the media companies and courts tended to find that the prohibition of advertising for operators not holding a Swedish license was unenforceable because the Lotteries Act was widely regarded as being in violation of the TFEU. Furthermore, the launch of infringement proceedings against Sweden reinforced The Stars Group’s then-current position that the supply of gambling services to Swedish players from another European Union member state is permitted.

In June 2018, the Swedish Parliament passed new legislation that introduced a point-of-consumption based licensing system to regulate online gaming and betting similar to other European “regulated markets” regimes. The new system, The Gambling Act (SFS 2018:1138), came into effect on January 1, 2019. On December 10, 2018, a subsidiary of The Stars Group was awarded a license under the new act and launched a licensed offering of poker, casino and betting on January 1, 2019. The offering under the license is currently undergoing a certification that must be submitted no later than July 1, 2019.

Great Britain

Betting and gaming with respect to customers in Great Britain (England, Scotland and Wales, but excluding Northern Ireland) is regulated by the Gambling Act 2005 (the “2005 Act”). The 2005 Act established the Gambling Commission as the regulator responsible for granting licenses to operate gambling services as well as overseeing compliance with applicable law and regulation. In 2014, the UK Parliament passed the Gambling (Licensing and Advertising) Act 2014, which required all remote gambling operators serving customers in Great Britain or advertising in Great Britain to obtain a license from the Gambling Commission. On November 1, 2014, one of The Stars Group’s subsidiaries obtained a “continuation” (i.e., interim) license issued by the Gambling Commission, and on March 18, 2015 a full operating license was issued along with the separate software and “key personnel” individual licenses. In addition, as a result of the SBG Acquisition, another subsidiary of The Stars Group also holds a full operating license as well as the separate software and “key personnel” individual licenses. The terms of these operating licenses require that the relevant subsidiary of The Stars Group source all telecommunication services in respect of its gaming activities, including the supply of a telecommunications circuit and internet access service, from a licensed provider. So long as the applicable license fees are paid and the British licenses are not suspended, revoked or otherwise surrendered, The Stars Group expects that the licenses will remain valid indefinitely.

British regulations require licensed companies to file quarterly returns as well as a more extensive “annual assurance statement” to provide the Gambling Commission with information regarding matters such as significant changes in control systems, risk management and governance since the last assurance statement, how the licensed company is addressing problem and at-risk gambling, and any improvements that the licensed company plans to implement to its control systems and risk management and governance and/or its approach to addressing problem and at-risk gambling, including actions to address the National Responsible Gambling Strategy.

United States

Generally, intrastate online gaming is lawful in the United States provided the relevant gaming complies with the Unlawful Internet Gambling Enforcement Act (the “UIGEA”) and the particular state has enacted legislation or otherwise properly authorized the same. Further, the Federal Wire Act of 1961 (the “Federal Wire Act”) makes it unlawful to use electronic communications to make interstate bets or wagers, or transmit information that assists in making such bets or wagers, on any sporting event or contest. In December of 2011, the United States Department of Justice (the “DOJ”) issued an opinion from its Office of Legal Counsel (“OLC”) indicating that it is the official opinion of the DOJ that the Federal Wire Act “prohibits only the transmission of communications related to bets or wagers on sporting events or contests.” More specifically, “interstate transmissions of wire communications that do not relate to a ‘sporting event or contest’ [. . .] fall outside of the reach of the Wire Act” (the “2011 DOJ Opinion”). Pursuant to this guidance, the legislatures of New Jersey, Nevada, Delaware and Pennsylvania authorized intrastate online gaming, provided that the gambling does not concern a sporting event or contest. On January 14, 2019, the DOJ made public a November 2, 2018 OLC opinion reversing the 2011 DOJ Opinion, finding the prohibitions in the Federal Wire Act were not limited to wire communications relating to bets or wagers on sporting events or contest, but rather extend to all forms of bets or wagers (the “2018 DOJ Opinion”).  Further, the 2018 DOJ Opinion detailed the OLC’s position that the enactment of UIGEA did not modify the scope of the Federal Wire Act. More specifically, the OLC

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determined that by excluding certain activities from UIGEA’s definition of ‘unlawful Internet gambling,’ UIGEA did not exclude those same activities from the prohibitions of the Federal Wire Act. The 2018 DOJ Opinion stated that anyone who reasonably relied on the 2011 DOJ Opinion may have a defense for actions taken in such reliance through November 2, 2018.  On January 15, 2019, DOJ Deputy Attorney General Rod Rosenstein issued a memorandum to United States Attorneys, Assistant Attorneys General and the Director of the Federal Bureau of Investigations stating that the DOJ should exercise discretion in applying the new interpretation provided under 2018 DOJ Opinion for a period of 90 days in order to “give businesses that relied on the [2011 DOJ Opinion] time to bring their operations into compliance with federal law.”

On September 27, 2017, New Jersey joined the Multi-State Internet Gaming Agreement (the “MSIGA”), which was previously entered into between Delaware and Nevada. The MSIGA permits New Jersey, Nevada and Delaware to share liquidity among players in both online poker and certain online casino games. Under the MSIGA, customers can only access online gaming sites that are licensed by the state in which they are located, i.e., Nevada residents can play online games on sites licensed in Nevada. The MSIGA sets forth certain minimum standards that each state is expected to have in place, including common standards in the regulated gaming industry, such as age and identity verification, anti-money laundering and related protocols, data security, and other measures intended to assure the integrity of wagering conducted pursuant to the MSIGA. The Stars Group believes MSIGA is intended to be expanded beyond its current membership of New Jersey, Nevada and Delaware. Due to the 2018 DOJ Opinion, there is a likelihood that interstate Internet poker and online casino games may fall within the DOJ’s current view of the Federal Wire Act prohibitions that could threaten the existing MSIGA participants and any future growth of operations under MSIGA.

On May 14, 2018, the United States Supreme Court (the “Supreme Court”) issued an opinion in Murphy v. National Collegiate Athletic Association (formerly known as Christie v. National Collegiate Athletic Association), No. 16-476, determining that the Federal Professional and Amateur Sports Protection Act (“PASPA”) was unconstitutional. PASPA prohibited a state from “authorizing by law” any form of sports betting. In striking down PASPA, the Supreme Court opened the potential for state-by-state authorization of sports betting. Several states, including New Jersey, Pennsylvania, West Virginia, Mississippi Nevada, New Mexico, Delaware, and Rhode Island already have laws authorizing sports betting. Regardless of the Supreme Court’s decision, sports betting in the United States may be subject to additional laws, rules and regulations, including those discussed in this annual information form. For example, see “Risk Factors and Uncertainties—Risks Related to Regulation—The Stars Group may not be able to capitalize on the expansion of online gaming or other trends and changes in the online gaming industry, including due to laws and regulations governing this industry.”

More detail on the regulatory framework in New Jersey and Pennsylvania, where The Stars Group currently holds a transactional waiver and conditional licenses, respectively, is provided directly below.

New Jersey

In New Jersey, the provision of online gaming, sports wagering and other aspects of casino gaming are subject to the requirements of the New Jersey Casino Control Act (the “NJ Act”) and the regulations promulgated thereunder. Under the online gaming laws in New Jersey, third-party companies may provide services to casino licensees to facilitate online poker casino and sports wagering, including website hosting and the providing game content. Such service providers must first obtain a casino service industry enterprise (a “CSIE”) license. The New Jersey Division of Gaming Enforcement (the “NJ DGE”) is responsible for investigating all license applications and prosecuting violations of the NJ Act.

Due to the length of investigative time prior to issuing of a plenary CSIE license, the New Jersey regulations allow a CSIE applicant to petition the NJ DGE for a transactional waiver, which allows a CSIE applicant to conduct business with a casino licensee prior to the issuance of a license at the discretion of the NJ DGE and subject to certain conditions.

Certain subsidiaries of The Stars Group were issued an initial six-month transactional waiver on September 30, 2015 in relation to an agreement entered into with an affiliate of Resorts Casino Hotel in Atlantic City, New Jersey to conduct online gaming in the state. Additional six-month renewal transactional waivers have been granted to these subsidiaries to continue operations with the most recent transactional waiver granted on September 30, 2018 and valid until March 30, 2019. The transactional waiver may be renewed in six-month intervals until a full, five-year license is issued; there can be no assurance that such a license will be issued. The transactional waiver contains certain conditions, including, prohibiting certain individuals from having any relationship with The Stars Group and informing the NJ DGE of various actions of such individuals, providing the NJ DGE with notice of certain corporate actions and copies of records relating to the same, and providing certain inspection rights to the NJ DGE.

Pennsylvania

In 2017, the Commonwealth of Pennsylvania passed gambling expansion legislation which included the authorization of online gaming and sports wagering, both land-based and online. Oversight of gambling in Pennsylvania is controlled by the Pennsylvania Gaming Control Board (“PGCB”). Under the gambling expansion legislation, third-party operators may offer online poker, casino and sports betting on behalf of, or in partnership with, an interactive gaming certificate holder, i.e. a land-based casino operator, subject to receipt of an interactive gaming operator license issued by the PGCB.  The term of the operator license is for a period of five years and

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may be renewed thereafter. The PGCB is also authorized to issue conditional licenses upon the completion of its preliminary investigation, which authorize providers to conduct interactive gaming on behalf of an interactive gaming certificate holder subject to completion of certain conditions by the interactive gaming certificate holder.

On November 28, 2018, a subsidiary of The Stars Group was issued a conditional interactive gaming operator license by the PGCB and on December 19, 2018 that same subsidiary was issued a conditional sports wagering operator license by the PGCB. On August 15, 2018, Mount Airy #1, LLC, d/b/a Mount Airy Resort Casino, received approval by the PGCB of its petition to conduct interactive gaming, naming The Stars Group as an interactive gaming operator on its behalf. Upon completion of certain technical review and operational approvals, The Stars Group can commence online gaming in Pennsylvania.

Multi-Jurisdictional Licenses

The Stars Group, through certain subsidiaries, holds gaming licenses in Malta, the Isle of Man and Alderney, which are often referred to as “multi-jurisdictional” or “point-of-supply” licenses (as opposed to the local, territory-specific or “point-of-consumption” licenses detailed in “—Local Licenses and Approvals” above). These multi-jurisdictional licenses are used by The Stars Group’s various subsidiaries to supply The Stars Group’s online gaming products to persons located in jurisdictions where The Stars Group does not possess a local, territory-specific or point-of-consumption gaming license authorizing the same.

Where online gaming products hosted on Maltese, Isle of Man or Alderney servers pursuant to the relevant multi-jurisdictional licenses are made available by The Stars Group for online usage by customers in other jurisdictions it is done based on the well-established general principle of e-commerce and Internet law that deems the provision of online product offerings to take place where the operator’s server and/or the operator itself is established and located. This principle is widely relied upon by online gaming operators as well as by many other e-commerce businesses.

Accordingly, The Stars Group relies on the fact that its supply of online gaming product offerings is lawfully licensed or approved within the jurisdiction of origin (i.e., Malta, the Isle of Man or Alderney) as the rationale for The Stars Group’s lawful offer of gaming product offerings to other jurisdictions where either: (i) such other jurisdictions have not established a regulatory and licensing framework for online gaming; (ii) the availability to citizens of online gaming hosted outside their jurisdictional boundaries is not clearly prohibited by the law of the jurisdiction; or (iii) the local laws of such other jurisdiction lack extra-territorial effect, including where local law is contrary to any supra-national law from which The Stars Group benefits. By way of example: item (iii) above is the position in European Union member states such as Germany, where domestic law is widely held to be incompatible with the basic principles of European Union law; and items (i) through (iii) above apply in relation to certain Asian jurisdictions where, although prohibitions on online gaming exist, they do not apply extra-territorially to, for example, gaming contracts entered into on servers located in (x) Malta or the Isle of Man on a lawful basis pursuant to and in accordance with the terms of the relevant multi-jurisdictional licenses as mentioned above or (y) jurisdictions, on a lawful basis, where The Stars Group’s B2B partners hold relevant licenses.

Where, however, any jurisdiction has enacted local domestic laws that clearly prohibit the availability to citizens of online gaming products hosted abroad, and where it is clear that such local domestic law has extra-territorial application to The Stars Group to the extent that the principle of extra-territoriality described above is clearly overridden, The Stars Group will take technical and administrative measures aimed at preventing persons from the relevant jurisdictions accessing its gaming product offerings. For additional information, see below under “—Regulatory Strategy”.

Set forth below is an overview of The Stars Group’s multi-jurisdictional licenses.

Alderney

The Bailiwick of Guernsey includes Alderney, which has been recognized as a leading offshore licensing jurisdiction for remote gambling since 2000. However, Alderney has its own government and legislature, and online gambling in Alderney is regulated by the Alderney Gambling Control Commission (“AGCC”).

Section 5(1) of the Gambling (Alderney) Law 1999 operates so as to make all forms of gambling unlawful unless conducted in accordance with the terms of an ordinance. Alderney (unlike neighboring Guernsey) issued an ordinance in 2001 providing that only online gambling (known as eGambling) conducted under a licence is lawful. The state has subsequently refined the regulation of eGambling by adopting various amendments to this ordinance and by issuing the Alderney eGambling Regulations 2009. The current ordinance regulating online gambling in Alderney is the Alderney eGambling Ordinance 2009. Various licenses are available in Alderney and are determined by the nature of the services being supplied and the location and set-up of the licence-holders’ infrastructure. Remote operators, B2B core service providers and key individuals all require a license issued by the AGCC to offer their services from Alderney.

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A subsidiary of SBG currently holds Category 1 and Category 2 eGambling licenses, which permit it to host remote gambling equipment in Guernsey and to offer sports betting, virtual sports, bingo, casino games and poker to its online customers based in Gibraltar, the Isle of Man and the Channel Islands, as well as Ireland in respect of bingo, casino games and poker only.

Isle of Man

Under the Online Gambling Regulation Act 2001, the Isle of Man Gambling Supervision Commission (the “GSC”) has responsibility for regulating and supervising all online gaming activities in the Isle of Man, and for investigating the character and financial status of any person applying for or holding a license in connection with online gaming. The GSC is authorized to grant a license to conduct online gaming to a company if the GSC is satisfied: (i) that the company is under the control of persons of integrity; (ii) as to the beneficial ownership of the company’s share capital; (iii) that the company’s activities are under the management of persons of integrity and competence; and (iv) that the company has adequate financial means available to conduct online gaming. Licenses are generally valid for a maximum of five years. The GSC may revoke a gaming license if the licensee fails, at any time, to meet any of the initial licensure requirements. The GSC may suspend or revoke a gaming license if the holder of the gaming license or designated official is convicted of certain offenses, or is convicted “by a court in any country or territory in the world of an offense punishable (in that country or territory) in the case of an adult by custody for an unlimited period or a term of two years or more.” Gaming licenses may also be suspended or revoked for other reasons, including the failure to pay required fees or failure to comply with license conditions or obligations.

One of The Stars Group’s subsidiaries holds a five-year gaming license issued by the GSC allowing The Stars Group to provide poker, casino and betting product offerings. The license was renewed on March 10, 2014 and The Stars Group anticipates that it will be renewed following its expiration.  

With the exception of the United States, outside the European Union, the Isle of Man license granted to one of The Stars Group’s subsidiaries generally permits the licensee to accept customers in various jurisdictions worldwide where domestic laws do not clearly prohibit the availability to citizens of online gaming products hosted abroad, and where it is clear that such local domestic law has extra-territorial application or where there is no national regulatory and licensing system that specifically requires licensure by foreign operators.  

Malta

Under the Maltese Lotteries and Other Games Act 2001 (Chapter 438 of the Laws of Malta) and the Remote Gaming Regulations (S.L. 438.04) (collectively, the “Maltese Regulations”), the Malta Gaming Authority (the “Maltese Authority”) regulates all aspects of gaming in Malta. Pursuant to the Maltese Regulations, any person who operates, promotes, sells, supplies or manages interactive gaming in or from Malta must obtain the appropriate license from the Maltese Authority. Currently, the Maltese Authority issues four classes of Remote Gaming Licenses: (i) a Class 1 Remote Gaming License—remote gaming license; (ii) a Class 2 Remote Gaming License—remote betting office license; (iii) a Class 3 Remote Gaming License—license to promote and/or abet remote gaming from Malta; and (iv) a Class 4 Remote Gaming License—license to host and manage remote gaming operators, excluding the licensee. The above-referenced licenses or an authorized equivalent from an EEA jurisdiction approved by the Maltese Authority are required to operate, promote, sell or abet Internet gaming in or from Malta.

In the coming weeks, the Maltese Lotteries and Other Games Act 2001 will be repealed and replaced by a new Gaming Act (Chapter 583 of the Laws of Malta). The new Gaming Act will replace the current multi-license class system with a system in which there will only be two different types of license: (i) a Business-to-Consumer (“B2C”) license; and (ii) a B2B license. As at the date of this annual information form, The Stars Group is reviewing a plan to migrate its B2C offerings that are currently made available pursuant to its Isle of Man gaming license to its Maltese licensing structure.

Three of The Stars Group’s subsidiaries hold an aggregate of 12 gaming licenses issued by the Maltese Authority, including Class 1, Class 2, Class 3 and Class 4 licenses, which enables such subsidiaries to offer all respective product offerings listed above. Absent any renewals or extension under the terms of the governing licensing agreements, the Class 1 license is set to expire on November 13, 2019, the Class 2 licenses are set to expire on January 20, 2020 and August 6, 2022, the Class 3 licenses are set to expire on December 22, 2021 and the Class 4 license is set to expire on December 22, 2021. In view of the change of law, the 12 gaming licenses held by The Stars Group will automatically change into one B2C license covering the same products offered under the Class 1, Class 2 and Class 3 licenses, and one B2B license. Licenses will be extended for an additional five years from the end of the latest one held by the group at the date of entry into force of the new regime.

Under the new Gaming Act, gaming duty and monthly contributions are payable in Malta on The Stars Group’s revenue from online gaming offered through these gaming licenses. With respect to online gaming offered under these gaming licenses to customers in certain jurisdictions such as Germany (other than Schleswig-Holstein) and Ireland (poker and casino), The Stars Group also pays applicable gaming duty or VAT in those jurisdictions on some or all of the online gaming offerings in those jurisdictions.

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In accordance with European Union law, The Stars Group’s Maltese gaming licenses entitle the holders of such licenses to provide online gaming services to other European Union member states in compliance with established European Union rules and principles on the free movement of services, unless those countries have their own national regulatory and licensing regime that is compatible with those same European Union rules and principles and in particular the core principles of the TFEU.

Set forth below is an overview of certain jurisdictions for which The Stars Group relies on its multi-jurisdictional licenses.

Austria

The Stars Group offers services to residents in Austria on its Malta licensed platform. Online gaming is regulated in Austria by the Ministry of Finance pursuant to the Austrian Gambling Act. This act’s compliance with European Union law is heavily disputed and has been the subject of several rulings from the European Court of Justice. In these judgments the court has determined that there are major violations of European Union law within the act. Austria has amended the act several times but the main issues remain in that there is a lack of consistency due to liberal laws on slot machine gambling and betting while maintaining a restrictive system for online gaming. There is also a lack of transparency in relation to the awarding of a single license for online gaming. The Stars Group is registered for and pays gaming duty in Austria on the revenues derived from residents.

In Austria, although the Austrian federal government has put forward a program for regulating betting centrally, this program has not yet been implemented and each Austrian state continues to regulate betting independently.

Brazil

Brazil’s Article 50 of Decree Law 3688/1941 (“Article 50”) prohibits certain types of gaming activities. The law defines gaming as games in which the gain or loss depends on luck. Several judicial opinions, administrative opinions, and other reports and legal opinions have held that poker is a game of skill, and accordingly, it is not prohibited under Article 50. While there have also been conflicting views, the consideration of poker as a game of skill appears to be the majority view in Brazil, and the Brazilian Sports Ministry has also recognized poker as a “sport.” Further, it is not clear whether Article 50’s restrictions apply to online gaming supplied into the jurisdiction from offshore operators as the law does not mention Internet gaming and there are no specific laws or regulations concerning Internet gaming. The Stars Group also believes that Brazilian law may take a narrow approach to the extra-territorial effect of Brazilian law with respect to the Internet. A different interpretation of Article 50 may be adopted by a court of competent jurisdiction, which could have a material adverse effect on The Stars Group’s business, financial condition and operating results.

Canada

In Canada, gaming regulation exists in a type of shared jurisdiction between the federal government of Canada and the provincial and territorial governments across the country. At the federal level, the Canadian Criminal Code contains provisions that both prohibit and allow certain types of gambling activity. Each province has the exclusive jurisdiction and power to regulate and offer or further restrict, within its borders, gambling activity.

Part VII of the Criminal Code establishes a number of offences related to gaming, betting, and lottery schemes, and also sets out a number of exemptions. The applicability of the various Criminal Code offences depends to a great extent on the nature of the specific gaming or betting activity itself, ancillary and related activities, and the extraterritorial limits of the Criminal Code. The Criminal Code does not specifically contemplate online gambling. The relevant provisions of the Criminal Code prohibit: (a) keeping a common gaming house (which requires a specific physical location); (b) betting activities; (c) games of pure chance; and (d) traditional gambling.

The Stars Group, aided by input from external legal advisors and The Stars Group’s Compliance Committee (as defined below), has formed the reasoned view that Part VII of the Criminal Code does not prohibit peer-to-peer online poker services, which are currently The Stars Group’s only real-money services accessible in Canada. Although no Canadian court has yet considered this question, The Stars Group holds this view because, among other reasons: (a) online poker does not occur in a specific physical location; (b) playing poker constitutes gaming and not “betting”; (c) poker is a game of skill with some element of chance; and (d) online poker, where the stakes are won and lost between the players who participate directly in peer-to-peer interactions around a virtual table, is not “traditional gambling” where players compete against the house. As such, The Stars Group does not currently hold or believe that it is required to hold a gaming license in any Canadian jurisdiction with respect to its online peer-to-peer poker offering. Although Canadian authorities have brought a number of prosecutions in relation to gaming, these are understood to have involved physical gaming operations based within the jurisdiction. A different interpretation of the Criminal Code may be adopted by a court of competent jurisdiction, which could have a material adverse effect on The Stars Group’s business, financial condition and operating results.

Germany (other than Schleswig-Holstein)

With respect to Germany (other than Schleswig-Holstein), The Stars Group’s online poker, casino and sports betting product offerings are accessible to customers in Germany pursuant to its Maltese licenses in accordance with the right to offer services freely

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across European Union member state borders set out in the Treaty on the Functioning of the European Union (“TFEU”). For information on The Stars Group’s operations in the State of Schleswig Holstein in Germany, see “—Germany—Schleswig Holstein” above.

The “Glücksspielstaatsvertrag” or Interstate Treaty on Gambling of July 1, 2012 (the “Treaty”) generally provides for Germany’s 16 states to assume responsibility for aspects of gambling regulation. Attempts have been made in Germany to maintain the state monopoly on lotteries, prohibit the offering of online casino games (including poker), and permit the licensing of only 20 sports betting operators. The German authorities, however, have been reluctant to initiate any enforcement actions regarding unlicensed online gaming services due to uncertainty over the compatibility of the Treaty with the TFEU, particularly in relation to sports betting subsequent to the February 2016 decision of the Court of Justice of the European Union (“CJEU”) in the Ince case (C-336/14). In the Ince case, the CJEU ruled that Germany runs an unlawful de facto state monopoly on sports betting due to the non-transparent, discriminatory licensing procedure under which private betting licenses could not be granted in practice all while the state-owned gaming operators are allowed to continue their respective businesses. The CJEU cited the incompatibility of the Treaty with the TFEU on the basis it does not observe the principles of equal treatment and non-discrimination on grounds of nationality and the consequent obligation of transparency. The CJEU’s judgment also called into question the regulation of online gaming in Germany as a whole, demanding clear licensing criteria. Given the CJEU’s position in February 2016 as well as wider European Union and domestic German concerns with the lawfulness of the Treaty, The Stars Group currently believes that it is justified in deriving revenue from the supply of The Stars Group’s online poker, casino and sports betting services to German customers using its Maltese licenses on the basis of the Treaty’s incompatibility with Germany’s obligations under the TFEU.

On October 27, 2017, the Bundesverwaltungsgericht (the “Federal Administrative Court of Germany”) published a press release detailing its decision to confirm the lawfulness of the Treaty’s current ban on unlicensed gambling. The Federal Administrative Court of Germany upheld two prohibition orders issued by the authorities of Baden-Württemberg against online gaming and sports betting operators based in Malta and Gibraltar. The Stars Group currently believes that the decision is unlikely to affect operators who applied for one of the 20 online betting licenses in Germany because in addition to the Ince case noted above, there exist various lower court decisions holding that process to have been deficient. In relation to online gaming, including poker, The Stars Group currently believes that there are still good arguments as to why the Treaty remains non-compliant with the TFEU. As such, The Stars Group continues to believe that it is justified in deriving revenue from the supply of The Stars Group’s online poker, casino and sports betting services to German customers using its Maltese licenses on the basis of the Treaty’s incompatibility with Germany’s obligations under the TFEU.

The Netherlands

The Stars Group’s online gaming offerings are also accessible to customers in the Netherlands pursuant to its Maltese licenses. The Dutch Betting and Gaming Act 1964 (the “BGA”) generally prohibits the provision of gambling without a license. It has been debated whether the BGA also applies to gambling provided via the Internet and if it is also applicable to actions taken outside of the Netherlands. However, the Dutch legislature passed a new law on July 7, 2016 introducing a new licensing framework for remote (and non-remote) gambling products as well as remote gambling regulations to implement the licensing regime. The Dutch senate passed the law on February 19, 2019, and The Stars Group currently expects that licensing under the new law will be available in 2021. The new law will introduce a point-of-consumption regime to allow operators wishing to provide their remote gambling products to persons in the Netherlands to apply for, and obtain, a license to do so.

In the meantime, the Dutch Gaming Authority will set out its approach to regulating gambling during the period pending the introduction of the new licensing regime, during which The Stars Group expects to be able to keep offering services to Dutch players.

Russian Federation

In the Russian Federation, The Stars Group’s primary offering is online poker offered in conjunction with the live events it sponsors in Sochi, Russia. These live events include (i) the PokerStars Championship Sochi, which included dozens of events with a centerpiece 150 million RUB (approximately $2.6 million) guaranteed main event, the largest guaranteed prize pool event in Russian poker history, (ii) a PokerStars Festival, and the European Poker Tour Sochi, which included 18 events with a total prize pool of approximately 286 million RUB (approximately $5 million). These live events also included a series of qualifying online events. The Stars Group is scheduled to hold the European Poker Tour Sochi again in March 2019, which is expected to include 23 events with a guaranteed prize pool for the Main Event of 150,000,000 RUB (approximately $2.25 million) and include a series of qualifying online events worldwide.

In November 2017, Russian President Putin signed a bill into law that introduced financial blocking measures in Russia for illegal gambling services (the “Financial Blocking Bill”), enforcement of which started in late May 2018. Although the Financial Blocking Bill does not clearly specify enforcement measures, as of the date of this annual information form certain measures to block certain transactions using domestic credit and debit cards have been implemented and some offshore payment processors and gambling companies have been “blacklisted”, which has caused certain locally licensed banking institutions to cease conducting business with such payment processors and gambling companies. The Stars Group is currently monitoring and assessing the actual and potential impact and disruptions to its business caused by the Financial Blocking Bill and it is engaging in various activities that it believes are and may

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continue to mitigate the potential impact of the Financial Blocking Bill. An example of The Stars Group’s mitigating activities is the marketing of its live events in Sochi, such as the European Poker Tour Sochi described above, which are being conducted in partnership with a land-based casino in Sochi. Nevertheless, the Financial Blocking Bill could materially adversely affect its business, results of operations and financial condition.

Switzerland

With respect to Switzerland, The Stars Group has received legal advice that, in the absence of any territorial connection to Switzerland, a foreign gaming operator cannot be liable for breach of gaming regulations under Swiss law. To The Stars Group’s knowledge, as of the date of this annual information form, the Swiss authorities have not sought to initiate any enforcement actions against offshore gaming operators. The Stars Group therefore relies on certain arguments on the lack of extra-territorial applicability and enforceability of Swiss law to support its continued offering of its online gaming products to customers located in Switzerland pursuant to its multi-jurisdictional licenses. In addition, The Stars Group continues to pay applicable VAT on its online poker offering in Switzerland. In June 2018, the Swiss government passed legislation that would provide for the grant of licenses to offer online gaming services to land-based gaming license holders in Switzerland. This legislation came into effect on January 1, 2019. On July 1, 2019, a licensing system will be launched that will allow holders of a local offline casino license to offer poker and casino games online. The Stars Group no longer offers sports betting or casino games and is preparing to launch a locally licensed poker offering as a supplier to a local casino.

Regulatory Strategy

The Stars Group seeks to ensure that it obtains all gaming licenses necessary to develop and offer its product offerings in the jurisdictions in which it operates, where its customers are located and/or where it is otherwise required to do so. In particular, The Stars Group intends to seek licensure with respect to more European Union member states if and when such member states introduce their own independent regulatory and licensing regimes compliant with European Union law. Outside of the European Union, The Stars Group anticipates there may be a potential for the regulation of online gaming, including online poker, casino and/or betting, including with respect to shared liquidity, and that this may result in potential licensing or partnerships with private operators in various jurisdictions. The Stars Group supports the regulation of online gaming, including licensing and taxation regimes and pooled poker liquidity, which it believes will promote sustainable online gaming markets that are beneficial for consumers, governments and the citizens of the regulating jurisdiction, operators and the gaming industry as a whole. The Stars Group expects to continue to invest substantial resources into these efforts, particularly in markets that management believes may in the future have the greatest impact on its business. The Stars Group strives to work with applicable governmental authorities to develop regulations that it expects would protect consumers, encourage responsible gaming, ensure reasonable levels of taxation and promote regulated gameplay. The Stars Group also strives to be among the first licensed operators to obtain gaming licenses and provide online gaming to customers in newly regulated jurisdictions, in each case to the extent it would be in furtherance of The Stars Group’s business goals and strategy and in compliance with its policies and procedures.

The Stars Group also seeks to ensure that its systems and product offerings comply with all the regulations and guidelines published by the gaming authorities that license The Stars Group. The Stars Group works with regulatory and governmental bodies to ensure its products, including the software and technological infrastructure underlying the same, undergo comprehensive, exhaustive and rigorous testing by such regulatory and governmental bodies, as well as by independent industry leading testing, accreditation and certification laboratories (including GLI and BMM). The objective of this testing is to certify to, among other things, security, conformity to applicable regulations and game integrity. The Stars Group seeks to meet or exceed best operational and customer protection practice requirements, each with an emphasis on fair and responsible gaming.

The methods and tools The Stars Group uses to permit or restrict access to its online gaming product offerings within a territory are mandated or approved by the applicable gaming regulatory authority in each jurisdiction where a subsidiary of The Stars Group holds a gaming license. In particular, The Stars Group employs the following methods and tools across such jurisdictions: (i) IP address blocking, which identifies the location of the player and blocks his or her IP address; and (ii) country-specific blocking based on the residence of the player. In certain jurisdictions, The Stars Group also employs geolocation blocking, which restricts access based upon the player’s geographical location determined through a series of data points such as mobile devices and wi-fi networks.

The Stars Group has a zero-tolerance approach to money laundering, terrorist financing, fraud, collusion and other forms of cheating and works with regulators and law enforcement globally on such matters. The Stars Group believes that it has a robust and extensive set of policies and procedures designed to identify such issues. Among other measures, it conducts escalating risk-based customer due diligence investigations and routinely monitors customer activity, including to identify the use of potential “proceeds of crime” in gaming. Customer activities that can trigger customer interactions initiated by The Stars Group include abnormal deposit and cashout patterns, customer-to-customer transfers and game play and prolonged, repetitive and unprofitable gaming. These are all monitored in accordance with local regulations and the guidelines of the relevant gaming authorities. The Stars Group also has a dedicated compliance team that works with The Stars Group’s employees and various departments to implement routine business activity

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monitoring and seeks to ensure that The Stars Group complies with its regulatory obligations under its gaming licenses, as well as with all the other law and regulation applicable to its business in each jurisdiction to which it is subject.

For further information regarding The Stars Group’s regulatory strategy and its commitment to ethical business conduct, see “—Technology Infrastructure, Supply Chain Management and Research and Development”.

Certain Other Regulatory Considerations

The Stars Group handles, collects, stores, receives, transmits and otherwise processes certain personal information of its customers and employees, which is subject to the laws relating to privacy as well as the protection and use of personal information that apply in various jurisdictions in which it operates and/or where its customers are located. Privacy and information protection laws, require, among other things, that entities collecting and processing such personal information do so in accordance with applicable legal and regulatory conditions. For example, the European Union General Data Protection Regulation (Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016) (the “GDPR”) cites as its core principles: (i) lawful, fair and transparent processing; (ii) processing for specific, explicit and legitimate purposes; (iii) that personal information be adequate, relevant and limited to what is necessary for the purposes in hand; (iv) that personal information be accurate and kept updated; (v) that personal data be retained for only as long as necessary; and (vi) appropriate security against loss, destruction, damage or theft is implemented. Failure to comply with applicable privacy and personal information laws can result in regulatory sanctions, fines and, in certain cases, criminal liability.

With regards to The Stars Group’s operations in Europe, particularly where the personal information being processed relates to residents of European Union member states, the European Union enacted the GDPR on May 25, 2018 to replace European Union Directive 95⁄46/EC as well as the national implementing legislation in each European Union member state. For example, the UK has adopted the GDPR along with supplementary legislation in the form of the Data Protection Act 2018. The GDPR imposes more stringent operational requirements for entities processing personal information and significant penalties for non-compliance. For instance, the GDPR introduces two categories of administrative fines depending on the seriousness of the breach that will range from: (a) up to €20 million or 4% of worldwide revenues of the preceding year (whichever is higher) for serious infringements; or (b) up to €10 million or 2% of worldwide revenues of the preceding financial year for less serious infringements. With respect to the GDPR, The Stars Group, among other things, maintains records of its data processing activities and carries out its own due diligence on entities that act as data processors on its behalf, and has introduced an automated process to delete personal information that is no longer in use. Additionally, to help ensure that personal information belonging to The Stars Group’s customers and employees will be processed in accordance with the GDPR (as well as any other relevant privacy and data and information protection legislation), The Stars Group has posted revised privacy statements together with updated terms and conditions for use of its product offerings on its websites.

The Stars Group is also subject to numerous other domestic and foreign laws and regulations. See also “Risk Factors and Uncertainties—Risks Related to the Business”. These can take the form of complex and evolving domestic and foreign laws and regulations regarding the Internet, privacy, data protection, competition, consumer protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, changes to The Stars Group’s business practices, monetary penalties, increased operating costs, or declines in customer growth or engagement, or otherwise harm its business.

Responsible and Safer Gaming

The Stars Group views the safety and welfare of its customers as critical to its business and has made appropriate investments into people and processes to identify and protect vulnerable customers. Accordingly, The Stars Group is committed to industry-leading responsible gaming practices and seeks to provide its customers with the resources and services they need to play responsibly, including through its dedicated responsible gaming staff. These practices, resources and services include deposit limits, table and game play limits, voluntary restrictions on access and use of certain games, temporary self-exclusion and cooling off periods, voluntary permanent exclusions from The Stars Group’s offerings, sites and applications, and where relevant activity monitoring, including through the use of indicator reports and data science technology. The Stars Group has also partnered with various responsible gaming organizations that conduct research and offer education and direct counselling for players. These organizations include Adictel in France, GamCare and GambleAware in the UK, the National Council on Problem Gambling in the United States and GamblingTherapy.org worldwide. The Stars Group also promotes its responsible gaming tools, resources and initiatives on its websites and platforms and through other channels.

The Stars Group regularly submits its responsible gaming policies and procedures for independent accreditation via various expert organizations that have developed comprehensive responsible gaming standards and measurements designed to determine the effectiveness of a gaming company’s policies, procedures and practices in addressing problem gaming. Independent organizations that have accredited The Stars Group’s responsible gaming program include GamCare, The United States’ National Council on Problem Gambling and the Responsible Gambling Council of Canada.

In addition to The Stars Group’s various responsible gaming accreditations, it has also built strong relationships with various gaming-related regulatory and consumer protection bodies such as the Gambling Commission, the Independent Betting Adjudication

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Service and the European Sports Security Association. Furthermore, SBG was the first online-only gaming company to join the Senet Group, an independent body set up to promote responsible gaming standards and ensure that the marketing of gaming is socially responsible.

Human Resources and Specialized Skills and Knowledge

As of December 31, 2018, The Stars Group, directly and through its subsidiaries, had approximately 4,516 employees of which approximately 3,402 were located in Europe, 351 in Canada, 453 in Australia, 67 in the United States, 187 in Latin America and 56 in Asia. These employees provide services in either general and administrative, marketing, operations, including customer support and services, information technology or R&D capacities, with operations comprising the largest department.

Although certain of The Stars Group’s employees may be or have been party to collective bargaining or related agreements and certain of The Stars Group’s employees in the European Union may be represented by labor unions, to its knowledge, the vast majority of its employees are not. The Stars Group has never experienced any employment-related work stoppages and believes its relationship with its employees is good.

The Stars Group values the benefits diversity can bring to its business, including diversity of personal characteristics such as age, gender, character, geographic residence, business experience (including financial skills and literacy), functional expertise, demonstrated leadership, stakeholder expectations and culture. It believes that diversity promotes the inclusion of different perspectives and ideas, and ensures that The Stars Group has the opportunity to benefit from all available talent. Women currently represent approximately 28% of The Stars Group’s workforce. The Stars Group has two women in key senior executive positions. As of the date of this annual information form, The Stars Group has not adopted a target for female executive officers. The Stars Group has identified a need to increase the number of women employees in the organization and to include diversity, including gender diversity, in its talent management programs. The Stars Group has begun identifying and reporting to senior management and the Corporate Governance and Nominating Committee (as defined below) of the Board of Directors (the “Board”) on the diversity of its workforce with a view to identify diversity gaps, workplace policies to better recruit and retain female employees and The Stars Group’s progress in increasing the number and proportion of female members of management and executive officers.

The development, design, marketing and distribution of The Stars Group’s current product offerings require specialized skills and knowledge, particularly in software architecture, development, conceptualization and graphic design, as well as in the online poker, casino and betting lines of operation. The Stars Group believes it has personnel with the required specialized skills and knowledge to carry out its operations. While the current labor market in the industries and locations in which The Stars Group operates is highly competitive, The Stars Group expects to, but there can be no assurance that it will, attract and maintain appropriately qualified employees for fiscal year 2019. If The Stars Group fails to attract and maintain appropriately qualified employees, its business, financial condition and operating results could be materially adversely affected. See also “Risk Factors and Uncertainties—Risks Related to the Business”, including “—Failure to attract, retain and motivate key employees may adversely affect The Stars Group’s ability to compete and the loss of the services of key personnel could have a material adverse effect on its business.”

Facilities

The Stars Group maintains approximately 25 offices internationally. The Stars Group’s headquarters are located in Toronto, Ontario, Canada, where its general and administrative departments and its corporate finance functions are based and primarily operate. These premises are leased and consist of approximately 5,283 square feet of space, with a lease term that expires on August 31, 2022.

Stars Interactive Group is headquartered in Douglas, Isle of Man, and its senior management is based there as well as staff in its general and administrative, marketing and technology departments. Stars Interactive Group’s headquarters consists of approximately 65,000 square feet of office space, which is owned by a subsidiary of The Stars Group. Technology services are also provided by staff based out of offices in Dublin and suburban Toronto.

SBG is headquartered in Leeds, England, and its senior management is based there as well as staff in its general and administrative, marketing and technology departments. SBG’s headquarters consists of approximately 100,000 square feet of office space, which is leased by a subsidiary of The Stars Group. Technology services are also provided by staff based out of offices in Sheffield, Birmingham and London.

The Stars Group, through its subsidiaries, also leases office space in or near Austin (Texas, United States), Fort Lauderdale (Florida, United States), Linwood (New Jersey, United States), London (England), Leeds (England), Malta, San Jose (Costa Rica), Sofia (Bulgaria), Toronto (Ontario, Canada), Sydney (Australia), Melbourne (Australia) and Darwin (Australia) and elsewhere internationally.

The Stars Group, through its subsidiaries, has data centers and transit points of presence throughout Europe and in certain other locations around the world, including through cloud based services. These include (i) approximately 24 data center facilities leased in various jurisdictions around the world, including the Isle of Man, France, Germany, Italy, Portugal, Spain, Malta, the Netherlands,

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Bulgaria, Romania, the United States, Australia, Hong Kong, Guernsey and the UK, and (ii) approximately seven transit points of presence leased in the UK, the United States, the Netherlands, France and Italy.

The Stars Group believes that its facilities are suitable and adequate for its current needs.

General Development of the Business

The Stars Group was incorporated in 2004 and completed its initial public offering and listing on the TSX Venture Exchange in July 2010. The Stars Group graduated to the Toronto Stock Exchange (“TSX”) in October 2013, was added to the S&P/TSX Composite Index in September 2014, and was listed on the Nasdaq Global Select Market in June 2015. In August 2014, The Stars Group completed the acquisition of Stars Interactive Holdings (IOM) Limited and its subsidiaries and affiliates (collectively, “Stars Interactive Group” and such acquisition, the “Stars Interactive Group Acquisition”), which transformed its operations into primarily a B2C online gaming business. Following the Stars Interactive Group Acquisition and as described below, The Stars Group explored additional strategic opportunities resulting in the divestment of its then-remaining B2B assets and its transformation into a pure-play consumer technology company. In 2018, The Stars Group completed the Acquisitions, which further transformed and diversified its operations into its current online gaming business. For a description of The Stars Group’s current online gaming business and the general development of the same, see “Business of the Corporation—Overview” above. The Stars Group believes that these strategic transactions, along with certain financings and capital markets activities, corporate initiatives and other announcements, each as further detailed below or elsewhere in this annual information form and the 2018 Annual MD&A have been the primary influence on the general development of its business during the last three completed financial years.

Divestiture of the Former B2B Business and Non-Core Gaming Investments (2015-2017)

Until July 31, 2015, when The Stars Group completed the disposition of its then-remaining B2B assets, its B2B business consisted of the operations of certain of its subsidiaries, which offered interactive and land-based gaming solutions. The Stars Group’s B2B business at that time included the design, development, manufacturing, distribution, sale and service of technology-based gaming solutions for the regulated gaming industry worldwide, primarily to land-based and online gaming operators and governmental agencies and bodies. The Stars Group’s former B2B solutions were designed to provide end-users with popular, engaging and cutting-edge content across multiple formats and through a secure technology environment. The Stars Group developed its former portfolio of solutions through both internal development and strategic acquisitions, including Ongame Network Ltd., Amaya (Alberta) Inc. (formerly Chartwell Technology Inc.), CryptoLogic Ltd., Cadillac Jack Inc., and Diamond Game Enterprises, all of which provided technology, content and services to a diversified customer base in the regulated gaming industry. As previously reported, The Stars Group divested these and other non-core gaming investments to, among other things, expedite The Stars Group’s overall business strategy.

2018 Acquisitions

Australian Acquisitions

On February 27, 2018, a subsidiary of The Stars Group acquired a 62% equity interest in TSG Australia Pty Ltd (formerly CrownBet Holdings Pty Limited) and its subsidiaries and affiliates (“BetEasy”) from Crown Resorts Limited. On March 6, 2018, The Stars Group also entered into agreements to increase its equity interest in BetEasy from 62% to 80% and for BetEasy to acquire TSGA Holdco Pty Limited (formerly William Hill Australia Holdings Pty Ltd) and its subsidiaries and affiliates (“TSGA” and such acquisitions, collectively the “Australian Acquisitions”), an Australian-based online sportsbook, and on April 24, 2018, The Stars Group and BetEasy completed these transactions. The Australian Acquisitions created the third largest operator in Australia and enhance The Stars Group’s position for the potential legalization of online poker in Australia as well as increase its proportion of revenues generated from regulated markets and improve the geographic diversification of revenues.

SBG Acquisition

On July 10, 2018, a subsidiary of The Stars Group acquired Cyan Blue Topco Limited and its subsidiaries and affiliates (collectively, “Sky Betting & Gaming” or “SBG” and such acquisition, the “SBG Acquisition”). SBG operates mobile-led betting, poker and gaming platforms primarily in the United Kingdom. SBG benefits from its strong relationship with Sky and the Sky brand, and leverages Sky’s entertainment heritage to appeal to a growing, mass-market customer base in the fast-growing mobile channel. See “Business of the Corporation—SBG’s Relationship with Sky”. SBG generates 100% of its revenue from regulated or taxed markets. On October 11, 2018, the UK Competition and Markets Authority cleared the SBG Acquisition following its Phase 1 review under the Enterprise Act 2002, which permitted The Stars Group to begin executing on its integration plans. Management believes that SBG is a key component of its strategic plan to grow market share both globally and in key markets. The SBG Acquisition transformed The Stars Group’s business by, among other things: (i) improving its revenue diversity, creating a more balanced spread across poker, casino and betting with a broad geographic reach; (ii) increasing its presence in locally regulated or taxed markets; (iii) helping develop betting as a second customer acquisition channel, complementing its core offerings and creating an opportunity to cross-sell players across multiple

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lines of operation; and (iv) enhancing its product offerings and technology through the addition of SBG’s innovative betting and casino offerings and portfolio of popular mobile apps.

The entities that ultimately became SBG were created in 2000 with the acquisition by Sky plc (together with all its subsidiaries, collectively “Sky”) of Sports Internet Group, which included an online sports betting company called Surrey Sports. Sky rebranded Surrey Sports as Sky Bet in 2002 to leverage the growing strength of the Sky brand and to pioneer interactive TV betting. Over time TV started to decline as a platform for transactions of all kinds, which led SBG to gradually expand its focus to internet and mobile phones. In March 2015, CVC Capital Partners acquired an 80% share in SBG from Sky, which facilitated the growth of the business and the Sky Bet brand into a leader in the online betting and gaming industry.

To pay for the SBG Acquisition, The Stars Group used a combination of cash and equity. To finance the cash portion of the purchase price, repay The Stars Group’s then-existing first lien term loans and repay SBG’s then-existing long-term debt, The Stars Group used cash on its balance sheet and raised $4.567 billion in first lien term loans, $1.00 billion in 7.00% unsecured senior notes (the “Senior Notes”) and $621.8 million of net proceeds (before expenses), excluding the overallotment, from the issuance of Common Shares as a result of the previously disclosed underwritten public offering of Common Shares at a price of $38.00 per share. The Corporation also obtained a new first lien revolving facility of $700.0 million, of which it had drawn $100.0 million as of completion of the SBG Acquisition (which as of the date hereof has subsequently been repaid). The Stars Group also issued to the sellers of SBG 37.9 million newly issued Common Shares (collectively with the foregoing, the “SBG Financing”). See note 17 in the 2018 Annual Financial Statements for additional information.

For additional information on the SBG Acquisition, see The Stars Group’s Business Acquisition Report (Form 51-102F4), dated September 17, 2018, which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Risk Factors and Uncertainties

Certain factors may have a material adverse effect on the Corporation’s business, financial condition, and results of operations. Current and prospective investors should consider carefully the risks and uncertainties described below, in addition to other risks and information included in this annual information form, the 2018 Annual Financial Statements and 2018 Annual MD&A, as well as in other filings The Stars Group has made and may make in the future with the applicable securities authorities. Additional risks and uncertainties that The Stars Group is currently unaware of, or that it currently believes are not material, may also become important factors that should be considered. If any of the following or other risks actually occur, The Stars Group’s business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of its securities could decline, and investors could lose part or all of their investment.

Risks Related to the Business

If The Stars Group fails to retain existing customers or add new customers, or if its customers decrease their level of engagement with its product offerings, The Stars Group’s revenue, financial results, and business may be significantly harmed.

The size of The Stars Group’s active customer base, specifically of net depositing customers, and the level of engagement of such customers are critical to its success. The financial performance of The Stars Group has been and will continue to be significantly determined by its success in adding, retaining, engaging and monetizing active customers of its product offerings, in particular high-value, net-depositing customers (primarily recreational players). If people do not perceive The Stars Group’s product offerings as enjoyable, reliable, relevant and trustworthy it may be unable to attract or retain customers or otherwise maintain or increase the frequency and duration of their engagement. A number of other online gaming and interactive entertainment companies that achieved early popularity have since seen their active customer bases or levels of engagement decline. The Stars Group’s strategy is to increase engagement, retention and monetization of customers, particular those it deems of higher value, but there is no guarantee that The Stars Group will not experience an erosion of its active customer base or engagement or monetization levels among such customers in the future. For example, since the beginning of 2016, The Stars Group has improved its poker ecosystem to benefit and attract high-value, net-depositing customers (primarily recreational players) and reduce incentives for high-volume, net-withdrawing customers. As a result of this change in the poker ecosystem, The Stars Group experienced, and may continue to experience, an expected overall decrease in the volume of gameplay and total deposit balances held by high-volume, net-withdrawing players. The Stars Group’s customer engagement patterns have changed over time, and customer engagement can be difficult to measure, particularly as customers continue to engage increasingly via mobile devices and as The Stars Group introduces new and different product offerings. Any number of factors could potentially negatively affect customer retention, growth and engagement, including if:

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If The Stars Group is unable to maintain or increase its customer base or engagement, or effectively monetize its customer base’s use of its product offerings, its revenue and financial results may be adversely affected. Any decrease in customer retention, growth or engagement could render The Stars Group’s products less attractive to customers. If The Stars Group’s active customer growth rate slows, it becomes increasingly dependent on its ability to maintain or increase levels of customer engagement and monetization in order to drive revenue growth, particularly with respect to high-value, net-depositing customers (primarily recreational players).

If The Stars Group is unable to build, maintain and enhance its brands, or if events occur that damage its reputation and brands, its ability to expand its customer base may be impaired and its business and financial results may be harmed.

The Stars Group believes that its brands, particularly PokerStars and related brands such as Sky Bet, have significantly contributed to the success of its business. The Stars Group also believes that building, maintaining and enhancing its brands, including its newer brands, and certain brand arrangements that it may enter into or maintain following the Acquisitions, is critical to expanding its customer base and generating revenue, in particular in new markets such as the United States. Building, maintaining and enhancing The Stars Group’s brands will depend largely on its ability to continue to successfully provide enjoyable, reliable, trustworthy and innovative products with adequate customer service. It will also depend on its ability to successfully maintain or advance its internal marketing and branding functions and its ability to establish and develop new relationships and build on existing relationships with ambassadors and service providers on which it relies to promote its product offerings. The Stars Group may introduce new product offerings, programs, terms of service or policies, including those related to loyalty programs, pricing and security, make decisions regarding regulation, user privacy, payments and other issues, and continue to experience media, legislative and regulatory scrutiny as it relates to The Stars Group, its directors, employees, contractors, vendors, joint venture partners or any of the foregoing that were previously associated with The Stars Group, or the online gaming industry in general, that customers do not like, all of which may negatively affect its brands. The Stars Group’s brands may also be negatively affected by the actions of customers, employees, contractors or vendors that are deemed to be hostile or inappropriate to other customers, including through the use of certain software to gain an advantage over other customers, or by the use of The Stars Group’s product offerings or of companies that provide similar products and services, for illicit, objectionable or illegal ends. In addition, The Stars Group cannot provide assurance that its current or former directors, officers, employees, ambassadors or service providers will act in a manner that will promote the success of The Stars Group or its product offerings. Maintaining and enhancing The Stars Group’s brands may require it to make or incur substantial investments, costs or fees. If The Stars Group fails to successfully promote and maintain its brands or if it incurs excessive expenses in this effort, it could adversely affect the

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size, engagement and loyalty of The Stars Group’s customer base and result in decreased revenue, which could adversely affect its business and financial results.

The online gaming and interactive entertainment industries are intensely competitive and The Stars Group’s potential inability to compete successfully could have a significant adverse impact.

There is intense competition among online gaming and interactive entertainment providers, and the online gaming and interactive entertainment industries are characterized by dynamic customer demand and technological advances. A number of established, well-financed companies producing online gaming and/or interactive entertainment products and services compete with The Stars Group’s product offerings. Such competitors may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more aggressive pricing or promotional policies or otherwise develop more commercially successful products or services than The Stars Group, which could negatively impact its business. Furthermore, new competitors, whether licensed or not, may enter The Stars Group’s key product and/or geographic markets. There has also been considerable consolidation among The Stars Group’s competitors in the gaming industry. Such consolidation and future consolidation could result in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them to offer more competitive products, gain a larger market share, expand product offerings and broaden their geographic scope of operations.

As a result of the foregoing, among other factors, The Stars Group must continually introduce and successfully market new and innovative technologies, product offerings and product enhancements to remain competitive and effectively stimulate customer demand, acceptance and engagement. The process of developing new product offerings and systems is inherently complex and uncertain, and new product offerings may not be well received by customers, even if well-reviewed and of high quality. Even if The Stars Group’s new product offerings attain market acceptance, those new product offerings could cannibalize its current product offerings’ market share or share of its customers’ wallets in a manner that could negatively impact such product offerings’ ecosystem. Although The Stars Group intends to continue investing in its R&D efforts, there can be no assurance that such investments will lead to successful new technologies or timely new product offerings or enhanced existing product offerings, in each case with product life cycles long enough for the product offering to be successful. Furthermore, The Stars Group may not recover the often substantial up-front costs of developing and marketing new technologies and product offerings, or recover the opportunity cost of diverting management and financial resources away from other technologies and product offerings. Additionally, if The Stars Group cannot efficiently adapt its processes and infrastructure to meet the needs of its product offering innovations, its business could be negatively impacted. For example, although The Stars Group has and continues to be a significant market leader in online poker, it has only recently, including through the Acquisitions as well as organic growth, become a more substantial market leader in online casino and betting, where competition is significant and formidable. While The Stars Group currently monetizes certain of these offerings, in the future it may not be successful in its efforts to generate consistently meaningful revenue from such offerings in either the short or long terms.

In an effort to remain competitive, The Stars Group has established a business strategy, which it continuously reviews and updates as appropriate based on developments in, among other things, the industries in which it operates, technology and cybersecurity and The Stars Group’s business and operations. This strategy is based on estimates, projections and assumptions of The Stars Group and certain third parties. The validity of its and their assumptions, including, among others, those regarding the size and availability of current and future potential markets, economic conditions, customer preferences, timeliness of product development, pricing, growth rates and availability of capital, could affect The Stars Group’s strategy and strategic decisions. There can be no assurances that The Stars Group’s strategy is appropriate or that it will succeed in implementing its strategy, and, even if successful, there is no guarantee that the revenue and cash flow generated as a result of its strategy will be greater than the revenue and cash flow that The Stars Group would have generated if it had pursued a different strategy.

The Stars Group’s business is vulnerable to changing economic conditions and to other factors that adversely affect the industries in which it operates.

The Stars Group believes that demand for entertainment and leisure activities, including gaming, can be highly sensitive to changes in consumers’ disposable income, and thus can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond its control. Unfavorable changes in general economic conditions, including recessions, economic slowdowns, sustained high levels of unemployment, and increasing fuel or transportation costs or the perception by customers of weak or weakening economic conditions, may reduce customers’ disposable income or result in fewer individuals engaging in entertainment and leisure activities, such as online gaming. As a result, The Stars Group cannot ensure that demand for its product offerings will remain constant. Adverse developments affecting economies throughout the world, including a general tightening of availability of credit, decreased liquidity in certain financial markets, increased interest rates, foreign exchange fluctuations, increased energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining consumer confidence, sustained high levels of unemployment or significant declines in stock markets, as well as concerns regarding epidemics and the spread of contagious diseases, could lead to a further reduction in discretionary spending on leisure activities, such as gaming. Any significant or prolonged decrease in consumer spending on entertainment or leisure activities could adversely affect the demand for The Stars Group’s product offerings, reducing its

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cash flows and revenues. If The Stars Group experiences a significant unexpected decrease in demand for its product offerings, its business may be harmed.

The Stars Group’s financial results will fluctuate from quarter to quarter and are difficult to predict.

The Stars Group’s quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, The Stars Group has a limited operating history with the current scale of its business, particularly with respect to certain of its newer product offerings, such as online casino and betting, which makes it difficult to forecast its future results. For example, The Stars Group may be unable to accurately predict the anticipated margin variances on such newer product offerings. Additionally, as noted above, The Stars Group’s betting operations have significant exposure to, and may be materially impacted by, sporting results and calendars, which can result in short-term volatility in betting win margins, thus impacting revenues. Consequently, investors should not rely upon The Stars Group’s past quarterly financial results as indicators of future performance. Investors should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving, highly regulated and competitive markets. The Stars Group’s financial results in any given quarter can be influenced by numerous factors, many of which it is unable to predict or are outside of its control, including the impact of seasonality and The Stars Group’s betting results, as described above under “Business of the Corporation—Seasonality and Other Factors Impacting the Business”, and the other risks and uncertainties set forth in this annual information form, particularly those risks related to The Stars Group’s regulatory environment.

In online casino, operator losses are limited per stake to a maximum payout. When looking at bets across a period of time, operator losses can potentially be larger in the short term, although in practice, this does not happen quickly and thus The Stars Group can take mitigating action. Given the high volume of the business and the statistical gross win margin embedded within all casino games, major operator losses are infrequent over long periods. However, The Stars Group’s quarterly financial results may also fluctuate based on whether it pays out any jackpots to its customers during the relevant quarter. Except for SBG’s limited participation in a network progressive jackpot program for certain of its casino offerings (the “Network Progressive Jackpot Games”), The Stars Group and its subsidiaries do not participate in such a program, and instead offer an equivalent system in which only its own customers participate. This means that other than with respect to the Network Progressive Jackpot Games, The Stars Group does not make contributions to a third-party central fund as the progressive jackpot builds up (because it is the only operator in the program, this would serve no purpose), and if a customer wins the progressive jackpot there is no third-party central fund to cover the payout. Accordingly, while The Stars Group maintains a provision for these progressive jackpots, the cost of the progressive jackpot payout would be a cash outflow for the business in the period in which it is won with a potentially significant adverse effect on The Stars Group’s financial condition and cash flows. Statistically, the likelihood of significant jackpot wins, either individually or in the aggregate, is extremely low and the algorithms of the slots games are such that the number of high winners overall is low, but because the winning is underpinned by a random mechanism, The Stars Group cannot predict with absolute certainty when a jackpot will be won.

Changes in tax laws or administrative policies related to tax could materially affect The Stars Group’s financial position and results of operations.

Changes in tax laws or administrative policies related to tax usually impact either or both of direct gaming taxes and corporate income and digital taxes, and any such changes could materially affect The Stars Group’s financial position and results of operations. The jurisdictions where The Stars Group’s product offerings are made available or accessible are frequently changing the tax laws and/or administrative policies related to the gaming industry due to, among other things, fiscal and political pressures.  These changes can have a material impact on The Stars Group’s financial position and results of operations.  

For example, with respect to direct gaming taxes, UK government announced that the UK Remote Gaming Duty (“RGD”) payable on poker and casino revenue will increase from 15% to 21% on April 1, 2019, and effective January 1, 2019, the Italian government increased the gaming duty payable on poker and casino revenue from 20% to 25% and such duty on betting revenue from 22% to 24%. In addition, on January 1, 2019, Romania implemented a new 2% tax calculated on all deposits received from players. While some jurisdictions have increased or have announced increases to the taxes on gaming-related activities, others jurisdictions have deceased or announced decreases to such taxes, like Spain, which decreased the Spanish Gaming Duty rate from 25% to 20% effect from July 1, 2018.

In the event that The Stars Group increases the percentage of its total revenues that are derived from operations in nationally or locally regulated jurisdictions, it may result in increased operating costs (including increased gaming taxes such as gaming duty and VAT) and effective tax rates of The Stars Group and its subsidiaries, which could have adverse consequences on its business, results of operations, cash flows or liquidity.

Furthermore, certain jurisdictions in which The Stars Group or its subsidiaries operate either tax or have proposed to tax players’ gaming winnings or impose a withholding obligation on foreign online gaming operators with respect to gaming winnings, which could make The Stars Group’s offerings less attractive to players in those jurisdictions.

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With respect to corporate income and digital taxes, the Organization for Economic Cooperation and Development (“OECD”) has been working on its Base Erosion and Profit Shifting (“BEPS”) project since 2012 to address gaps and mismatches in tax rules that it believes facilitated the artificial shifting of profits across the world. The BEPS project resulted in many countries agreeing to certain minimum standards to counteract base erosion and profit shifting, changing the taxation framework for multinational groups (such as The Stars Group). In 2017, a multilateral instrument was signed to efficiently implement these changes as relevant to international double tax treaties. The BEPS project has changed the global approach and attitude for addressing tax avoidance, and while collective actions are currently being taken, tax authorities may take additional unilateral actions as has already occurred in the UK (i.e., diverted profits tax) and other countries. In addition, the OECD, European Commission and certain countries are considering whether further changes are required to address specific issues in relation to taxing the digital economy/digital transactions. Any developments that arise in this area could significantly impact The Stars Group and its tax costs.

Several European countries have since determined that the BEPS project did not go far enough to protect their tax base from multinational digital companies, which many perceive as not paying sufficient taxes in the jurisdictions where their customers or users reside.  These countries generally believe there is a mismatch between the location where profits are currently taxed and how certain digital activities create value.  This has resulted in several proposals for taxes with rates ranging from 2% to 5% based on gross revenue. These proposed taxes, commonly known as digital services taxes (“DSTs”) are intended to capture the value generated by certain digital business models such as search engines, social media platforms and online marketplaces.  While The Stars Group currently believes that online gaming businesses are not the target of DSTs, tax authorities could seek to apply DSTs to The Stars Group’s revenues, in particular poker revenues, depending on the terms of the applicable legislation.  Italy and France have recently announced DSTs, which will be effective during 2019, but they have not yet released any detailed guidance on how those DSTs will be applied. As at the date of this annual information form, Austria, Spain, the UK and Australia, among others have also either announced plans for a DST or are in the process of consulting on one. The European Union and the OECD are also continuing their efforts for a coordinated approach on DSTs.

Effective at January 1, 2018 the U.S. government enacted the most comprehensive tax reform in over 20 years, but due to The Stars Group’s profile and current U.S. operations, the tax reform has not yet had a material impact on its current tax position. However, given recent developments in the U.S. gaming market, this tax reform may in the future have more of an impact on its future tax positions, results of operations, cash flows and financial condition.

The Stars Group’s substantial indebtedness requires and will continue to require that it use a significant portion of its cash flow to make debt service payments, and it may not generate sufficient cash flows to meet its debt service obligations, which could have significant adverse consequences on it and its business.

As at December 31, 2018, The Stars Group and its subsidiaries had $5.45 billion of outstanding long-term indebtedness. The Stars Group’s substantial indebtedness could have significant adverse consequences on it and its business, including:

The Stars Group’s ability to make scheduled payments on or to refinance its debt obligations and to make distributions to enable it to service its debt obligations depends on a number of variables that may affect its and its subsidiaries’ financial and operating performance and the ability to generate cash from their operations. These variables are subject to prevailing economic and competitive conditions and to certain financial, business, legal, regulatory and other factors beyond The Stars Group’s and its subsidiaries’ control, including fluctuations in interest rates, market liquidity conditions, operating costs and trends in the industries in which they operate. If

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The Stars Group’s and its subsidiaries’ cash flows and capital resources are insufficient to fund its debt service obligations, then it may be forced to reduce, delay or cease business activities, investments, expansion or capital expenditures, sell assets, seek additional capital, including through additional indebtedness or through dilutive financings, or restructure or refinance its indebtedness. Depending on the capital markets at the time of any such restructuring, refinancing or capital raise, it is possible that the same could be available only on unattractive terms, if at all, leading to potentially significant increases in debt service costs and interest expenses and could potentially result in additional restrictions on The Stars Group’s operations. Any default by The Stars Group in meeting its debt service obligations in a timely manner would have a material adverse effect on its business, operating results and financial condition.

As of December 31, 2018, a significant portion of The Stars Group’s total debt was subject to variable interest rates, which exposes The Stars Group to interest rate risk. If interest rates were to increase, The Stars Group’s debt service obligations on such variable rate indebtedness would increase even though the amount borrowed remained the same, and as a result, The Stars Group’s net income and cash flows, including cash available for debt service, would correspondingly decrease. Although The Stars Group has entered into, and from time to time in the future may enter into additional, hedging instruments that it anticipates will result in fixed interest rates and/or lower interest payments on existing debt and potentially mitigate the impact of interest rate and exchange rate fluctuations, in particular in the Euro and British pound sterling to U.S. dollar  exchange rates with respect to such debt, there can be no assurance that the anticipated benefits will be realized and as such, The Stars Group remains subject to the risk of fluctuations in interest and exchange rates described herein. Further, The Stars Group may decide to not maintain interest rate swaps with respect to some or all of its variable rate indebtedness, and any swaps it enters into may not fully mitigate its interest rate risk.

The Stars Group’s capital allocation policies, strategies and decisions, including its recent decision to prepay certain amounts of its outstanding debt, limit its ability to pursue other strategies that may be beneficial to its business. There can be no assurances that The Stars Group’s capital allocation policies, strategies and decisions will be appropriate in light of then-current market conditions, and The Stars Group could be unable to expand into additional markets or offer additional products and services due to capital allocation constraints.

For additional information on The Stars Group’s outstanding long-term debt, including amounts outstanding, interest, and certain restrictions and requirements, see the 2018 Annual MD&A, including under the heading “Liquidity and Capital Resources” and the 2018 Annual Financial Statements.

Integrating SBG’s business into The Stars Group’s business may divert management’s attention away from operations, and The Stars Group may also encounter significant difficulties in integrating the two businesses.

Successful integration of SBG’s operations, products and personnel into those of The Stars Group may place a significant burden on management and other internal resources. The diversion of management’s attention and any difficulties encountered in the transition and integration process could harm The Stars Group’s business, financial condition and results of operations. In addition, uncertainty about the effect of the SBG Acquisition on employees, customers, suppliers, partners, and other third parties, including regulators, may have an adverse effect on The Stars Group and SBG. These uncertainties may impair The Stars Group or SBG’s ability to attract, retain and motivate key personnel for a period of time after the SBG Acquisition, and could cause customers, suppliers and others who deal with The Stars Group and SBG to seek to change existing business and other relationships. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with The Stars Group, The Stars Group’s business could be harmed.

Furthermore, the overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of customers and other relationships. The difficulties of combining the operations of the companies include, among others, difficulties in:

Many of these factors will be outside The Stars Group’s control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially impact its business, financial condition and results of operations.

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The Stars Group may not realize any or all of its estimated operational improvements, revenue synergies and cost savings with respect to the Acquisitions, which would have a negative effect on its results of operations.

As part of The Stars Group’s business strategy, it has and expects to continue to implement certain operational improvements, revenue synergies and cost savings initiatives following the Acquisitions. Any synergies and cost savings that The Stars Group realizes from such efforts may differ materially from its estimates. Those estimates are The Stars Group’s current estimates as at such time, but they involve risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such estimates. In addition, any synergies and cost savings that The Stars Group realizes may be offset, in whole or in part, by reductions in revenues, or through increases in other expenses, including costs to achieve its estimated synergies and cost savings, some of which are described below. The Stars Group’s operational improvements and cost savings plans are subject to numerous risks and uncertainties that may change at any time. The Stars Group cannot provide assurance that its initiatives will be completed as anticipated or that the benefits it expects will be achieved on a timely basis or at all. Even though The Stars Group has completed the Acquisitions, it may be unable to implement its operational improvements or cost savings programs within its anticipated timeline and it may take longer than expected to achieve the run-rate level of anticipated synergies and cost savings. Although The Stars Group believes these estimates and assumptions to be reasonable, investors should not place undue reliance upon them.

In addition to the costs related directly to the Acquisitions, The Stars Group incurred and expects to continue to incur significant costs, some of which are recurring while others are non-recurring, in connection with integrating SBG’s operations, products and personnel into The Stars Group’s business. These costs may include costs for:

While The Stars Group has incurred a significant amount of transaction fees and other one-time costs related to the Acquisitions, additional unanticipated costs may yet be incurred, which cannot be estimated accurately at this time.

The Stars Group incurred and issued, as applicable, significant new indebtedness in connection with the Acquisitions, net of debt refinanced in connection therewith. This debt may limit The Stars Group’s financial and operating flexibility, and it may incur additional debt, which could increase the risks associated with its substantial indebtedness. The Stars Group’s substantial indebtedness may have material consequences for its business, financial condition and results of operations. See “—The Stars Group’s substantial indebtedness requires and will continue to require that it use a significant portion of its cash flow to make debt service payments, and it may not generate sufficient cash flows to meet its debt service obligations, which could have significant adverse consequences on it and its business.”, “—The Stars Group’s secured credit facilities and unsecured bonds contain covenants and other restrictions that may limit its flexibility in operating its business.” and “—The Stars Group’s substantial indebtedness requires and will continue to require that it use a significant portion of its cash flow to make debt service payments, and it may not generate sufficient cash flows to meet its debt service obligations, which could have significant adverse consequences on it and its business.”

The Stars Group is subject to foreign exchange and currency risks that could adversely affect its operations, and its ability to mitigate its foreign exchange risk through hedging transactions may be limited.

The Stars Group is exposed to foreign exchange risk with respect to customer purchasing power and the translation of foreign-currency-denominated balance sheet accounts into U.S. dollar-denominated balance sheet accounts. The primary depositing currencies on The Stars Group’s product offerings are currently currencies other than the U.S. dollar. However, with respect to the International segment, the primary currency of customer game play is the U.S. dollar and a significant portion of its expenses are incurred in Canadian, U.S. and Australian dollars, Euros and British pounds sterling. Consequently, past and potential future weakness in these and certain other global currencies against the U.S. dollar decreases the purchasing power of the Corporation’s International segment customer base, which could cause those customers to be unwilling to deposit and spend the same or similar amounts that they may otherwise deposit or spend.

In addition, The Stars Group’s consolidated financial results, in particular with respect to its UK and Australia segments, are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposure arises from current transactions and anticipated transactions denominated in currencies other than the U.S. dollar and from the translation of foreign-currency-denominated balance sheet accounts into U.S. dollar-denominated balance sheet accounts. Exchange rate fluctuations could materially adversely affect The Stars Group’s operating results and cash flows and the value of its foreign assets.

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While The Stars Group has certain natural expense hedges and has entered and may in the future enter into derivative and hedging instruments intended to mitigate foreign currency exchange risk, there can be no assurance it will do so or that any instruments that it enters into will successfully mitigate such risk. If The Stars Group enters into hedging contracts, it would be subject to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and The Stars Group may be unable to take action to protect its exposure. In the event of a counterparty default, The Stars Group could lose the benefit of its hedging contract, which may harm its business and financial condition. If one or more of The Stars Group’s counterparties becomes insolvent or files for bankruptcy, The Stars Group’s ability to eventually recover any benefit lost as a result of that counterparty’s default may be limited by the liquidity of the counterparty. The Stars Group expects that it will be unable to hedge all its exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies. Changes in exchange rates and The Stars Group’s limited ability or inability to successfully hedge exchange rate risk could have an adverse impact on its liquidity and results of operations. For additional information regarding The Stars Group’s hedging activity and foreign exchange risk, as well as an analysis of certain constant currency measures, see the 2018 Annual MD&A.

The Stars Group may prioritize customer growth and engagement and the customer experience over short-term financial results.

The Stars Group has made, and may in the future make, product and investment decisions that may not prioritize its short-term financial results if it believes that the decisions are consistent with its mission and long-term goals to benefit the aggregate customer experience, improve its financial performance and maximize shareholder value. For example, The Stars Group has implemented and may in the future implement changes to, including certain reductions in, its loyalty programs to ensure that the distribution of rebates, rewards and incentives is aligned with its goal of incentivizing customers for loyalty and behavior that is positive to the overall customer experience and the particular product offering’s ecosystem, such as the introduction of Stars Rewards, and introduced and may in the future introduce other changes, such as adjustments to product pricing. The Stars Group also may introduce changes to existing product offerings, or introduce new product offerings, that direct customers away from product offerings where it has a proven means of monetization and which may reduce engagement with its core product offerings, such as through the introduction of online casino, betting or new variants of online poker. The Stars Group also may take steps that limit distribution of certain product offerings, such as on mobile devices, in the short term to attempt to ensure the availability of such product offerings to its customers over the long term. These decisions may not produce the benefits that The Stars Group expects, in which case its customer growth and engagement, its relationships with third parties, and its business and results of operations could be harmed.

The Stars Group has significant international operations and plans to continue expanding its operations abroad, which may subject it to increased business and economic risks that could affect its financial results.

The Stars Group has significant international operations and plans to continue to expand its international business operations and product offerings. The Stars Group’s product offerings are available in numerous jurisdictions and approximately two dozen languages, and it operates from offices, data centers or transit points of presence throughout the world. Nearly all The Stars Group’s current operations are conducted from offices in foreign jurisdictions, particularly in the Isle of Man, Malta, UK, Australia and in certain member states of the European Union, and it derives revenue from customers in various countries worldwide. As such, The Stars Group’s operations and revenues may be adversely affected by changes in foreign government policies and legislation or social, economic or political instability and other factors that are not within its control, including recessions in foreign economies, expropriation, nationalization and limitation or restriction on repatriation of funds, assets or earnings, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses, changes in online gaming policies, regulatory requirements or the personnel administering them, exchange controls, economic sanctions, risk of terrorist activities, revolution, border disputes, implementation of tariffs and other trade and investment barriers and protectionist practices, withdrawals from economic or political unions, such as “Brexit”, taxation policies, including royalty and tax increases (such as additional corporate tax, VAT and gaming duties) and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in protecting intellectual property, evolving regulations regarding data and information privacy and payment processing, labor disputes and other risks arising out of foreign governmental sovereignty over the areas in which The Stars Group conducts operations. If The Stars Group’s operations or revenues are disrupted or threatened for unexpected reasons, its business may be materially harmed.

The Stars Group’s international activities may involve protracted negotiations with host governments and regulators, national companies and third parties. Foreign government regulations may require foreign product and service providers to, among other things, be located in or employ citizens or residents of a particular jurisdiction and otherwise comply with numerous and extensive procedures and formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities, and in some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity or the actions taken. The Stars Group’s management is unable to predict the effect of additional corporate and regulatory formalities that may be adopted in the future, including whether any such laws or regulations would materially increase The Stars Group’s cost of doing business or affect its operations in any jurisdiction. In addition, The Stars Group may in the future enter into agreements and directly or indirectly conduct activities outside of the jurisdictions where it currently carries on business, which

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expansion may present challenges and risks that it has not faced in the past, any of which could adversely affect its results of operations and/or financial condition.

Moreover, in the event a dispute arises in connection with The Stars Group’s operations with respect to a foreign jurisdiction where it conducts its business or has customers, The Stars Group may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of domestic courts or enforcing domestic judgments in such other jurisdictions. The Stars Group may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity.

Although The Stars Group believes that management’s experience to date in numerous foreign jurisdictions may help reduce these risks, The Stars Group’s direct and indirect activities in foreign jurisdictions could be substantially affected by factors beyond its control, any of which could have a material adverse effect on it.

The Stars Group currently depends on the ongoing support of payment processors, the quality and cost of which may be variable in certain jurisdictions.

The Stars Group currently relies on payment and multi-currency processing providers to facilitate the movement of funds between The Stars Group and its customer base. Anything that could interfere with or otherwise harm its relationships with payment service providers could have a material adverse effect on its businesses. Any introduction of legislation or regulations restricting financial transactions with online gambling operators or prohibiting the use of credit cards and other banking instruments for online gambling transactions, or any other increase in the stringency of regulation of financial transactions, whether in general or in relation to the online gambling industry in particular, may restrict the ability of The Stars Group to accept payment from its customers or facilitate withdrawals by them. Certain governments may seek to impede the online gambling industry by introducing legislation or through enforcement measures designed to prevent customers or financial institutions based in their jurisdictions from transferring money to online gambling operations. They may seek to impose embargoes on currency use, wherever transactions are taking place. This may result in the providers of payment systems for a particular market deciding to cease providing their services for such market. This in turn would lead to an increased risk of payments due to The Stars Group being misappropriated, frozen or diverted by banks and credit card companies. There may be a limited availability of alternative systems, in particular in light of recent consolidation in the financial services industry. As a result, payment systems providers may increase their charges to The Stars Group or its customers, and/or it may be required to source new payment systems providers of lesser quality and reliability than those providers previously used to service a particular market, which would also enhance the risk of default or delayed payments in circumstances where it would be too time consuming and challenging to sue for recovery. The likelihood of any such legislation or enforcement measures is greater in certain markets that seek to protect their state gambling monopolies and/or that have foreign currency or exchange control restrictions. The tightening of money laundering regulations may also affect the speed and convenience of payment processing systems, resulting in added inconvenience to customers. Card issuers and acquirers may dictate how transactions and products need to be coded and treated which also may impact on acceptance rates. Certain card issuers, acquirers, payment processors and banks may also cease to process transactions relating to the (online) gambling industry as a whole or certain operators, such as The Stars Group, for reputational and/or regulatory reasons or in light of increased compliance standards of such third parties that seek to limit their business relationships with certain industry sectors considered as “high risk” sectors. It may also result in customers being dissuaded from accessing The Stars Group’s product offerings if they cannot use a preferred payment option or the quality or the speed of the supply is not satisfactory. Any such developments in these or other markets may have a material and adverse effect on The Stars Group’s future financial position.

Litigation costs and the outcome of litigation could have a material adverse effect on The Stars Group’s business.

The Stars Group may be subject to litigation claims through the ordinary course of its business operations or otherwise, regarding, among other things, employment matters, tax matters, security of customer and employee personal information, third-party contracts, marketing, intellectual property right infringement, its current and former operations and the operations of businesses it acquired or may acquire in the future prior to their respective acquisitions. Litigation to defend The Stars Group against claims by third parties, or to enforce any rights that it may have against third parties, may be necessary, which could result in substantial costs and diversion of its resources, causing a material adverse effect on its business, financial condition and results of operations. Given the nature of The Stars Group’s business, it is, and may from time to time in the future be, party to various, and at times numerous, legal, administrative and regulatory inquiries, investigations, proceedings and claims that arise in the ordinary course of business, as well as potential class action lawsuits. Because the outcome of such legal matters is inherently uncertain, if one or more of such legal matters were to be resolved against The Stars Group for amounts in excess of management’s expectations or any applicable insurance coverage or indemnification right, or if such legal matters result in decrees or orders preventing it from offering certain features, functionalities, products or services, or requires that it change its development process or other business practices, its results of operations and financial condition could be materially adversely affected. Any litigation to which The Stars Group is a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or in payments of substantial monetary damages or fines, the posting of bonds requiring significant collateral, letters of credit or similar instruments, or The Stars Group may decide to settle lawsuits on similarly unfavorable terms. Moreover, The Stars Group cannot be sure that the remedies available to it at law or under contract, or the indemnification granted to it

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by contractual counterparties, will be sufficient in amount, scope or duration to fully or partially offset any such possible liabilities. Any of these factors, individually or in the aggregate, could materially adversely affect The Stars Group’s business, results of operations, cash flows or liquidity. For a description of certain currently pending legal and regulatory proceedings, including the Kentucky Proceeding, certain class action lawsuits and challenge of the Preferred Share mandatory conversion, see “Legal Proceedings and Regulatory Actions”.

The Stars Group’s business could suffer as a result of the uncertainty surrounding the UK’s withdrawal from the European Union and, if completed, the terms of such withdrawal.

In June 2016, voters in the UK approved the withdrawal of the UK from the European Union (commonly known as “Brexit”). In March 2017, the UK government initiated the exit process under Article 50 of the Treaty on European Union, and on March 29, 2019, the UK is scheduled to exit the European Union. The effects of Brexit will depend on any agreements the UK makes to retain access to the European Union markets either during a transitional period or more permanently. Uncertainty over the terms of the UK’s departure from the European Union could cause economic and political uncertainty in the UK and the rest of Europe.

The announcement of Brexit in 2016 caused significant volatility in global stock markets and fluctuations in currency exchange rates, including for the British pound sterling and the Euro with respect to each other and/or the U.S. dollar, and contributed to the weakening of the British pound sterling against the U.S. dollar and the Euro. The ongoing Brexit negotiations may continue to cause significant volatility in these and other global currency exchange rates, and as the British pound sterling is one of the primary currencies of gameplay in its operations in the United Kingdom and the Euro is one of the primary depositing currencies in its operations in the rest of the world (other than Australia), may adversely affect The Stars Group’s financial results. The progress and outcomes of Brexit negotiations may create economic uncertainty, both within the UK, which is one of the world’s largest economies and is home to a large portion of The Stars Group’s customers, and globally. Uncertainty over Brexit’s ultimate fate and over the potential consequences of the various forms that Brexit could take has already impacted the UK economy, for example by reduced levels of foreign investment and hiring, significant depreciation of the British pound sterling against certain foreign currencies, including the U.S. dollar and the Euro, and the UK government’s inability to address pressing domestic needs due to the overriding political focus on Brexit.  Depending on its terms, Brexit could significantly disrupt the free movement of goods, services, people and capital between the UK and the European Union, result in the imposition of tariffs on consumer goods and disrupt and possibly reduce cross-border trade, each of which could result in a reduction of UK consumers’ disposable income. The Stars Group relies on its customers having sufficient disposable income or capital to spend on betting and gaming, and a deterioration of general economic conditions and increases of prices of consumer goods could significantly affect The Stars Group’s customer activity levels, which could materially adversely affect its overall business, results of operations, financial condition and cash flows.

Brexit could also lead to legal and regulatory uncertainty and potentially differing national laws and regulations as the UK determines which European Union laws to replicate or replace. It is possible that The Stars Group or certain of its subsidiaries will be subject to increased obligations and complexities imposed by new or changing laws and regulations, including those relating to gaming licenses, tax benefits and liabilities, trade, security and employment, which could lead to increased costs and expenses as it adapts to changing legal and regulatory frameworks. Brexit may also significantly reduce SBG’s ability to operate on an unfettered basis in certain European markets by making SBG an operator from a non-European Union country, thus subjecting it to rules of European markets that have sought to restrict competition from gaming companies based overseas.  In addition, any changes to UK immigration policy as a result of Brexit could affect The Stars Group’s ability to hire employees. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications Brexit may have and how such withdrawal would affect The Stars Group and its subsidiaries, some of which, such as SBG, have significant operations in the UK. Any of these or other effects of Brexit could be disruptive to The Stars Group’s operations and business relationship in the UK and could materially adversely affect its overall business, business opportunities, results of operations, financial condition and cash flows.

The Stars Group plans to continue to make acquisitions if opportunities arise in the future. Investigating, completing, implementing and integrating acquisitions involve risks that could negatively affect The Stars Group’s business, results of operations, cash flows or liquidity.

As part of its business strategy, The Stars Group has made and intends to continue to make acquisitions if opportunities arise in the future to add specialized employees and new or complementary businesses, products, brands or technologies. In some cases, the costs of such acquisitions may be substantial, including as a result of professional fees and due diligence efforts. There is no assurance that the time and resources expended on pursuing a particular acquisition will result in a completed transaction, or that any completed transaction will ultimately be successful. Currently, The Stars Group anticipates that it may continue to make strategic acquisitions if opportunities arise, some of which may be significant; however, it may be unable to identify suitable acquisition or strategic investment opportunities, or may be unable to obtain any required financing, consent from its lenders or regulatory approvals, and therefore may be unable to complete such acquisitions or strategic investments on favorable terms, if at all. The Stars Group may decide to pursue acquisitions with which its investors may not agree and The Stars Group cannot assure investors that any acquisition or investment will be successful or otherwise provide a favorable return on investment. In addition, acquisitions and the integration thereof require

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significant time and resources and place significant demands on The Stars Group’s management, as well as on its operational and financial infrastructure. In particular, acquisitions may expose The Stars Group to operational challenges and risks, including:

If The Stars Group does not successfully integrate recent or future acquisitions, such as the SBG Acquisition and the Australian Acquisitions, it may not realize the expected benefits and its business, liquidity and operating results may be materially adversely affected.

The Stars Group may pay substantial amounts of cash or incur debt, including convertible debt, to pay for acquisitions, which could adversely affect its liquidity and its ability to service its debt. Incurring indebtedness would also result in increased fixed obligations, increased interest expense, and could also subject The Stars Group to covenants or other restrictions that would impede its ability to manage its operations.

The Stars Group may also issue equity securities to pay for acquisitions and may grant a significant amount of equity-based incentive awards to retain the employees of acquired companies, which could increase its expenses, adversely affect its financial results, and result in dilution to its shareholders. In addition, any acquisitions The Stars Group announces could be viewed negatively by customers or investors, which may adversely affect its business or the price or liquidity of its securities. Furthermore, acquired companies may have liabilities that The Stars Group failed, or was unable, to discover or sufficiently assess while performing due diligence investigations. The effectiveness of The Stars Group’s due diligence review and its ability to evaluate the results of such due diligence depend in part upon the accuracy and completeness of statements and disclosures made or actions taken by the companies it acquires or their representatives, as well as the limited timeframe in which acquisitions are executed.

In addition, The Stars Group may fail to accurately forecast the financial impact of an acquisition, including tax and accounting charges, such as impairments of acquired assets. The Stars Group cannot be sure that the remedies available to it at law or under contract, or the indemnification granted to it by sellers of acquired companies, will be sufficient in amount, scope or duration to fully or partially offset any possible liabilities The Stars Group assumes upon consummation of an acquisition. The Stars Group may learn additional information about its acquired businesses that could materially adversely affect it, such as unknown or contingent liabilities, unprofitable products or third-party arrangements or relationships or restrictions or limitations on the same, and liabilities related to third-party arrangements or compliance with applicable laws. Acquisitions may also result in The Stars Group recording significant additional expenses to its results of operations and recording substantial finite-lived intangible assets on its balance sheet upon closing. Any of these factors, individually or in the aggregate, could have a material adverse effect on The Stars Group’s business, results of operations, cash flows or liquidity. For a description of the Kentucky Proceeding (as defined below), see “Legal Proceedings and Regulatory Actions”.

Failure to attract, retain and motivate key employees may adversely affect The Stars Group’s ability to compete and the loss of the services of key personnel could have a material adverse effect on its business.

The Stars Group depends on the services of its executive officers as well as its key technical, operational, marketing and management personnel. The loss of any of these key persons could have a material adverse effect on The Stars Group’s business, results of operations and financial condition. The Stars Group’s success also highly depends on its continuing ability to identify, hire, train, motivate and retain highly qualified technical, operational, marketing and management personnel. Competition for such personnel can be intense, and The Stars Group cannot provide assurance that it will be able to attract or retain such highly qualified personnel in the future. Equity-based awards comprise a key component of executive and senior management compensation, and if The Stars Group’s Common Share price declines or is volatile, it may be difficult to retain such individuals. In addition, as The Stars Group matures, the incentives to attract, retain and motivate employees provided by its equity-based awards or by future arrangements may not be as effective as in the past, and if it issues significant equity to attract additional employees, the ownership of its existing shareholders may be further diluted. The Stars Group’s potential inability to attract and retain the necessary personnel may adversely affect its future

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growth and profitability. The Stars Group’s retention and recruiting may require significant increases in compensation expense, which would adversely affect its results of operation.

The leadership of the current executive officers of The Stars Group and certain of its subsidiaries has been a critical element of its success. The departure, death or disability of any such officers or other extended or permanent loss of any of their services, or any negative market or industry perception with respect to any of them or their loss, could have a material adverse effect on The Stars Group’s business. Certain of The Stars Group’s and its subsidiaries’ other senior management have made significant contributions to its growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect The Stars Group. The Stars Group is not protected by key man or similar life insurance covering its executive officers or members of senior management.

The Stars Group may require additional capital to support its business growth, and this capital may not be available on acceptable terms, if at all.

The Stars Group may require additional capital to support its business growth or to respond to business opportunities, challenges or unforeseen circumstances. The Stars Group’s ability to obtain additional capital, if and when required, will depend on its business plans, investor demand, its operating performance, capital markets conditions, and other factors. If The Stars Group raises additional funds by issuing equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of its currently issued and outstanding equity or debt, and its existing shareholders may experience dilution. If The Stars Group is unable to obtain additional capital when required, or on satisfactory terms, its ability to continue to support its business growth or to respond to business opportunities, challenges or unforeseen circumstances could be adversely affected, and its business may be harmed.

The Stars Group’s insurance coverage may not be adequate to cover all possible losses it may suffer, and in the future its insurance costs may increase significantly or it may be unable to obtain the same level of insurance coverage.

The Stars Group may suffer damage to its property due to a casualty loss (such as fire, natural disasters and acts of war or terrorism) or other losses, such as those related to labor, professional liability or certain actions or inactions by its management, directors, employees or others, that could severely disrupt its business or subject it to claims by third parties who are injured or harmed. Although The Stars Group maintains insurance that it believes is adequate, that insurance may be inadequate or unavailable to cover all the risks to which its business and assets may be exposed, including risks related to certain litigation. Should an uninsured loss (including a loss that is less than the applicable deductible or that is not covered by insurance) or loss in excess of insured limits occur, it could have a significant adverse impact on The Stars Group’s business, results of operations or financial condition.

The Stars Group generally renews its insurance policies annually. If the cost of coverage becomes too high or if The Stars Group believes certain coverage becomes inapplicable, it may need to reduce its policy limits or agree to certain exclusions from its coverage to reduce the premiums to an acceptable amount or to otherwise reduce its coverage for certain occurrences. On the other hand, The Stars Group may determine that it either does not have certain coverage that would be prudent for its business and the risks associated with its business and/or its current coverages are too low to adequately cover such risks. In either event, The Stars Group may incur additional or higher premiums for such coverage than it had in prior years.

Among other factors, national security concerns, catastrophic events or any change in the current applicable statutory requirement that insurance carriers offer coverage for certain acts of terrorism could also adversely affect available insurance coverage and result in, among other things, increased premiums on available coverage (which may cause The Stars Group to elect to reduce its policy limits or not renew its coverage) and additional exclusions from coverage. As cyber incidents and threats continue to evolve, The Stars Group may be required to expend additional, perhaps significant, resources to continue to update, modify or enhance its protective measures or to investigate and remediate any vulnerability to cyber incidents. Although The Stars Group maintains and monitors its information technology systems and has insurance coverage for protecting against cyber security risks, such systems and insurance coverage may not be sufficient to protect against or cover all the losses it may experience as a result of any cyber-attacks.

The Stars Group’s results of operations could be affected by natural events in the locations in which it operates or where its customers or suppliers operate, as well as by scheduling and live broadcasting of major sporting events, and cancellation, postponement or curtailment of the same.

The Stars Group and its suppliers have operations in, and customers reside in, locations subject to natural occurrences such as severe weather and other geological events, including hurricanes, earthquakes, floods or tsunamis that could disrupt operations and gameplay. Any serious disruption at any of The Stars Group’s or its suppliers’ facilities or the residences of its customers due to a natural disaster could have a material adverse effect on The Stars Group’s revenues and increase its costs and expenses. If there is a natural disaster or other serious disruption at any of The Stars Group’s facilities, it could impair its ability to adequately supply its customers, cause a significant disruption to its operations, cause it to incur significant costs to relocate or re-establish these functions and negatively impact its operating results. While The Stars Group insures against certain risks, such insurance may not adequately compensate it for any losses incurred as a result of natural or other disasters. In addition, any natural disaster that results in a prolonged disruption to the

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operations of The Stars Group’s suppliers or the ability of its customers to engage in gameplay may adversely affect its business, results of operations or financial condition.

The Stars Group’s betting business is affected by the scheduling and live broadcasting of significant sporting and other events. Disruptions to the scheduling and broadcasting of those events may have a material impact on The Stars Group’s business, results of operations or financial condition for the relevant period. In some instances, the scheduling of major sporting and other events occurs seasonally, such as horse racing or soccer, or at regular but infrequent intervals, such as the World Cup. Additionally, The Stars Group generally utilizes third-party data feeds for pricing and content for such sporting events, and for certain events it offers live streaming to its customers via third-party data feeds. The cost of such data feeds could increase significantly.

The cancellation, postponement or curtailment of significant sporting or other events, for example due to adverse weather conditions, terrorist acts, or other acts of war or hostility or the outbreak of infectious diseases, or cancellation of, disruption to, postponement of or loss of access to the live broadcasting of such sporting events, for example due to contractual disputes, technological or communication problems, or the insolvency of or loss of broadcasting rights by major broadcasters, including Sky, could materially adversely affect The Stars Group’s business, results of operations, financial condition and prospects.

The Stars Group’s secured credit facilities and unsecured bonds contain covenants and other restrictions that may limit its flexibility in operating its business.

The Stars Group’s secured credit facilities, indenture governing its unsecured bonds and the terms governing its Preferred Shares (although there are no Preferred Shares outstanding as of the date hereof) contain various provisions that may limit The Stars Group’s ability to, among other things:

The Stars Group’s ability to comply with these provisions may be affected by events beyond its control. A breach of any of the covenants or undertakings in the agreements governing the secured credit facilities or indenture governing the unsecured bonds could result in an event of default under the same. Upon the occurrence of an event of default under The Stars Group’s secured credit facilities or unsecured bonds, if it does not cure such default within any applicable grace period, the lenders or bondholders, as applicable, could declare all amounts outstanding thereunder to be immediately due and payable and as applicable, terminate all commitments to extend further credit. If The Stars Group was unable to repay those amounts, then the lenders under such facility could proceed against the collateral granted to them to secure that indebtedness. If any of The Stars Group’s lenders or bondholders accelerate the repayment of borrowings, The Stars Group cannot assure that it will have sufficient assets to repay the amounts outstanding, which could have a material adverse effect on its business, financial condition and results of operation.

The Stars Group may have exposure to greater than anticipated tax liabilities.

The Stars Group’s tax obligations are varied and include taxes on gaming income (e.g., VAT and gaming duty) and taxes on profits and transactions of its group entities (corporate tax, VAT and withholding taxes).

The tax laws applicable to The Stars Group’s business are subject to interpretation, and certain jurisdictions are seeking to introduce new, or aggressively interpret existing, laws to tax online gaming operators on their activity with local customers in an effort to raise additional tax revenue from companies such as The Stars Group. The taxing authorities of the jurisdictions in which The Stars Group operates or has customers may challenge the tax residence status of The Stars Group or its subsidiaries, or assert the existence of a permanent establishment and/or that other taxes are payable, which could increase The Stars Group’s worldwide effective tax rate and harm its financial position and results of operations. The Stars Group is subject to periodic review and audit by domestic and foreign

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tax authorities. Tax authorities may disagree with certain positions The Stars Group has taken and will take, and any adverse outcome of such a review or audit could have a negative effect on its financial position and results of operations. For instance, while The Stars Group believes that the transactions described in this annual information form, including the mandatory conversion of its Preferred Shares, will not create a tax liability for it or a tax liability for the holders of the Preferred Shares in respect of which The Stars Group would be liable, tax authorities may disagree with this position. Although The Stars Group believes that its provision for income taxes and other tax liabilities is reasonable, determining this provision requires significant judgment and the ultimate tax outcome may differ from the amounts recorded in its financial statements and may materially affect its financial results in the period or periods for which such determination is made. For example, The Stars Group has included in the income tax expense for its 2017 fiscal year a tax provision of $26.5 million relating to an ongoing transfer pricing dispute in Canada for one of its subsidiaries. The issue in dispute relates to the subsidiary’s operations for its 2003 to 2007 fiscal years, prior to its acquisition by The Stars Group. The Stars Group has been advised that it has strong arguments to defend the adjustments proposed by the Canadian tax authorities and the subsidiary intends to vigorously defend its position. However, as the subsidiary has to go through the process of appealing the reassessments and it is uncertain what the final outcome will be, a tax provision was recorded to cover the potential tax adjustment and interest thereon. As at the date of this annual information form, the subsidiary has initiated the appeal and there has been no material change in the position from the 2017 fiscal year. See the 2018 Annual Financial Statements for additional information. This could continue to happen in the future in various jurisdictions where The Stars Group offers or has offered its product offerings or where it has or had subsidiaries or activities.

Each of SBG and BetEasy had an ongoing tax audit at the time The Stars Group acquired it, and as part of The Stars Group’s accounting for such acquisitions it recorded a provision for what it believed to be the probable outcomes of such audits. These provisions represent The Stars Group’s estimate of what it believes to be the most probable outcome; however, these provisions could ultimately be incorrect, resulting in a higher or lower tax liability than anticipated.

As discussed elsewhere in this annual information form, The Stars Group pays gaming duty as a requirement of certain of its gaming licenses. The Stars Group attempts to take reasonable positions in its tax filings and seeks to support this with external advice where deemed necessary or appropriate. However, the tax laws governing how the tax base for gaming duty is determined can be subject to differing interpretation, and tax authorities in certain jurisdictions may disagree with positions taken by The Stars Group.

Moreover, the application of indirect taxes, such as sales and use tax, VAT, provincial sales taxes, goods and services tax, business tax and gross receipt tax, to the businesses of The Stars Group and its subsidiaries is a complex and evolving issue. For example, as of January 1, 2015, the European Union imposed an obligation on businesses to collect and remit VAT on the provision of electronically supplied services, and similar regimes have been implemented in a number of other jurisdictions across the world. Gaming activities have typically been exempt from VAT where there is a local regulatory framework; however, such activities potentially fall within the rules applying local VAT on electronically supplied services, both in the European Union and elsewhere. Given the uncertainty surrounding the application of VAT to gaming activities, and the calculation methodology, under these constantly changing and developing rules, The Stars Group is complying with certain VAT collection and remittance procedures in certain countries both within and outside of the European Union, and the VAT cost is deducted from net gaming revenue. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded could change. These changes may result in The Stars Group paying VAT on a greater number of transactions, or on a different tax base, which could significantly increase its VAT costs and consequently reduce its net gaming revenue, harming its financial position and results of operations. Additionally, tax authorities may raise questions about The Stars Group’s calculation, reporting and collection of taxes and may ask it to remit additional taxes, as well as an alternative calculation of such taxes. Where necessary The Stars Group seeks external advice on the application of new taxes and changes to existing law, and should any new taxes become applicable or if the taxes The Stars Group pay are found to be deficient, including as a result of differing interpretations of ambiguous laws, its business, financial condition and results of operations could be harmed.

The Stars Group and its subsidiaries transact with each other as part of their operations. The tax laws of many countries where The Stars Group or its subsidiaries operate have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. The taxation authorities in these countries could disagree with The Stars Group’s arm’s length related party transfer pricing policies. International transfer pricing is a subjective area of taxation and generally involves a significant degree of judgment. If any of these taxation authorities were to successfully challenge The Stars Group’s transfer pricing policies, this could result in a higher worldwide effective tax rate and harm its financial position and results of operations.

If The Stars Group’s goodwill or intangible assets become impaired, it may be required to record a significant charge to earnings.

The Stars Group reviews its intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable, such as a decline in stock price and market capitalization. The Stars Group tests goodwill for impairment at least annually. If such goodwill or intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. The Stars Group may be required to record a significant charge in its financial statements during the period in which any impairment of its goodwill or intangible assets is determined, which would negatively affect its results of operations.

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The Stars Group’s conclusions regarding intangible assets and goodwill impairment are detailed in its 2018 Annual Financial Statements. Although The Stars Group did not recognize any material impairment with respect to intangible assets or any impairment with respect to goodwill for the year ended December 31, 2018, its conclusions with respect to the United Kingdom and Australia segments were particularly sensitive to changes in key management estimates and assumptions as certain reasonable hypothetical changes could have resulted in an impairment or additional impairments, as applicable. For example, if the future actual cash flows for any such segment were to adversely differ from management’s best estimates as at December 31, 2018, the Corporation could experience a future, potentially material, impairment in goodwill.

The Stars Group’s customer growth, engagement, and monetization on mobile devices each depend upon effective operation with mobile operating systems, networks and standards that it does not control.

A growing portion of The Stars Group’s customers use its product offerings on mobile devices and The Stars Group believes that this will continue to be increasingly important to its long-term success. There is no guarantee that popular mobile devices will start or continue to support or feature The Stars Group’s product offerings, or that mobile device users will continue to use its product offerings rather than competing products. As it relates to its mobile platforms, The Stars Group is dependent on the interoperability of such platforms with popular mobile operating systems, technologies, networks and standards that it does not control, such as the Android and iOS operating systems, and any changes, bugs, technical or regulatory issues in such systems, The Stars Group’s relationships with mobile partners, manufacturers and carriers, or in their terms of service or policies that degrade The Stars Group’s product offerings’ functionality, reduce or eliminate its ability to distribute its product offerings, give preferential treatment to competitive products, limit its ability to deliver high quality product offerings, or impose fees or other charges related to delivering its product offerings, could adversely affect its product usage and monetization on mobile devices. If it is difficult or unfavorable for The Stars Group’s customers to access and use its product offerings on their mobile devices, or if its customers choose not to access or use its product offerings on their mobile devices or use mobile products that do not offer access to its product offerings, its customer growth and engagement could be harmed, which could adversely affect its business, results of operations and financial condition.

The Stars Group’s online offerings are part of new and evolving industries, which presents significant uncertainty and business risks.

The online gaming and interactive entertainment industries are relatively new and continue to evolve. Whether these industries grow and whether The Stars Group’s online business will ultimately succeed, will be affected by, among other things, developments in social networks, mobile platforms, legal and regulatory developments (such as passing new laws or regulations or extending existing laws or regulations to online gaming and related activities), taxation of gaming activities, data and information privacy and payment processing laws and regulations, and other factors that it is unable to predict and which are beyond its control. Given the dynamic evolution of these industries, it can be difficult to plan strategically, including as it relates to product launches in new or existing jurisdictions which may be delayed or denied, and it is possible that competitors will be more successful than The Stars Group at adapting to change and pursuing business opportunities. Additionally, as the online gaming industry advances, including with respect to regulation in new and existing jurisdictions, The Stars Group may become subject to additional compliance-related costs, including as it relates to licensing and taxes. Consequently, The Stars Group cannot provide assurance that its online and interactive offerings will grow at the rates expected, or be successful in the long term. If The Stars Group’s product offerings do not obtain popularity or maintain popularity, or if they fail to grow in a manner that meets its expectations, or if it cannot offer its product offerings in particular jurisdictions that may be material to its business, The Stars Group’s business, results of operations and financial condition could be harmed.

The Stars Group is subject to risks related to its and its subsidiaries contractual relationships with Sky, and events impacting those relationships or agreements with Sky could result in significant disruptions to The Stars Group’s business.

SBG and one or more subsidiaries of The Stars Group have ongoing arm’s length commercial relationships with Sky, which allow SBG and one or more subsidiaries of The Stars Group to utilize the Sky brand and integrate with Sky’s commercial and advertising platforms pursuant to several contractual agreements. Events impacting Sky’s relationship with SBG and The Stars Group, including triggers for terminating SBG’s and The Stars Group’s contractual arrangements with Sky, could result in significant disruptions (including in the delivery of services provided to customers) and costs that would adversely affect the overall operational performance, financial performance, financial position or prospects of SBG’s business, as well as harm its reputation or brand and/or attract increased regulatory scrutiny. Additionally, the commercial and advertising platforms that Sky provides to SBG may not operate as expected, may not fulfil their intended purpose or may be damaged or interrupted by unanticipated increases in usage, human error, unauthorized access, natural hazards or disasters or similar events. Any interruption to the services Sky provides to SBG could damage SBG’s business and reputation, and could cause it to incur higher marketing and other costs, which could have a material adverse effect on its business, results of operations, financial condition and prospects.

SBG relies on the Sky brand and product offering to attract customers. If the customer perception of the Sky brand were to deteriorate (as a result of acts or omissions by Sky, SBG or The Stars Group), or if Sky were to lose some or all of its material licensing

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arrangements with respect to sports broadcasting, the perception of the Sky brand could be impacted, which could have a material adverse effect on SBG’s business, results of operations, financial condition and prospects.

The contractual license arrangement pursuant to which SBG and one or more subsidiaries of The Stars Group utilizes the Sky brand is set to expire on March 18, 2040. There can be no assurances that The Stars Group will be able to extend the term of the license beyond such expiration date. Additionally, Sky may terminate the license if The Stars Group (including SBG) does not comply with the license terms. Any expiration or termination of this Sky brand license could have a material adverse effect on SBG’s and The Stars Group’s business, results of operations, financial condition and prospects.

Pursuant to the terms of the license, The Stars Group (including SBG) is only entitled to utilize the Sky brand in approved territories, which currently comprise, among others, the UK, Republic of Ireland, Italy and Germany. Any use of the Sky brand in any other territory may be undertaken only with Sky’s prior consent, and is subject to the satisfaction of certain conditions as to the legality of betting and gaming operations, no adverse impacts on the Sky brand, and the absence of conflicts with third-party rights and existing third-party restrictions and arrangements. There can be no guarantee that The Stars Group will be entitled to use the Sky brand in any additional territories other than the currently approved territories. The Stars Group’s inability to utilize the Sky brand to expand its operations internationally could have a material adverse effect on its business, results of operations, financial condition and prospects.

The Stars Group has secured certain limited rights to utilize the SBG brands in conjunction with The Stars Group’s brands in the approved territories where use of the Sky brand is permitted. These rights relate to the positioning of the SBG brands on websites, applications, marketing and promotional materials which also feature The Stars Group’s brands. The Stars Group has also secured rights to utilize the benefits of the Advertising Agreement in relation to the promotion of The Stars Group’s brands in the UK and the Republic of Ireland. Any loss of such rights and benefits could have a material adverse effect on The Stars Group’s business and its results of operations, financial condition and prospects.

The Stars Group is subject to risks related to corporate social responsibility, responsible gaming, reputation and ethical conduct.

Many factors influence The Stars Group’s reputation and the value of its brands, including the perception held by its customers, business partners, investors, other key stakeholders and the communities in which it operates regarding The Stars Group and its business and governance practices, such as its environmental, social responsibility, corporate governance and responsible gaming practices. The Stars Group has and will likely continue to face increased scrutiny related to environmental, social, governance and responsible gaming activities, and its reputation and the value of its brands can be materially adversely harmed if it fails to act responsibly in a number of areas, such as environmental, supply chain management, climate change, diversity and inclusion, workplace conduct, responsible gaming, human rights, philanthropy and support for local communities. Any harm to The Stars Group’s reputation could impact employee engagement and retention, and the willingness of customers and The Stars Group’s partners to do business with it, which could have a materially adverse effect on the its business, results of operations and cash flows.

The Stars Group believes that its reputation is critical to its role as a leader in the online and mobile gaming and interactive entertainment industries and as a publicly traded company. The Board has adopted a Code of Business Conduct as well as other related policies and procedures, and management is heavily focused on the integrity of its directors, officers, senior management, employees, other personnel and third-party suppliers and partners. Illegal, unethical or fraudulent activities perpetrated by any of such individuals, suppliers or partners for personal gain could expose The Stars Group to potential reputational damage and financial loss.

The Stars Group’s betting business, which following the Acquisitions, comprises a large portion of its business, may experience significant losses with respect to individual events or betting outcomes.

Following the Acquisitions, betting comprises a large portion of The Stars Group’s business and revenues. The Stars Group’s fixed-odds betting products involve betting where winnings are paid on the basis of the stake placed and the odds quoted, rather than derived from a pool of stake money received from all customers. Odds are determined with the objective of providing an average return to the bookmaker over a large number of events and therefore, over the long term, The Stars Group’s gross win percentage has remained fairly constant. However, there can be significant variation in gross win percentage event-by-event and day-by-day. The Stars Group has systems and controls that seek to reduce the risk of daily losses occurring on a gross-win basis, but there can be no assurance that these will be effective in reducing their exposure, and consequently The Stars Group’s exposure to this risk in the future. As a result, in the short term, there is less certainty of generating a positive gross win, and The Stars Group may experience (and it has from time to time experienced) significant losses with respect to individual events or betting outcomes, in particular if large individual bets are placed on an event or betting outcome or series of events or betting outcomes. Odds compilers and risk managers are capable of human error, thus even allowing for the fact that a number of betting products are subject to capped pay-outs, significant volatility can occur. Also, there may be such a volume of trading during any particular period that even automated systems would be unable to address and eradicate all risks. Any significant losses on a gross-win basis could have a material adverse effect on The Stars Group and its cash flows and therefore a material adverse effect on its business, financial condition and results of operations. In addition, if a jurisdiction where it

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holds or wishes to apply for a license imposes a high turnover tax for betting (as opposed to a gross-win tax), this too would impact profitability, particularly with high value/low margin bets, and likewise have a material adverse effect on its business.

The Stars Group’s betting operations can fluctuate due to seasonal trends and other factors. The Stars Group believes that the climate and weather in geographies where its customers reside tend to impact, among other things, revenues from operations, key metrics and customer activity, and as such, historically those have been generally higher in the first and fourth quarters than in the second and third quarters. The Stars Group’s betting operations (and thus its financial performance) are also subject to the seasonal variations dictated by various sports calendars, which will have an effect on its financial performance. A significant proportion of The Stars Group’s current betting revenue is and will continue to be generated from bets placed on soccer, horse racing, the Australian Football League and the National Rugby League, each of which have their own off-seasons, which can cause decreases in its betting revenues during such periods. The Stars Group’s revenues may also be affected by the scheduling of major sporting events that do not occur annually, such as the World Cup and the UEFA European Championships. In addition, certain individuals or teams advancing or failing to advance and their scores and other results within specific tournaments, games or events may have impact The Stars Group’s financial performance. Also, the cancellation of sporting events and races could negatively impact wagers and revenues. For additional information, see “Business of the Corporation—Seasonality and Other Factors Impacting the Business” and the 2018 MD&A under the heading “Summary of Quarterly Results”.

While The Stars Group has implemented systems and controls to monitor and manage such risk, there can be no assurance that these systems and controls will be effective in reducing the exposure to this risk. The effect of future fluctuations and single event losses could have a material adverse effect on The Stars Group’s cash flows and therefore a material adverse effect on its business, results of operations, financial condition and prospects.

Real or perceived inaccuracies in The Stars Group’s customer metrics may harm its reputation and negatively affect its business.

The numbers for The Stars Group’s key metrics, which currently include QAU, QNY, Stakes, Betting Net Win Margin and Net Deposits (all as defined in the 2018 Annual MD&A), as well as certain other metrics, are calculated using internal company data based on customer account activity. There are certain challenges and limitations in measuring the usage of its product offerings across its customer base, and such challenges and limitations may also affect The Stars Group’s understanding of certain details of its business. See “Non-IFRS Measures, Key Metrics and Other Data” in the 2018 Annual MD&A. In addition, The Stars Group’s key metrics and related estimates may differ from estimates published by third parties or from similarly-titled metrics of its competitors due to differences in methodology and access to information. The Stars Group continually seeks to improve its estimates of, among other things, its active customer base, and such estimates may change due to improvements or changes in its methodology.

For example, the methodologies used to measure The Stars Group’s customer metrics are based on significant internal judgments and estimates, and may be susceptible to algorithm, calculation or other technical errors, including how certain metrics may be defined (and the assumptions and considerations made and included in, or excluded from, such definitions) and how certain data may be, among other things, integrated, analyzed and reported after The Stars Group completes an acquisition or strategic transaction such as the Australian Acquisitions and the SBG Acquisition. Moreover, The Stars Group’s business intelligence tools may fail on a particular data backup or upload, which could lead to certain customer activity not being properly recorded or accurately included, in the calculation of a particular key metric. In addition, as it relates to certain of The Stars Group’s product offerings, customers are required to provide certain information when registering and establishing real-money accounts, which could lead to the creation of multiple accounts for the same customer (in nearly all instances such account creation would violate The Stars Group’s applicable terms and conditions of use) and customers could take advantage of certain customer acquisition incentives to register and interact with its product offerings, but not actually deposit or transfer funds into their real-money accounts with The Stars Group. Although The Stars Group typically addresses and corrects any such failures, duplications and inaccuracies relatively quickly, its metrics are still susceptible to the same and its estimations of such metrics may be lower or higher than the actual numbers.

The Stars Group regularly reviews its processes for calculating and defining these metrics, and it may discover inaccuracies in its metrics or make adjustments to improve their accuracy that may result in the recalculation or replacement of historical metrics or introduction of new metrics. These changes may also include adjustments to underlying data, such as changes to historical revenue amounts as a result of certain accounting reallocations made in later periods and adjustments to definitions in an effort to provide what management believes may be more helpful and relevant data. The Stars Group also continuously seeks to improve its ability to identify irregularities and inaccuracies (and suspend any customer accounts that violate its terms and conditions of use and limit or eliminate promotional incentives that are susceptible to abuse), and its key metrics or estimates of key metrics may change due to improvements or changes in its methodology. Additionally, all The Stars Group’s metrics are subject to software bugs, inconsistencies in its systems and human error. Notwithstanding, The Stars Group believes that any such irregularities, inaccuracies or adjustments are immaterial unless otherwise stated.

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If the public or investors do not perceive The Stars Group’s customer metrics to accurately represent its customer base, or if it discovers material inaccuracies in its customer metrics, it may be subject to liability and its reputation may be harmed, which could negatively affect its business, results of operations and financial condition.

The Stars Group cannot assure investors that it will effectively manage its growth.

The growth and expansion of The Stars Group’s business, headcount and product offerings could create significant challenges for its management, operational and financial resources, including managing its relationships with customers, investors and other third parties. In the event of continued growth of The Stars Group’s operations or in the number of its third-party relationships, it may not have adequate resources, operationally, technologically or otherwise, to support such growth. In addition, some members of The Stars Group’s management do not have significant experience managing a large, public global business operation, so its management may be unable to manage such growth effectively. To effectively manage The Stars Group’s growth, it must continue to improve its operational, financial and management processes and systems and to effectively expand, train and manage its employee base. As The Stars Group’s organization continues to grow and it is required to implement more complex organizational management structures, it may find it increasingly difficult to maintain the benefits of its corporate culture and efficiencies, including its ability to quickly develop and launch new and innovative products. This could negatively affect The Stars Group’s business performance.

If The Stars Group’s internal controls are ineffective, its operating results and market confidence in its reported financial information could be adversely affected.

The Stars Group’s internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If The Stars Group fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, if it experiences difficulties in their implementation, or if controls are disrupted or compromised as a result of cyber-attacks, its business and operating results and market confidence in its reported financial information could be harmed and it could fail to meet its financial reporting obligations.

During the quarters ended June 30, 2018 and September 30, 2018, The Stars Group had identified a deficiency in its internal control over financial reporting and related disclosure controls and procedures relating to the same, which led management to conclude that there was a material weakness in the same. The material weakness identified related to the design of controls over The Stars Group’s accounting for debt and related disclosures, and was primarily a result of deficiencies in control design over a complex model that was previously developed to support the underlying accounting for debt. For additional information, see the 2018 Annual MD&A, particularly under the heading “Disclosure Controls and Procedures and Internal Control over Financial Reporting”. The Stars Group has implemented certain measures, which successfully remediated this material weakness as at December 31, 2018, and enhanced The Stars Group’s internal control over financial reporting. Although this material weakness has been remediated, there can be no assurance that The Stars Group’s internal control over financial reporting will be sufficient to prevent this or other material weaknesses in the future.

As of December 31, 2018, the Corporation identified two material weaknesses in its internal control over financial reporting, which led management to conclude that its internal control over financial reporting as of such date was not effective. The material weaknesses identified related to controls over foreign currency translation of intercompany loans and controls over the timely assessment of inputs and assumptions used in the valuation of embedded derivatives. These material weaknesses are more fully explained in the 2018 Annual MD&A under the heading “Disclosure Controls and Procedures and Internal Control over Financial Reporting”.

The existence of any material weaknesses in the future may preclude management from concluding that The Stars Group’s internal control over financial reporting is effective and may further preclude its independent auditors from issuing an unqualified opinion that The Stars Group’s internal controls are effective. Any material weaknesses could cause investors to lose confidence in The Stars Group’s financial reporting and may negatively affect the price of its Common Shares. The Stars Group can make no assurances that it will be able to timely and cost effectively remediate any internal control deficiencies. Moreover, effective internal controls are necessary to produce reliable financial reports. If The Stars Group is unable to satisfactorily remediate any or if it discovers other deficiencies in its internal control over financial reporting, then such deficiencies could lead to misstatements in its financial statements or otherwise negatively impact its financial statements, business, results of operations and reputation.

New product offerings and partnerships or other similar third-party relationships may be subject to complex revenue recognition standards, which could materially affect The Stars Group’s financial results.

As The Stars Group introduces new product offerings and enters into partnerships or other third-party relationships and as transactions become increasingly complex, additional analysis and judgment is required to account for and recognize revenues, expenses, assets, liability and equity in accordance with applicable accounting standards. Transactions may include unique new product offerings or third-party relationships, and applicable accounting principles or regulatory product approval delays could further impact the timing

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of recognizing the applicable revenues, expenses, assets, liabilities or equity, which could adversely affect The Stars Group’s financial results for any given period.

Risks Related to Regulation

The online gaming industry is heavily regulated and The Stars Group’s failure to obtain or maintain applicable licensure or approvals, or otherwise comply with applicable requirements, could be disruptive to its business and could adversely affect its operations.

The Stars Group and its officers, directors, major shareholders, key employees and business partners are generally subject to the laws and regulations relating to online gaming of the jurisdictions in which The Stars Group conducts business, as well as the general laws and regulations that apply to all e-commerce businesses, such as those related to privacy and personal information, tax and consumer protection. These laws and regulations vary from one jurisdiction to another and future legislative and regulatory action, court decisions or other governmental action, which may be affected by, among other things, political pressures, attitudes and climates, as well as personal biases, may have a material impact on The Stars Group’s operations and financial results. In particular, some jurisdictions have introduced regulations attempting to restrict or prohibit online gaming, while others have taken the position that online gaming should be licensed and regulated and have adopted or are in the process of considering legislation to enable that to happen. Even where a jurisdiction purports to license and regulate online gaming, the licensing and regulatory regimes can vary considerably in terms of their business-friendliness and at times may be intended to provide incumbent operators with advantages over new licensees. As such, some “liberalized” regulatory regimes are considerably more commercially attractive than others.

Regulatory regimes imposed upon gaming providers varies by jurisdiction. Typically, however, most regulatory regimes include the following elements:

Any gaming license may be revoked, suspended or conditioned at any time, and the industry has recently experienced significantly more enforcement actions, particularly in Great Britain, where the Gambling Commission has issued fines against numerous operators (including SBG) for regulatory failings. The loss of a gaming license in one jurisdiction could trigger the loss of a gaming license or affect The Stars Group’s eligibility for such a license in another jurisdiction, and any of such losses, or potential for such loss, could cause The Stars Group to cease offering some or all of its product offerings in the impacted jurisdictions. The Stars Group may be unable to obtain or maintain all necessary registrations, licenses, permits or approvals, and could incur fines or experience delays related to the licensing process, which could adversely affect its operations. The determination of suitability process may be expensive and time-consuming. The Stars Group’s delay or failure to obtain gaming licenses in any jurisdiction may prevent it from distributing its product offerings, increasing its customer base and/or generating revenues. A gaming regulatory body may refuse to issue or renew a gaming license if The Stars Group, or one of its directors, officers, employees, major shareholders or business partners: (i) is considered to be a detriment to the integrity or lawful conduct or management of gaming, (ii) no longer meets a licensing or registration requirement, (iii) has breached or is in breach of a condition of licensure or registration or an operational agreement with a regulatory authority, (iv) has made a material misrepresentation, omission or misstatement in an application for licensure or registration or in reply to an inquiry by a person conducting an audit, investigation or inspection for a gaming regulatory authority, (v) has been refused a similar gaming license in another jurisdiction, (vi) has held a similar gaming license in that province, state or another jurisdiction which has been suspended, revoked or cancelled, or (vii) has been convicted of an offence, inside or outside of Canada or the United States that

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calls into question the honesty or integrity of The Stars Group or any of its directors, officers, employees or associates. For additional information, see “Business of the Corporation—Regulatory Environment”. Additionally, a gaming regulatory body may refuse to issue or renew a gaming license or restrict or condition the same, based on the historic activities of The Stars Group or its current or former directors, officers, employees, major shareholders or business partners, which could adversely affect its operations or financial condition.

Additionally, The Stars Group’s product offerings must be approved in most regulated jurisdictions in which they are offered; this process cannot be assured or guaranteed. Obtaining these approvals is a time-consuming process that can be extremely costly. A developer and provider of online gaming products may pursue corporate regulatory approval with regulators of a particular jurisdiction while it pursues technical regulatory approval for its product offerings by that same jurisdiction. It is possible that after incurring significant expenses and dedicating substantial time and effort towards such regulatory approvals, The Stars Group may not obtain either of them. If The Stars Group fails to obtain the necessary gaming license in a given jurisdiction, it would likely be prohibited from distributing and providing its product offerings in that particular jurisdiction altogether. If The Stars Group fails to seek, does not receive, or receives a suspension or revocation of a license in a particular jurisdiction for its product offerings (including any related technology and software) then it cannot offer the same in that jurisdiction and its gaming licenses in other jurisdictions may be impacted. Furthermore, some jurisdictions require license holders to obtain government approval before engaging in some transactions, such as business combinations, reorganizations, stock offerings and repurchases. The Stars Group may not be able to obtain all necessary gaming licenses in a timely manner, or at all. Delays in regulatory approvals or failure to obtain such approvals may also serve as a barrier to entry to the market for The Stars Group’s product offerings. If The Stars Group is unable to overcome the barriers to entry, it will materially affect its results of operations and future prospects.

To the extent new online gaming jurisdictions are established or expanded, The Stars Group cannot guarantee it will be successful in penetrating such new jurisdictions or expanding its business or customer base in line with the growth of existing jurisdictions. As The Stars Group directly or indirectly enters into new markets, it may encounter legal, regulatory and political challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. If The Stars Group is unable to effectively develop and operate directly or indirectly within these new markets or if its competitors are able to successfully penetrate geographic markets that it cannot access or where it faces other restrictions, then its business, operating results and financial condition could be impaired. The Stars Group’s failure to obtain or maintain the necessary regulatory approvals in jurisdictions, whether individually or collectively, would have a material adverse effect on its business. See “Business of the Corporation—Regulatory Environment”. To expand into new jurisdictions, The Stars Group may need to be licensed, obtain approvals of its products and/or seek licensure of its officers, directors, major shareholders, key employees or business partners. This is a time-consuming process that can be extremely costly. Any delays in obtaining or difficulty in maintaining regulatory approvals needed for expansion within existing markets or into new jurisdictions can negatively affect The Stars Group’s opportunities for growth, including the growth of its customer base, or delay its ability to recognize revenue from its product offerings in any such jurisdictions.

Future legislative and regulatory action, and court decisions or other governmental action, may have a material impact on The Stars Group’s operations and financial results. Governmental authorities could view The Stars Group or its officers, directors, major shareholders, key employees or business partners as having violated their local laws, despite The Stars Group’s efforts to obtain all applicable licenses or approvals. Therefore, there is a risk that civil and criminal proceedings, including class actions, could be initiated against The Stars Group, its officers, directors, major shareholders, key employees or business partners and others involved in the online gaming industry. Such potential proceedings could involve substantial litigation expense, penalties, fines, seizure of assets, injunctions, payment blocking, Internet service provider blocking or other restrictions being imposed upon The Stars Group or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on The Stars Group’s business, revenues, operating results and financial condition as well as impact upon its reputation, even in instances where such proceedings are concluded successfully in its favor.

There can be no assurance that legally enforceable prohibiting legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to The Stars Group’s business to prohibit, legislate or regulate various aspects of the Internet, e-commerce, payment processing, or the online gaming and interactive entertainment industries (or that existing laws in those jurisdictions will not be interpreted negatively). Compliance with any such legislation may have a material adverse effect on The Stars Group’s business, financial condition and results of operations, either as a result of its determination that a jurisdiction should be blocked, or because a local license or approval may be costly for it or its business partners to obtain and/or such licenses or approvals may contain other commercially undesirable conditions. See “Business of the Corporation—Regulatory Environment”, including for additional information regarding the recently passed Financial Blocking Bill in Russia.

The Stars Group relies on its multi-jurisdictional licenses to offer online gaming to residents in certain jurisdictions that do not have an established regulatory and licensing framework for online gaming, and certain changes in these jurisdictions or the jurisdictions where it holds multi-jurisdictional licenses could be disruptive to its business and could adversely affect its operations.

As described above, The Stars Group offers online gaming to persons resident in certain jurisdictions through multi-jurisdictional licenses where either: (i) such jurisdictions have not established a regulatory and licensing framework for online gaming; (ii) the

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availability to citizens of online gaming hosted outside their jurisdictional boundaries is not clearly prohibited by the law of the jurisdiction; or (iii) the local laws of such other jurisdiction lack extra-territorial effect. Certain Asian markets are serviced on this basis. See “Business of the Corporation—Regulatory Environment—Regulation of The Stars Group’s Business—Multi-Jurisdictional Licenses”.

In addition, The Stars Group takes such steps as it considers prudent and reasonable to mitigate any perceived potential legal, regulatory or political risk arising from the individual circumstances of each major market. Such measures may include, for example, the offer of online gaming in a particular jurisdiction on a B2B basis, with a local or regional partner entering into end-user agreements with local customers, or The Stars Group may require detailed information as to the origin and manner of processing of customer payments, so as to mitigate any risk associated with the receipt of unlawful monies, in accordance with The Stars Group’s “zero-tolerance” policy described in “Business of the Corporation—Regulatory Environment—Regulation of The Stars Group’s Business—Regulatory Strategy”.

While The Stars Group obtains and relies upon external local legal advice and structures its operations with what it considers to be an appropriate degree of prudence in markets where there is no regulatory and licensing framework, such as certain Asian jurisdictions, it cannot guarantee that such external advice and such measures obviate all risk arising from The Stars Group’s involvement in such markets. If any changes in local law and regulation, judicial interpretation of local law and regulation, the attitude of local authorities to international e-commerce, political attitudes in individual territories or any defaults, errors or omissions of The Stars Group’s local business partners and persons associated with them, were to occur, then The Stars Group’s business could be materially harmed. Furthermore, in some jurisdictions the application of the rule of law, as well the conventions and expectations of due process in regulatory and administrative behavior, may vary dramatically from European and North American standards.  

Social responsibility concerns and public opinion can significantly influence the regulation of online gaming and impact responsible gaming requirements, each of which could impact The Stars Group’s business and could adversely affect its operations.

Public opinion can significantly influence the regulation of online gaming. A negative shift in the perception of online gaming by the public or by politicians, lobbyists or others could affect future legislation or regulation in different jurisdictions. Among other things, such a shift could cause jurisdictions to abandon proposals to legalize online gaming, thereby limiting the number of new jurisdictions into which The Stars Group could expand. Negative public perception could also lead to new restrictions on or to the prohibition of online gaming in jurisdictions in which The Stars Group currently operates.

In addition, concerns with safer betting and gaming could lead to negative publicity, resulting in increased regulatory attention, which may result in restrictions on The Stars Group’s operations. If The Stars Group had to restrict its marketing or product offerings or incur increased compliance costs, this could have a material adverse effect on its business, results of operations, financial condition and prospects. In particular, further changes to the UK’s betting or gaming laws or regulations in reaction to the current adverse media coverage in that jurisdiction, including changes in the political or social attitude to online gaming caused by such coverage, could have a material impact on The Stars Group’s business, operations and financial position.

In January 2018, the Gambling Commission wrote to all its licensed casino operators raising its concerns about licensees’ approach to anti-money laundering and social responsibility. The letter explained that following recent compliance assessments, there was a need for remote casino operators to improve their responsible gaming procedures. Based on the Gambling Commissions actions and comments, it is likely that the Gambling Commission believed that many licensees were breaching their social responsibility obligations under the Licence Conditions and Codes of Practice (“LCCP”), which sets out procedures operators should have in place to protect children and other vulnerable people from being harmed or exploited by gambling.  Over the past year, there has been an increase in the amount of public statements released by the Gambling Commission with the majority covering, in some part, social responsibility issues with respect to gambling.  In December 2018, the Gambling Commission opened a consultation on a new national strategy to reduce gambling harm and to propose amendments to the LCCP regarding the requirement for gambling businesses to contribute to research, prevention and treatment.

An example of the Gambling Commission’s recent focus on responsible gaming matters is the regulatory investigation with respect to certain of SBG’s former practices. See “Legal Proceedings and Regulatory Actions—SBG Regulatory Matter”.

The Stars Group may not be able to capitalize on the expansion of online gaming or other trends and changes in the online gaming industry, including due to laws and regulations governing this industry.

The Stars Group directly and indirectly participates in the constantly evolving online gaming industry through its online (including mobile) and social products. The Stars Group intends to take advantage of the liberalization of online gaming, both within North America, Europe and elsewhere internationally; however, expansion of online gaming involves significant risks and uncertainties, including legal, business and financial risks. The success of online gaming and The Stars Group’s product offerings may be affected by future developments in social networks, mobile platforms, regulatory developments, payment processing laws, data and information privacy laws and other factors that The Stars Group is unable to predict and are beyond its control. Consequently, The Stars Group’s

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future operating results relating to its online gaming products are difficult to predict, and it cannot provide assurance that its product offerings will grow at expected rates or be successful in the long term.

Additionally, The Stars Group’s ability to successfully pursue its online gaming strategy depends on the laws and regulations relating to wagering through interactive channels. There is considerable debate over, and opposition to, online and interactive real-money gaming. There can be no assurance that this opposition will not succeed in preventing the legalization of online gaming in jurisdictions where it is presently prohibited, prohibiting or limiting the expansion of online gaming where it is currently permitted or causing the repeal of legalized online gaming in any jurisdiction. Any successful effort to curtail the expansion of, or limit or prohibit, legalized online gaming could have an adverse effect on The Stars Group’s results of operations, cash flows and financial condition. Combatting such efforts to curtail expansion of, or limit or prohibit, legalized online gaming can be time-consuming and can be extremely costly.

For example, there was uncertainty as to whether the Federal Wire Act prohibited U.S. states from conducting intrastate lottery transactions via the Internet if the transmissions over the Internet during the transaction crossed state lines. In late 2011, the OLC of the DOJ issued the 2011 DOJ Opinion to the effect that state lottery ticket sales over the Internet to in-state adults do not violate the Federal Wire Act, and the Federal Wire Act was limited to sports wagering. The opinion provided an impetus for states to authorize forms of online lottery or gaming in order to generate additional revenue. Certain states wishing to pursue online gaming, enacted appropriate enabling legislation, such as the actions taken by Delaware, Nevada, New Jersey and Pennsylvania to authorize various forms of online gaming.

However, on January 14, 2019, the DOJ made public the 2018 DOJ Opinion reversing the 2011 DOJ Opinion, finding the prohibitions in the Federal Wire Act were not limited to wire communications relating to bets or wagers on sporting events or contest, but rather extend to all forms of bets or wagers.  Further, the 2018 DOJ Opinion detailed the OLC’s position that the enactment of UIGEA did not modify the scope of the Federal Wire Act.  More specifically, the OLC determined that by excluding certain activities from UIGEA’s definition of “unlawful Internet gambling”, UIGEA did not exclude those same activities from the prohibitions of the Federal Wire Act.  The 2018 DOJ Opinion stated that anyone who reasonably relied on the 2011 DOJ Opinion may have a defense for actions taken in such reliance through November 2, 2018. On January 15, 2019, DOJ Deputy Attorney General Rod Rosenstein issued a memorandum to United States Attorneys, Assistant Attorneys General and the Director of the Federal Bureau of Investigations stating that the DOJ should exercise discretion in applying the new interpretation provided under the 2018 DOJ Opinion for a period of 90 days in order to “give businesses that relied on the [2011 DOJ Opinion] time to bring their operations into compliance with federal law.”  It is unclear at this time the impact of the 2018 DOJ Opinion on The Stars Group’s current or future operations, but if interpreted or enforced in a manner adverse to The Stars Group or its current or future operations, its business, results of operations, prospects or financial condition could be materially adversely harmed.

As can be seen by the 2018 DOJ Opinion, there are still significant forces working to limit or prohibit online gaming in the United States.  In previous sessions of Congress in 2015 and 2016, Representative Jason Chaffetz (R-UT-3) introduced the Restoration of America’s Wire Act (“RAWA”) in the U.S. House of Representatives and Senator Lindsey Graham (R-SC) and Senator Tom Cotton (R-AK), respectively, introduced similar legislation in the U.S. Senate. RAWA and its counterparts in the Senate failed to pass Congress in the 114^th Session of Congress and therefore the legislation expired. RAWA was not reintroduced in the 115^th Session of Congress and as of the date hereof, has not been reintroduced in the current 116th Session of Congress.  Further, even though the Supreme Court issued an opinion in May 2018 determining that the PASPA was unconstitutional, and in striking down PASPA, the Supreme Court opened the potential for state-by-state authorization of sports betting. Regardless of the Supreme Court’s decision, sports betting in the United States may be subject to additional laws, rules and regulations, including those discussed in this annual information form. For example, on December 19, 2018, now-retired Senator Orrin Hatch (R-UT) introduced the Sports Wagering Market Integrity Act of 2018 (“SWMIA”) in the U.S. Senate.  The bill was co-sponsored by Senator Chuck Schumer (D-NY).  As proposed, SWMIA would require all states to get approval from the US Attorney General’s office before they enact legal sports betting, including online sports betting.  SWMIA would also give the federal government the power to veto state sports wagering laws.  SWMIA would further require betting operators to use data provided by or officially licensed by sports leagues through 2023 and a federal excise tax of 0.25% of total handle would be imposed on State-authorized sports wagers, the proceeds of which would be placed into a wagering trust fund for deployment on betting matters when needed.  SWMIA failed to pass Congress in the 115th Session of Congress and therefore the legislation expired.  As of the date hereof, SWMIA has not been reintroduced in the current 116th Session of Congress. The enactment of online gaming legislation that federalizes significant aspects of the regulation of online gaming and/or limits the forms of online wagering that are permissible could have an adverse impact on The Stars Group’s ability to pursue its interactive strategy in the United States.

Internationally, laws relating to online gaming are evolving, particularly in Europe. To varying degrees, a number of European governments have taken steps to change the regulation of online wagering by implementing new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. The Stars Group cannot predict the timing, scope or terms of any such state, federal or foreign laws and regulations, or the extent to which any such laws and regulations will facilitate or hinder its interactive strategy.

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Moreover, new gaming laws or regulations, changes in existing gaming laws or regulations, new interpretations of the same or changes in the manner in which existing laws and regulations are enforced, may hinder or prevent The Stars Group from continuing to operate in jurisdictions where it currently conducts business, including in jurisdictions where its product offerings are available through its multi-jurisdictional licenses, which would harm its operating results and financial condition. For example, The Stars Group ceased offering its real-money online products to customers physically located in Australia (poker only), Colombia and Slovenia in 2017 and South Africa in 2018 due to changes in the regulatory environment in those jurisdictions. Additionally, if new or existing gaming laws or regulations instituting a legal regime for online gaming in jurisdictions where The Stars Group does not currently operate are implemented in a manner that could prevent it from taking advantage of such new or existing laws or regulations due to its historic actions or those of its directors, officers, employees or other stakeholders, this could harm The Stars Group’s business, results of operations and financial condition.

If The Stars Group fails to comply with any existing or future laws or requirements, regulators may take action against it, which could include fines, the conditioning, suspension or revocation of approvals, registrations, permits or licenses, and other disciplinary action. If The Stars Group fails to adequately adjust to any such potential changes, its business, results of operations or financial condition could be harmed.

The Stars Group’s business is subject to complex and evolving domestic and foreign laws and regulations regarding the Internet, privacy, data protection, competition, consumer protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to The Stars Group’s business practices, monetary penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm its business.

In addition to regulations governing online gaming, The Stars Group is subject to a variety of laws and regulations domestically and abroad that involve the Internet, e-commerce, privacy, and protection of data and personal information, rights of publicity, acceptable content, intellectual property, advertising, marketing, distribution, data and information security, electronic contracts and electronic communications, competition, protection of minors, consumer protection, unfair commercial practices, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment and payment processing services. The Stars Group may introduce new products, expand its activities in certain jurisdictions, or take other actions that may subject it to additional laws, regulations or other government scrutiny. For example, when The Stars Group began offering sports betting in Great Britain, it became subject to certain financing arrangements intended to support industries from which it profits, including the statutorily imposed Horserace Betting Levy, which is intended to support the British horse racing industry. In addition, foreign data and information protection, privacy, competition and other laws and regulations can impose different obligations or be more restrictive than those in the United States or Canada. For example, The Stars Group handles, collects, stores, retrieves, transmits and uses confidential, personal information relating to its customers and personnel for various business purposes, including marketing and financial purposes, and credit card information for processing payments. The Stars Group may share this personal or confidential information with vendors or other third parties in connection with processing of transactions, operating certain aspects of its business, combating fraud or for marketing purposes.

These laws, regulations and legislation, along with other applicable laws and regulations, which in some cases can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations, including pre-existing laws regulating communications and commerce in the context of the Internet and e-commerce, are often uncertain, particularly in the new and rapidly evolving industries in which The Stars Group operates, and may be interpreted and applied inconsistently across jurisdictions and inconsistently with its current policies and practices. Any regulatory or legislative action affecting the manner in which The Stars Group displays content or provides its product offerings to its customers or obtains consent to various practices could adversely affect customer growth and engagement, including by restricting or prohibiting the use of the Internet. In addition, foreign court judgments or regulatory actions could impact The Stars Group’s ability to transfer, process and/or receive information that is critical to its operations, including information relating to suppliers, partners or customers. Such judgments or actions could affect the manner in which The Stars Group provides its products or services and adversely affect its financial results.

All of The Stars Group’s product offerings are subject to its privacy policy and terms of service. The Stars Group generally complies with industry standards, such as PCI-DSS, ISO27001-based gaming regulations, and the voluntary cybersecurity framework released by the National Institute of Standards and Technology, which consists of controls designed to identify and mange cyber security risks and the terms of its privacy-related obligations to players and third parties. The Stars Group strives to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably practical. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or The Stars Group’s practices. It is possible that The Stars Group’s security controls over consumer data may not prevent the improper access or disclosure of personally identifiable information. Any failure or perceived failure by The Stars Group to comply with its privacy policy and terms of service, its privacy-related obligations to players or other third parties, or its privacy-related legal obligations, industry standards and best practices or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmental enforcement

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actions, litigation or public statements against it by consumer advocacy groups or others, and could cause its customers to lose trust in it, which could have an adverse effect of its business, financial conditions or results of operations.

Proposed or new legislation and regulations relating to the above matters could also significantly affect The Stars Group’s business. For example, the European Commission approved the GDPR, a single framework for data protection regulation in the European Union, which came into force on May 25, 2018. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different and generally more stringent than those previously in place in the European Union, and include significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting The Stars Group’s business, such as liability for copyright infringement by third parties. In addition, some jurisdictions are considering or have passed legislation implementing data and information protection requirements or requiring local storage and processing of data and information or similar requirements that could increase the cost and complexity of delivering The Stars Group’s product offerings, and to the extent The Stars Group is subject to data and/or information protection laws and regulations of any jurisdiction that does not adopt the GDPR, it may experience increased costs and expenses as a result of having to comply with multiple, and potentially conflicting, data and/or information protection laws and regulations. The Stars Group believes that the adoption of increasingly restrictive regulations relating to the above matters is likely within the U.S. and other jurisdictions.

Legislators and regulators also look beyond online gaming regulations specifically to implement restrictive measures on online gaming. In certain jurisdictions, this has included restrictions on payment processing, internet blocking, account and identity verification requirements, and similar measures. For example, in June 2010, Norway enacted a law prohibiting the remittance of monies from Norwegian bank accounts to gaming operators and in November 2017, Russian President Putin signed a bill into law to require certain banks and payment processors within Russia to block transactions between Russian-based customers and off-shore online gaming operators. Furthermore, restrictions on gambling advertising has been recently introduced in various jurisdictions, such as in July 2018, Italy passed legislation banning gambling advertising in various forms, with the ban extending to in-game advertising and sponsorships of sports or cultural events beginning on July 1, 2019.Such regulations, if not appropriately mitigated, could materially adversely affect The Stars Group’s business, results of operations or financial condition. For additional information regarding the bill, see “Business of the Corporation—Regulatory Environment”.

In addition, such restrictive measures may impact the ability or desire of third-party suppliers, including payment processors, to provide services to The Stars Group globally or in certain jurisdictions. A supplier could require The Stars Group, as a condition of its continued use of the supplier’s products, to restrict access from customers in certain jurisdictions. Such third-party restrictions could affect the manner in which The Stars Group provides its products or services in certain jurisdictions and adversely affect its financial results due to, among other things, the potential need to determine whether to change suppliers, which may not be on as favorable terms, or comply with the supplier’s requested restrictions.

The Stars Group is also vulnerable to developments in intellectual property laws and/or political, legislative, regulatory developments that may seek further liability to pay royalties, integrity fees or other types of levy to the organizers of sporting events or data right owners, which arise from the concept of the so-called “right-to-bet”, where the organizers of sporting events and competitions and those claiming to have data rights in relation to such events seek to obtain a share of the revenue gaming operators generate on such events and competitions. In all such cases, the level of any such royalty, fee or levy will be outside The Stars Group’s control. The Stars Group cannot predict with any certainty what further payments may be required in the future and what other additional resources may need to be made available to address the conditions on which royalties, fees or other levies may be imposed, as well as sports integrity issues.

These laws and regulations, as well as any changes to the same and any related inquiries, investigations or any other government actions, may be costly to comply with and may delay or impede new product development, result in negative publicity, increase The Stars Group’s operating costs, require significant management time and attention, and subject it to remedies that may harm its business, including fines or demands or orders that modify or cease certain or all existing business practices, such as limiting its use of personal information to add value for customers, or implement costly and burdensome compliance measures. Any such consequences could adversely affect The Stars Group’s business, results of operations or financial condition.

The Stars Group is subject to various laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect its operations, reputation, business, prospects, operating results and financial condition.

The Stars Group must comply with all applicable international trade, export and import laws and regulations of Canada, the United States and other countries, and it is subject to export controls and economic sanctions laws and embargoes imposed by the U.S. and Canadian governments. Changes in trade sanctions laws may restrict The Stars Group’s business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in The Stars Group modifying its compliance programs. The Stars Group is also subject to the CFPOA, the FCPA, the UK Bribery Act, the IOM Bribery Act (each as defined below) and other anti-bribery laws that generally prohibit the offering, promising, giving, agreeing to give, or authorizing others to give anything

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of value, either directly or indirectly, to a government official in order to influence official action, or otherwise obtain or retain a business advantage. Certain of such laws also require public companies to make and keep books and records that accurately and fairly reflect the company’s transactions and to devise and maintain an adequate system of internal accounting controls.

The Stars Group’s business is heavily regulated and therefore involves significant direct and indirect interaction with public officials, including officials of various governments worldwide. The Stars Group has implemented safeguards and policies to discourage practices by its directors, officers, employees and agents that would violate applicable laws. However, The Stars Group cannot ensure that its compliance controls, policies and procedures will in every instance protect it from acts committed by its directors, officers, employees, agents, contractors or collaborators that would violate the laws or regulations of the jurisdictions in which it operates.

Violations of these laws and regulations could result in significant fines, criminal sanctions against The Stars Group, its officers or its employees, requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, implementation of new or enhanced compliance programs, exclusion from government contracts or programs, prohibitions on the conduct of its business and its inability to market and sell its products in one or more countries. Additionally, any such violations could materially damage The Stars Group’s reputation, brand, international expansion efforts, commercial relationships, ability to attract and retain employees and customers, and its business, operating results and financial condition. For information regarding a certain previously disclosed foreign payments matter and The Stars Group’s review of the same, see “Legal Proceedings and Regulatory Actions” below. In particular, as a result of this matter, The Stars Group and one or more subsidiaries could be subject to fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings or criminal charges. This could have a material adverse effect on The Stars Group, including its reputation and ability to conduct business, its holding of gaming regulatory licenses, the listing of its securities on an exchange, its contractual arrangements by, among other things, causing a breach or resulting in a termination of the same, its financial position, profitability or liquidity or the market price of its securities. In addition, it is difficult for The Stars Group to estimate the time or resources that will be needed for the investigation of this matter or its final resolution because, in part, the time and resources needed depend on the nature and extent of the information requested by the authorities involved, and such time or resources could be substantial.

The Stars Group has been subject to regulatory investigations and settlements and it expects to continue to be subject to such proceedings in the future, which could cause it to incur substantial costs or require it to change its business practices in a materially adverse manner.

From time to time, The Stars Group receives formal and informal inquiries from government authorities and regulators, including securities authorities, tax authorities and gaming regulators, regarding its compliance with laws and other matters. The Stars Group expects to continue to be the subject of investigations and audits in the future as it continues to grow and expand its operations. Violation of existing or future regulatory orders or consent decrees could subject The Stars Group to substantial monetary fines and other penalties that could negatively affect its financial condition and results of operations. In addition, it is possible that future orders issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause The Stars Group to incur substantial costs, expose it to unanticipated civil and criminal liability or penalties, or require it to change its business practices in a manner materially adverse to its business. See also “—The Stars Group may have exposure to greater than anticipated tax liabilities.” and “Legal Proceedings and Regulatory Actions”.

The Stars Group’s shareholders are subject to extensive governmental regulation, and if a shareholder is found unsuitable by a gaming authority, that shareholder may not be able to beneficially own, directly or indirectly, certain securities of The Stars Group.

In many jurisdictions, gaming laws can require any of The Stars Group’s shareholders to file an application, be investigated, and qualify or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition, revoke or suspend any gaming license, or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities.

Any person found unsuitable by a gaming authority may not hold directly or indirectly ownership of any voting security or the beneficial or record ownership of any nonvoting security or any debt security of any company that is registered with the relevant gaming authority beyond the time prescribed by the relevant gaming authority. A violation of the foregoing may constitute a criminal offense. A finding of unsuitability by a particular gaming authority impacts that person’s ability to associate or affiliate with gaming licensees in that particular jurisdiction and could impact the person’s ability to associate or affiliate with gaming licensees in other jurisdictions.

Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage, sometimes 5%, of voting securities of a gaming company and, in some jurisdictions, non-voting securities to report the acquisition to gaming authorities, and gaming authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting securities for investment purposes only. Some jurisdictions may also limit the number of gaming licenses with which a person may be associated.

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The Stars Group’s articles include certain provisions to ensure that it complies with applicable gaming regulations. These provisions provide, among other things, that The Stars Group shall have the right, subject to the conditions set out in the gaming provisions share terms, to redeem Common Shares held by an unsuitable person. Such redemption rights may negatively affect the trading price and/or liquidity of The Stars Group’s Common Shares.

Risks Related to the Corporation’s Intellectual Property and Technology

The Stars Group’s intellectual property may be insufficient to properly safeguard its technology and brands.

The Stars Group holds granted patents, registered trademarks and other intellectual property rights. The Stars Group also has applications for patent protection in the United States, Canada, Europe and other countries relating to certain existing and proposed processes, designs and methods and other product innovations. Patent applications can, however, take many years to issue and The Stars Group can provide no assurance that any of these patents will be granted at all, particularly in light of a global shift towards not granting patents involving computer-related inventions. If The Stars Group is denied any or all of these patents, it may be unable to successfully prevent its competitors from imitating its product offerings or using some or all of the processes that are the subject of such patent applications. Such imitation may lead to increased competition for The Stars Group’s product offerings. Even if pending patents are granted to The Stars Group, its intellectual property rights may not be sufficiently comprehensive to prevent its competitors from developing similar competitive products and technologies or may be vulnerable to challenge due to changing case law regarding the patentability of computer-related inventions. If the granted patents are challenged, protection may be lost. The Stars Group’s success may also depend on its ability to obtain trademark protection for the names or symbols under which it markets its product offerings and to obtain copyright protection of its proprietary technologies, other game innovations and creative assets. The Stars Group may not be able to build and maintain goodwill in its trademarks or obtain trademark protection. There can be no assurance that any trademark, copyright or granted patent will provide competitive advantages for The Stars Group or that its intellectual property will not be successfully challenged or circumvented by competitors.

Source codes for The Stars Group’s technology may receive protection under international copyright laws. However, for many third parties who intend to use The Stars Group source codes without its consent, the presence of copyright protection in the source codes alone may not be enough of a deterrent to prevent such use. As such, The Stars Group may need to initiate legal proceedings following such use to obtain orders to prevent further use of the source code.

The Stars Group also relies on trade secrets and proprietary know-how. Although The Stars Group generally requires its employees and independent contractors to enter into confidentiality and intellectual property assignment agreements, it cannot be assured that the obligations therein will be maintained and honored. If these agreements are breached, it is unlikely that the remedies available to The Stars Group will be sufficient to compensate it for the damages suffered even if it promptly applies for injunctive relief. In spite of confidentiality agreements and other methods of protecting trade secrets, The Stars Group’s proprietary information could become known to or independently developed by competitors. If The Stars Group fails to adequately protect its intellectual property and confidential information, its business may be harmed and its liquidity and results of operations may be materially adversely impacted.

The Stars Group may be party to intellectual property infringement or invalidity claims and adverse outcomes of litigation could unfavorably affect its operating results.

The Stars Group monitors for infringement and misappropriation of intellectual property by, among other thing, using brand enforcement software that searches the Internet for potential infringements upon The Stars Group’s intellectual property rights, and it also has a standardized process for enforcing its intellectual property rights in the event of a potential infringement. However, monitoring for such infringement and misappropriation can be difficult and expensive, and The Stars Group may not be able to detect infringement or misappropriation of its proprietary rights. Although The Stars Group intends to aggressively pursue anyone who is reasonably believed to be infringing upon its intellectual property rights and who poses a significant commercial risk to the business, to protect and enforce its intellectual property rights, initiating and maintaining suits against such third parties will require substantial financial resources. The Stars Group may not have the financial resources to bring such suits, and, if it does bring such suits, it may not prevail. Regardless of The Stars Group’s success in any such actions, the expenses and management distraction involved may have a material adverse effect on its financial position. A significant portion of The Stars Group’s revenues is generated from product offerings using certain intellectual property rights, and its operating results would be negatively impacted if it was unsuccessful in licensing certain of those rights and/or protecting those rights from infringement, including losses of proprietary information from breaches of The Stars Group’s cybersecurity efforts.

If the registration and enforcement policies regarding The Stars Group’s intellectual property portfolios are inadequate to deter unauthorized use or appropriation by third parties, the value of The Stars Group’s brands and other intangible assets may be diminished and competitors may be able to more effectively mimic its brands, products, services and methods of operations. Such events could adversely affect The Stars Group’s business and financial results. At the same time, The Stars Group has to be mindful of how it will be perceived by its customers and potential customers if it deploys an unduly strict enforcement policy; an overly aggressive position may

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deter its customers from supporting the brands and therefore damage not only the brands’ reputation in the market place but also negatively impact financial results.

It is also possible that the validity of any of The Stars Group’s intellectual property rights might be challenged or an attempt to reduce its intellectual property rights or protections may be made. There can be no assurance that The Stars Group’s intellectual property rights will withstand an invalidity claim and, if declared invalid, the protection afforded to the product, branding or marketing material will be lost.

Moreover, the future interpretation of intellectual property law regarding the validity of intellectual property by governmental agencies or courts in Canada, Europe, the United States or other jurisdictions where The Stars Group has rights could negatively affect the validity or enforceability of its current or future intellectual property. This could have multiple negative impacts including the marketability of, or anticipated revenue from, certain of its product offerings. Additionally, due to the differences in foreign patent, trademark, trade dress, copyright and other laws concerning proprietary rights, The Stars Group’s intellectual property may not receive the same degree of protection in each jurisdiction where it operates. The Stars Group’s failure to possess, obtain or maintain adequate protection of its intellectual property rights for any reason in these jurisdictions could have a material adverse effect on its business, results of operations and financial condition.

Furthermore, infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and The Stars Group may not have the financial and human resources to defend itself against any infringement suits that may be brought against it. Litigation can also distract management from day-to-day operations of the business.

In addition, The Stars Group’s business depends in part on the intellectual property of third parties. For example, The Stars Group licenses trademarks and other intellectual property from third parties for use in its gaming products. The Stars Group’s future success may depend upon its ability to obtain licenses to use new marks and its ability to retain or expand existing licenses for certain products. If The Stars Group is unable to obtain new licenses or renew or expand existing licenses, it may be required to discontinue or limit its use of such products that use the licensed marks and its financial condition, operating results or prospects may be harmed.

Further, The Stars Group’s competitors and third-party service providers have certain patents protecting various gaming products and services, including systems, methods and designs. If The Stars Group’s product offerings employ these processes, or other subject matter that is claimed under its competitors’ patents, or if other companies obtain patents claiming subject matter that The Stars Group uses, those companies may bring infringement actions against it. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because patent applications can take many years to issue, there may be applications now pending of which The Stars Group is unaware, which might later result in granted patents that its product offerings may infringe. There can be no assurance that The Stars Group’s product offerings, including those with currently pending patent applications, will not be determined to have infringed upon an existing third-party patent. If any of The Stars Group’s product offerings infringe a valid patent, it may be required to discontinue offering certain products or systems, pay damages, purchase a license to use the intellectual property in question from its owner, or redesign the product in question to avoid infringement. A license may not be available or may require The Stars Group to pay substantial royalties, which could in turn force it to attempt to redesign the infringing product or to develop alternative technologies at a considerable expense. Additionally, The Stars Group may not be successful in any attempt to redesign the infringing product or to develop alternative technologies, which could force it to withdraw its product offerings from the market.

The Stars Group may also infringe other intellectual property rights belonging to third parties, such as trademarks, copyrights and confidential information. As with patent litigation, the infringement of trademarks, copyrights and confidential information involve complex legal and factual issues and The Stars Group’s products, branding or associated marketing materials may be found to have infringed existing third-party rights. When any third-party infringement occurs, The Stars Group may be required to stop using the infringing intellectual property rights, pay damages and, if it wishes to keep using the third-party intellectual property, purchase a license or otherwise redesign the product, branding or associated marketing materials to avoid further infringement. Such a license may not be available or may require The Stars Group to pay substantial royalties.

Security breaches involving the source code of The Stars Group’s products or other sensitive and proprietary information could adversely affect its business.

The Stars Group securely stores the source code for its software products as it is created. A breach, whether physical, electronic or otherwise, of the systems on which such source code and other sensitive data are stored could lead to damage or piracy of The Stars Group’s software. In addition, certain parties with whom The Stars Group does business are given access to its sensitive and proprietary information in order to provide services to support it. These third parties may misappropriate The Stars Group’s information and engage in unauthorized use of it. If The Stars Group is subject to data security breaches, it may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures which could materially and adversely affect its business, financial condition and operating results. The Stars Group may become subjected to increased competition if its systems are breached in

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connection with commercial espionage activities. Any theft or unauthorized use or publication of The Stars Group’s trade secrets and other confidential business information as a result of such an event could adversely affect its competitive position, reputation, brand and future customer use of its product offerings. The Stars Group’s business could be subject to significant disruption, and it could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.

Compromises of The Stars Group’s systems, manipulation of its products or services, or unauthorized access to its confidential information or data, or its customers’ personal information or data, could materially harm its reputation and business.

The Stars Group assesses, monitors and, as necessary, desirable or appropriate, continuously upgrades, the security of its systems as well as the collection, processing, storage and transmission of customer information on an ongoing basis. See also “Business of the Corporation—Technology Infrastructure, Supply Chain Management and Research and Development”. However, The Stars Group’s business is prone to, is frequently subjected to, and expects to continue to be subjected to, cyber-attacks. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. These third parties often seek unauthorized access to The Stars Group’s confidential information or data or its customers’ or employees’ personal information or data, or to maliciously overwhelm The Stars Group’s services, which could result in prolonged outages during which customers would be unable to use its products or services. Any failure to prevent or mitigate security breaches and improper access to or disclosure of The Stars Group’s data or user information could result in the loss, corruption or misuse, including fraudulent manipulation of or “ransom” demands with respect to, such data or information, which could harm The Stars Group’s business and reputation and diminish its competitive position. In addition, computer malware, viruses, denial-of-service, social engineering (predominantly spear phishing attacks) and general hacking and similar attacks have become more prevalent in The Stars Group’s industries. Further, because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, The Stars Group may be unable to anticipate these techniques or to implement adequate preventative measures. Although The Stars Group has not experienced attacks that have resulted in a material adverse effect on it, such as a materially prolonged service outage or the compromise of a material amount of company or personal data, attacks have occurred on its systems in the past, most commonly distributed denial-of-service attacks, some of which resulted in temporary or limited services outages, and such types of attacks will occur on its systems in the future. As a result of The Stars Group’s prominence in the industries in which it operates, particularly in online gaming, and large customer base who provide personal information to create accounts, as well as the ever increasing sophistication of individual and organized hacking attempts, which in recent years have resulted in massive breaches of data from other Internet-facing companies, including online gaming companies, and customers’ tendencies to share password and email information across different websites, The Stars Group believes that it is a particularly attractive target for such breaches and attacks. The costs to mitigate the foregoing security threats and vulnerabilities could be significant. Such attacks may cause, among other things, (i) interruptions to The Stars Group’s product offerings, which could lead to lost revenues, confidence and trust, (ii) compromises of confidential customer or employee information, (iii) unauthorized access to proprietary or sensitive information, (iv) devaluation of its intellectual property, (v) increased expenditures on data and information security and remediation costs, which could be significant and could impact its results of operations, (vi) destruction or corruption of data, (vii) theft of financial assets, (viii) litigation, fines, liability, disciplinary action or investigations by customers (for lost deposits, wagers, personal information, or otherwise) or applicable regulatory authorities, as applicable, (ix) other regulatory scrutiny, (x) increased insurance premiums, (xi) reputational and competitive harm as a result of negative customer experiences, including as a result of the foregoing, and (xii) a negative impact on its internal control over financial reporting.

The Stars Group’s efforts to protect its product offerings, and company and customer data and information may also be unsuccessful due to software bugs or other technical malfunctions, employee, contractor or vendor error or malfeasance, government surveillance, break-ins or theft, third-party security breaches, or other factors or threats that evolve, such as casualty loss. In addition, third parties may attempt to fraudulently induce employees or customers to, or The Stars Group’s employees or customers themselves may, disclose information in order to gain access to The Stars Group’s data or its customers’ information and potentially use such data or information improperly. Although The Stars Group believes it and its internal information security group are adequately prepared and have developed systems and processes that are designed to prevent or hinder cyber-attacks and protect its systems, data and customer information and to prevent outages, data or information loss, fraud and to prevent or detect security breaches, including a disaster recovery strategy for server and equipment failure and back office systems and the use of third parties for certain cyber security services, The Stars Group cannot assure investors that such measures will provide absolute security. Disruptions from unauthorized access to, fraudulent manipulation of, or tampering with The Stars Group’s computer systems and technological infrastructure, or those of third parties it utilizes, in any such event could result in a wide range of negative outcomes, including those outcomes listed above, each of which could materially adversely affect The Stars Group’s business, operating results and financial condition.

The Stars Group also provides limited information to certain third parties based on the scope of services provided to it. However, if these third parties or developers fail to adopt or adhere to adequate data and information security practices, or in the event of a breach of their networks, The Stars Group’s customers’ information may be improperly accessed, used or disclosed. Such improper access, use or disclosure could result in a perception that The Stars Group does not adequately secure this information or provide customers with adequate notice about or provide informed consent to the information that they authorize it to disclose, legal liability, costly remedial

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measures, governmental and regulatory investigations, harm its profitability, reputation and brand, and cause its financial results to be materially affected.

Any loss, disclosure or misappropriation of, or access to, customers’ or other proprietary information or other breach of The Stars Group’s information security could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, including for failure to protect personal information or for misusing personal information, which could disrupt The Stars Group’s operations, force it to modify its business practices, damage its reputation and expose it to claims from its customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on The Stars Group’s business, financial condition and operations. In particular, The Stars Group is subject to payment card association rules and obligations pursuant to contracts with payment card processors. Under these rules and obligations, if information is compromised, The Stars Group could be liable to payment card issuers for the cost of associated expenses and penalties. In addition, if the Stars Group fails to follow payment card industry security standards, even if no consumer information is compromised, it could incur significant fines or experience a significant increase in payment card transaction costs.

In addition, The Stars Group’s customers may attempt to or commit fraud, cheat or use impermissible methods in violation of The Stars Group’s terms and conditions of use, such as the use of artificial intelligence or bots with respect to online poker offerings, to create an artificial competitive advantage to increase winnings. Acts of fraud or cheating may involve various tactics, possibly in collusion with employees or other customers of The Stars Group. Employees could also engage in internal acts of cheating through collusion with programmers and other personnel. Successful exploitation of The Stars Group’s systems could have negative effects on its products, services and user experience. In particular, the virtual economies that The Stars Group has established in some of its product offerings are subject to abuse, exploitation and other forms of fraudulent activity that interfere with customers’ enjoyment of a balanced game environment. See also “Business of the Corporation—Technology Infrastructure, Supply Chain Management and Research and Development”. Failure to discover such acts or schemes in a timely manner could result in harm to The Stars Group’s operations. In addition, negative publicity related to such schemes could have an adverse effect on The Stars Group’s reputation, potentially causing a material adverse effect on its business, financial condition, and results of operations. In the event of the occurrence of any such issues with The Stars Group’s product offerings, substantial engineering and marketing resources, and management attention, may be diverted from other projects to correct these issues, which may delay other projects and the achievement of its strategic objectives.  

The Stars Group’s business is dependent on its ability to maintain and scale its technical infrastructure, and any significant disruption in its service, including service interruptions of Internet and other technology service providers, could damage its reputation, result in a potential loss of customers and engagement, and adversely affect its financial results.

The Stars Group’s reputation and ability to attract, retain and serve its customers depends in part upon the reliable performance of its product offerings and its underlying technical infrastructure. The Stars Group devotes significant resources to network and data security, including through the use of encryption and other security measures intended to protect its systems and data. However, The Stars Group’s systems may not be adequately designed with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to its business. If The Stars Group’s product offerings are unavailable when customers attempt to access them, or if they do not load as quickly as expected, customers may not use them as often in the future, or at all. If The Stars Group’s customer base and engagement continue to grow, and the amount and types of product offerings continue to grow and evolve, it will need an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy its customers’ needs. Such infrastructure expansion may be complex, and unanticipated delays in completing these projects or availability of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of The Stars Group’s product offerings. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after The Stars Group has started to fully use the underlying equipment or software, that could further degrade the customer experience or increase its costs. As such, The Stars Group could fail to continue to effectively scale and grow its technical infrastructure to accommodate increased demands. In addition, The Stars Group’s business may be subject to interruptions, delays or failures resulting from earthquakes, adverse weather conditions, other natural disasters, power loss, terrorism, cyber-attacks or other catastrophic events. The Stars Group has contingency plans in place to prevent or mitigate the impact of these events. However, if such an event were to occur, customers may be subject to service disruptions or outages and The Stars Group may not be able to recover its technical infrastructure and customer information in a timely manner to restart or provide its product offerings, which may adversely affect its financial results.

A substantial portion of The Stars Group’s network infrastructure is provided by third parties, including Internet service providers and other technology-based service providers. The Stars Group requires its technology-based service providers to implement cyber-attack-resilient systems and processes. However, if Internet service providers experience service interruptions, including because of cyber-attacks, communications over the Internet may be interrupted and impair The Stars Group’s ability to conduct business. Internet service providers and other technology-based service providers may in the future roll out upgraded or new mobile or other telecommunications services, such as 5G or 6G services, which may not be successful and thus may impact the ability of The Stars Group’s customers to access its product offerings. In addition, The Stars Group’s ability to process e-commerce transactions depends on bank processing and credit card systems. To prepare for system problems, The Stars Group continuously seeks to strengthen and

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enhance its current facilities and the capabilities of its system infrastructure and support. Nevertheless, there can be no assurance that the Internet infrastructure or The Stars Group’s own network systems will continue to be able to meet the demand placed on it by the continued growth of the Internet, the overall online gaming and interactive entertainment industries and The Stars Group’s customers. Any difficulties these providers face, including the potential of certain network traffic receiving priority over other traffic (i.e., lack of net neutrality), may adversely affect The Stars Group’s business, and it exercises little control over these providers, which increases its vulnerability to problems with the services they provide. Any system failure as a result of reliance on third parties, such as network, software or hardware failure, including as a result of cyber-attacks, which causes a loss of The Stars Group’s customers’ property or personal information or a delay or interruption in its online services and products and e-commerce services, including its ability to handle existing or increased traffic, could result in a loss of anticipated revenue, interruptions to its product offerings, cause it to incur significant legal, remediation and notification costs, degrade the customer experience and cause customers to lose confidence in its product offerings, any of which could have a material adverse effect on its business, revenues, operating results and financial condition.

Furthermore, gaming licenses of The Stars Group or its subsidiaries in certain jurisdictions require that all telecommunication services in respect of its gaming activities, including the supply of a telecommunications circuit and Internet access service, be provided by a licensed provider in the relevant jurisdiction. The Stars Group’s expansion in such jurisdictions in the future may be limited by its telecommunications arrangements.

The Stars Group has servers located throughout the world and there can be no assurance that all network infrastructure and telecommunications systems will constantly be in operation in all these locations. Additionally, some jurisdictions have restricted broadband capacity and resilience, and while The Stars Group has not encountered material issues with server capacity in respect of its servers in the past, such restricted capacity could in the future give rise to various difficulties in the provision of its product offerings, including occasional disconnections.

If The Stars Group fails to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, its technology, such as its platforms and offerings, may become less competitive or obsolete.

The Stars Group’s future success depends on its ability to adapt and enhance its suite of technology and software, such as its platforms, as well as its product offerings. To attract new customers and increase revenue from existing customers, The Stars Group needs to continue to enhance and improve its platforms, product offerings, features and enhancements to meet customer needs at competitive prices. Such efforts will require adding new functionality and responding to technological advancements or disruptive technologies, such as artificial intelligence, which will increase The Stars Group’s R&D costs. If The Stars Group is unable to develop technology and products that address customers’ needs, or enhance and improve its platforms and product offerings in a timely manner, that could have a material adverse effect on its business, revenues, operating results and financial condition. The Stars Group’s ability to continue to operate and grow is also subject to the risk of future disruptive technologies. If new and/or disruptive technologies emerge that are able to deliver online betting and gaming and/or entertainment products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely affect The Stars Group’s ability to compete.

The Stars Group may experience losses due to technical problems with its product offerings or internal systems.

The Stars Group’s product offerings and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is highly technical and complex. Alternative third-party suppliers may be difficult to identify, may require regulatory approval and may take a significant period of time before they would be able to start providing services to The Stars Group. In addition, The Stars Group’s product offerings and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which The Stars Group relies has contained, and may currently or in the future contain, undetected errors, bugs or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within such software may result in a negative customer experience, delay product introductions or enhancements, result in targeting, measurement or processing errors, such as incorrectly determining game outcomes or customer winnings, or compromise its ability to protect its customers’ information and/or its intellectual property. Any errors, bugs, or defects discovered in the software on which The Stars Group relies could result in damage to its reputation, loss of customers, loss of revenue, liability for damages, impairment of its ability to offer its product offerings in the future, and/or delays in releases of its product offerings or product enhancements, any of which could adversely affect its business and financial results.

Furthermore, the costs incurred in correcting any product or service defects or errors may be substantial and could adversely affect The Stars Group’s operating margins. There can be no assurance that The Stars Group’s efforts to monitor, develop, modify and implement appropriate test and processes for its product offerings will be sufficient to permit it to avoid a rate of failure in its product offerings that results in substantial delays, significant repair or replacement costs or potential damage to its reputation, any of which could have a materially adverse effect on its business, results of operations and financial condition.

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The Stars Group may also be subject to claims that its product offerings are defective or that some function or malfunction of its product offerings caused or contributed to damages. The Stars Group attempts to minimize this risk by incorporating provisions into its standard agreements and terms and conditions of use that are designed to limit its exposure to potential claims of liability, in addition to maintaining applicable liability insurance policies. However, there can be no assurance that all claims will be barred by the contractual provisions and terms and conditions of use limiting liability or that the provisions will be enforceable. The Stars Group may be liable for any unforeseen failures or damages regarding the use of its product offerings. A significant liability claim against The Stars Group could have a materially adverse effect on its operating results and financial position.

Risks Related to The Stars Group’s Common Shares

The price and trading volume of the Common Shares has been and will likely continue to be volatile.

The market price of the Common Shares has been and will likely continue to be highly volatile and subject to wide fluctuations. In addition, the trading volume of the Common Shares will likely continue to fluctuate and cause significant price variations to occur. Volatility in the market price of the Common Shares may prevent a holder of Common Shares from being able to sell his, her or its shares. In addition to the factors discussed in this annual information form, the market price for the Common Shares could fluctuate significantly for various reasons, many of which are beyond The Stars Group’s control, including:

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The Common Shares are currently listed on both NASDAQ and TSX and volatility in the market prices of the Common Shares may increase as a result thereof because trading is split between the two markets, resulting in less liquidity on both exchanges. In addition, different liquidity levels, volume of trading, currencies and market conditions on the two exchanges may result in different prevailing trading prices.

In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including those in the gaming industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of the Common Shares could fluctuate based upon factors that have little or nothing to do with The Stars Group, and these fluctuations could materially reduce the Common Share price.

The Stars Group’s advance notice by-laws may prevent attempts by its shareholders to replace or remove its current management.

Provisions in The Stars Group’s by-laws may frustrate or prevent any attempts by its shareholders to replace or remove current management by making it more difficult for shareholders to remove The Stars Group’s directors. These charter provisions could make removing management more difficult. Furthermore, the existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for Common Shares. They could also deter potential acquisitions of The Stars Group, thereby reducing the likelihood that shareholders could receive a premium for Common Shares in an acquisition.

Future sales, the possibility of future sales or “short” positions in a substantial amount of the Common Shares may depress the price of the Common Shares.

Future sales, the possibility of future sales or “short” positions in a substantial amount of the Common Shares in the public market could adversely affect the prevailing market price of the Common Shares and could impair The Stars Group’s ability to raise capital through future sales of equity securities. The Stars Group cannot predict future sales, the possibility of future sales or “short” positions, or the effect, if any, that any of the same may have on the market price of the Common Shares. Sales of substantial amounts of Common Shares (including Common Shares issued in connection with an acquisition), or the perception that such sales could occur, and substantial “short” positions may adversely affect prevailing market prices for Common Shares.

The Stars Group does not intend to pay cash dividends in the foreseeable future.

The Stars Group has never declared or paid cash dividends and has no present plans to pay cash dividends to its shareholders and, for the foreseeable future, intends to retain all of its earnings for use in its business. The declaration of any future dividends by the Stars Group is within the Board’s discretion and will depend on The Stars Group’s earnings, financial condition and capital requirements, as well as any other factors the Board deems relevant.

Based on publicly available information, certain shareholders, each individually own a significant amount of the Common Shares on a fully diluted basis and may be able to exert influence over matters requiring shareholder approval.

As of the date hereof and based on publicly available information, Caledonia (Private) Investments Pty Limited, CVC Capital Partners, GSO Capital Partners LP (“GSO”), Blackrock and Tang Hao (including through their respective affiliated entities funds or accounts managed or advised by them or their affiliates, as applicable), beneficially owned or had control over approximately 19.4%, 9.7%, 8.8%, 5.5%, and 9.5%, respectively, of the outstanding Common Shares on a fully-diluted basis. As a result, each individually may be able to exercise significant influence over any matter requiring shareholder approval in the future.

All of The Stars Group’s debt obligations, and any future indebtedness it may incur, will have priority over Common Shares with respect to payment in the event of a liquidation, dissolution or winding up.

In liquidation, dissolution or winding up of The Stars Group, the Common Shares would rank below all debt claims against it. In addition, any convertible or exchangeable securities or other equity securities that The Stars Group may issue in the future (such as the Preferred Shares, of which there are none outstanding as of the date hereof) may have rights, preferences and privileges more favorable than those of the Common Shares. As a result, holders of Common Shares will not be entitled to receive any payment or other distribution of assets upon the liquidation or dissolution until after The Stars Group’s obligations to its debt holders and holders of equity securities that rank senior to the Common Shares, if any, have been satisfied.

Dividends and Distributions

The Corporation has never declared or paid any dividend or any other distribution. The Corporation currently intends to retain any future earnings to fund the development and growth of its business and does not currently anticipate paying any dividend or distribution

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in the foreseeable future. Any future determination to pay dividends or distributions will be at the Board’s discretion and will depend upon many factors, including the Corporation’s results of operations, capital requirements and other factors as the Board may deem relevant, as well as any restrictions under its articles or applicable law.

Description of Capital Structure

As of March 5, 2019, The Stars Group’s authorized share capital consisted of an unlimited number of Common Shares and an unlimited number of Preferred Shares. As of the same date, the Corporation had a total of the following issued and outstanding equity securities:

 

For more information on The Stars Group’s issued and outstanding stock options, equity-based awards (including restricted share units, performance share units and deferred share units) and its stock option and equity incentive plans, see “Market for Securities—Issuances of Securities”, the 2018 Annual MD&A, the 2018 Annual Financial Statements, and the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation, each of which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Common Shares

Each Common Share entitles its holder to notice of, and to one vote on, all matters submitted to The Stars Group’s shareholders for their consideration. The holders of Common Shares are entitled to receive, after payment of the full dividend on any Preferred Shares, non-cumulative annual dividends if, as and when declared by the Board. There are no fixed dates or time limits on payment of dividends on Common Shares. Holders of Common Shares do not have any pre-emptive rights or other rights to subscribe for additional shares, nor any conversion rights. In the event of liquidation, dissolution or winding-up of the Corporation, its net assets available for distribution to its shareholders will be distributed ratably among the holders of the Common Shares, subject to the rights, privileges, restrictions and conditions of the Corporation’s then issued and outstanding Preferred Shares, if any.

Certain gaming provisions in the Corporation’s articles facilitate compliance with applicable gaming regulations (the “Gaming Provisions”). The Gaming Provisions protect the Corporation from the consequences of having a shareholder whose ownership of Common Shares or whose failure to make an application to seek licensure or suitability review from, or otherwise comply with the requirements of, a gaming regulatory authority (an “Unsuitable Person”) may result in the suspension or revocation (or similar action) of any gaming license held by the Corporation, or the denial of any gaming license sought by the Corporation. The Gaming Provisions provide the Corporation with a right to redeem all Common Shares held by an Unsuitable Person at a redemption price determined pursuant to a written valuation and fairness opinion from an investment banking firm of nationally recognized standing in the United States. The Gaming Provisions require individuals who plan, either on their own or as part of a group acting in concert, to acquire or dispose of 5% or more of Common Shares to provide advance written notice to the Corporation prior to effecting such an acquisition or disposition. Notwithstanding the Gaming Provisions, the Corporation may not be able to exercise its redemption rights in full or at all. Under the OBCA, a corporation may not make any payment to redeem shares if there are reasonable grounds for believing that (a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due, or (b) after the payment, the realizable value of the corporation’s assets would be less than the aggregate of: (i) its liabilities, and (ii) the amount that would be required to pay the holders of shares that have a right to be paid, on a redemption or in a liquidation, ratably with or before the holders of the Common Shares being purchased or redeemed, to the extent that amount has not been included in its liabilities. Furthermore, The Stars Group may become subject to contractual restrictions on its ability to redeem its shares by, for example, entering into a secured credit facility subject to such restrictions.

The foregoing description of the terms of the Common Shares does not purport to be complete and is subject to and qualified in its entirety by reference to the Corporation’s currently effective articles and general by-laws, each of which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Preferred Shares

In connection with the Stars Interactive Group Acquisition, the Corporation issued $1.05 billion of Preferred Shares on August 1, 2014. The Preferred Shares were issued at an offering price of CDN$1,000.00 per Preferred Share. Each Preferred Share was convertible at the holder’s option at any time in whole or in part, initially into 41.67 Common Shares (the “Conversion Ratio”), based on an initial

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conversion price of CDN$24.00 per Common Share (the “Initial Conversion Price”), subject to adjustments. The Preferred Shares ranked senior to the Common Shares in receiving payment of their liquidation preference (which was initially CDN$1,000.00 per Preferred Share, subject to adjustments to the Conversion Ratio) upon the liquidation, winding up or dissolution of the Corporation or in any other distribution of substantially all of its assets (a “Liquidation”).  The Preferred Shares were not entitled to receive dividends and had no voting rights (or any related notice rights, including notice of shareholder meetings) except with respect to amendments to the terms of the Preferred Shares or as otherwise required under applicable laws.  The Conversion Ratio, representing the number of Common Shares that would have been issued to a holder of Preferred Shares for each Preferred Share upon exercise of the conversion right, were adjusted each February 1 and August 1 (until the redemption) by multiplying the Conversion Ratio then in effect immediately prior to such adjustment by 1.03.

As of August 1, 2017, The Stars Group had the right to force a mandatory conversion of the Preferred Shares by giving notice to holders of Preferred Shares to force conversion (in whole or in part under certain circumstances) but only if the following two conditions are satisfied: (i) the closing share price of the Common Shares has been in excess of 175% of the Initial Conversion Price on any 20 trading days within a 30 consecutive day period, and (ii) except in certain circumstances, the average daily volume on any 20 trading days within the 30 consecutive day period referred to above was at least 1.75 million Common Shares. Any mandatory conversion would also be subject to specified regulatory and consent conditions.

On June 5, 2018, The Stars Group elected to effect the mandatory conversion of all of its outstanding Preferred Shares pursuant to their terms, and on July 18, 2018, the Corporation completed the same and issued 51,999,623 Common Shares to the holders thereof. Accordingly, on July 18, 2018, all Preferred Shares were cancelled and all rights associated therewith were terminated. Prior to completion of the conversion, certain minority holders of the Preferred Shares applied to the Ontario Superior Court of Justice for a declaration that the mandatory conversion would contravene The Stars Group’s articles of continuance. On July 17, 2018, the Superior Court ruled in favor of The Stars Group and dismissed the application. As a result, The Stars Group proceeded with the conversion as indicated above. The applicants subsequently appealed the Superior Court decision and in the appeal are seeking, among certain declarations, rescission of the conversion or potential damages and costs. See “Legal Proceedings and Regulatory Actions—Preferred Shares Mandatory Conversion Matter.”

The Preferred Shares also contained anti-dilution Conversion Ratio adjustments for certain dividends or distributions (cash, shares or otherwise), share splits, share combinations, below market equity issuances or rights, options or warrant issuance, tender offer or exchange offer payments, and reorganization events. In addition, upon a “fundamental change”, additional Common Shares would have been issuable to holders of Preferred Shares as a premium.

The terms of the Preferred Shares also contained certain covenants and restrictions for as long as each of GSO and BlackRock holds 50% or more of the Preferred Shares issued to it on August 1, 2014. The covenants and restrictions, which were subject to certain exceptions, related to, among other things incurring additional indebtedness, issuing equity securities ranking equal or superior to the Preferred Shares, making certain significant acquisitions, and maintaining the listing of the Common Shares on the NASDAQ. If The Stars Group failed to comply with these undertakings, the Conversion Ratio could have been increased between a range of 2% and 6% per annum, depending on which undertaking was breached, for each year in which the breach occurs.

To create any additional class or series of preferred shares, the Corporation must, among other things, comply with the terms of the Preferred Shares and amend its articles, and such amendment will be subject to shareholder approval.

The foregoing description of the terms of the Preferred Shares does not purport to be complete and is subject to and qualified in its entirety by reference to the Corporation’s currently effective articles, which are available on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Market for Securities

Trading Price and Volume

On October 1, 2013, The Stars Group’s Common Shares began trading on the TSX. On September 22, 2014, The Stars Group was added to the S&P/TSX Composite Index, and on June 8, 2015, the Common Shares began trading on NASDAQ. The Common Shares currently trade on the TSX and NASDAQ under the symbols “TSGI” and “TSG”, respectively. As of the date of this annual information form, only the Common Shares are publicly traded.

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The following table sets out the high and low prices and total trading volume of the Common Shares listed on the TSX and NASDAQ for each month of the year ended December 31, 2018.

 

 

Issuances of Securities

For information regarding options and warrants to purchase Common Shares and other equity-based securities (including restricted share units, performance share units and deferred share units) that can be settled in Common Shares, and Common Shares issued or issuable upon the exercise of options and warrants or settlement of other equity-based securities, see the notes to the 2018 Annual Financial Statements. The Stars Group did not otherwise issue any class of securities of The Stars Group that is not listed or quoted on a marketplace during the year ended December 31, 2018.

Debt Securities

On July 10, 2018, two of the Corporation’s subsidiaries, Stars Group Holdings B.V. and Stars Group (US) Co-Borrower, LLC (the “Issuers”), issued the Senior Notes due 2026 at par in an aggregate principle amount of $1.00 billion. The Senior Notes mature on July 15, 2026. Interest on the Senior Notes is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2019. The Senior Notes are guaranteed by each of the Issuers’ restricted subsidiaries that guarantees the Revolving Facility. The Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future senior indebtedness.

The indenture governing the Senior Notes (the “Indenture”) provides the holders of the Senior Notes with customary rights, including the right to require Stars Group Holdings B.V. to offer to repurchase the Senior Notes in certain limited circumstances and it also provides the Issuers with the right to redeem some or all of the Senior Notes at defined redemption prices based on when the redemption occurs. The Senior Notes include, among other terms and conditions, certain customary limitations on the Issuers’ ability to take certain actions or engage in certain activities. See note 17 in the 2018 Annual Financial Statements for further information in respect of the terms and conditions of the Indenture and Senior Notes. As at the date hereof, the aggregate principal amount of outstanding Senior Notes is $1.00 billion.

For additional information on the Senior Notes, see the 2018 Annual Financial Statements and 2018 Annual MD&A. For a description of The Stars Group’s other long-term debt, see “General Development of the Business” above, the 2018 Annual Financial Statements and 2018 Annual MD&A.

Credit Ratings

The following information regarding The Stars Group’s credit ratings is provided as it relates to The Stars Group’s cost of funds and liquidity. In particular, The Stars Group’s ability to access debt funding markets and to engage in certain business activities on a cost-effective basis is primarily dependent upon maintaining competitive credit ratings. A lowering of The Stars Group’s credit ratings may also have potentially adverse consequences for its funding capacity for growth projects or access to the capital markets, may affect its ability, and the cost, to enter into normal course derivative or hedging transactions and may require it to post additional collateral under certain contracts.

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The following table shows the ratings issued for The Stars Group by the rating agencies noted herein as of the date of this annual information form. The credit ratings are not recommendations to purchase, hold or sell the debt securities because such ratings do not comment as to the market price or suitability for a particular investor. Any rating may not remain in effect for any given period of time or may be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant.

 

Standard& Poor’s Ratings Services credit ratings for long-term debt are on a rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. The BB rating is the fifth highest of ten major categories. The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories. If S&P anticipates that a credit rating may change in the next six to 24 months, it may issue an updated ratings outlook indicating whether the possible change is likely to be “positive,” “negative,” “stable,” or “developing.” However, a rating outlook does not mean that a rating change is inevitable.

Moody’s Investors Service (“Moody’s”) credit ratings for long-term debt are on a rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. According to Moody’s, a rating of Ba1 is the fifth highest of nine major categories. For ratings of Aa through Caa, Moody’s may apply numerical modifiers of 1, 2 or 3 in each generic rating classification to indicate relatively higher, middle or lower ranking. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. A Moody’s rating outlook is an opinion regarding the likely rating direction over the medium-term. Ratings outlooks fall into four categories: positive, negative, stable, and developing. A stable outlook indicates a low likelihood of a rating change over the medium term. A negative, positive or developing outlook indicates a higher likelihood of a rating change over the medium term. The time between the assignment of a new rating outlook and a subsequent rating action has historically varied widely. On average, the next rating action has followed within about a year. The next rating action subsequent to the assignment of a negative rating outlook has historically been a downgrade or review for possible downgrade.

Fitch Ratings Ltd. credit ratings are assigned based on a scale ranging from AAA to D, which represents the range from highest to lowest quality. The terms “investment grade” and “speculative grade” have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative grade). The ratings from AA to B may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories. According to Fitch Ratings Ltd.’s system, BBB ratings indicate good credit quality and that the expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity. An outlook indicates the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. Positive or negative rating outlooks do not imply that a rating change is inevitable and, similarly, ratings with stable outlooks can be raised or lowered without a prior revision to the outlook, if circumstances warrant such an action.

A definition and description of the categories of the credit ratings described above that have been assigned to The Stars Group’s debt are publicly available from the website of each of the individual rating agencies.

The Stars Group understands that the ratings are based on, among other things, information furnished to the above rating agencies by it and information obtained by the rating agencies from publicly available sources. The credit ratings given to The Stars Group’s debt instruments by the rating agencies are not recommendations to buy, hold or sell such debt instruments since such ratings do not comment as to market price or suitability for a particular investor. There is no assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant. Credit ratings given to The Stars Group’s debt instruments may not reflect the potential impact of all risks on the value of such instruments, including risks related to market or other factors discussed in this annual information form. See “Risk Factors and Uncertainties” above.

Directors and Officers

Directors, Executive Officers and Other Key Senior Officers

The following table sets forth, for each of the Corporation’s directors and executive officers and other key senior officers as of the date hereof, the person’s name, place of residence, positions within the Corporation, principal occupation and, if a director, the day, month and year on which the person became a director. Directors are elected at each annual shareholders meeting for a term that expires on the date of the Corporation’s next annual shareholders meeting or until his or her successor is duly elected, unless prior thereto the

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director resigns or otherwise vacates office. As of the date of this annual information form, each of Messrs. Lazzarato, Hurley and Goodson and Ms. Turner are “independent” under applicable securities laws and exchange rules.

 

 

Divyesh (Dave) Gadhia, CPA, C.A., ICD.D

Mr. Divyesh (Dave) Gadhia, 56, is the Executive Chairman of The Stars Group’s Board. Mr. Gadhia is and has been the President of Atiga Investments Inc., an investment firm focused on consumer products, since 2010. He served as the Chief Executive Officer and Executive Vice Chairman of Gateway Casinos & Entertainment Limited from 1992 until 2010, where he was responsible for strategic

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initiatives, regulatory matters and governmental relations. He has served as a director of a number of other private and public companies, as well as charities, including a director of the Canadian Gaming Association from 2005 to 2010, a director of Gateway Casinos & Entertainment Limited from 1999 to 2007, and a director of Trian Equities from 1994 to 1999. In 2009, Mr. Gadhia was awarded the Canadian Gaming News Outstanding Achievement Award and was previously awarded the Business in Vancouver’s Top 40 Under 40 Award. Mr. Gadhia is an FCPA, FCA, a member of the Institute of Corporate Directors and holds a business degree from Simon Fraser University.

Rafael (Rafi) Ashkenazi

Mr. Rafael (Rafi) Ashkenazi, 44, currently serves as the Chief Executive Officer of The Stars Group and is a current director of The Stars Group, and is responsible for devising and implementing its business plan and strategies. Mr. Ashkenazi is also the Chief Executive Officer for The Stars Group’s primary operating business, Stars Interactive Group, and is responsible for the performance and strategy of its offerings, including PokerStars and related brands. Mr. Ashkenazi, who initially joined Stars Interactive Group in January 2013 as Chief Operating Officer, is an experienced gaming industry executive who previously served as Chief Operating Officer of Playtech plc (LSE: PTEC), a global gaming software development company (“Playtech”), from January 2006 to January 2010 and then from September 2011 to January 2013, and as a member of the board of directors of Playtech from March 2006 to January 2010. From January 2010 to September 2011, Mr. Ashkenazi served as Vice President of Business Operations of Playtech. He was appointed Senior Vice President of Strategy for The Stars Group in April 2015, Chief Executive Officer of Stars Interactive Group in November 2015, Interim Chief Executive Officer of The Stars Group in March 2016 and then permanent Chief Executive Officer of The Stars Group in November 2016. Mr. Ashkenazi graduated with honors from Shenkar College in Israel where he earned a B.A. in Industrial Engineering.

Brian Kyle

Mr. Brian Kyle, 54, joined The Stars Group in June 2017 and currently serves as its Chief Financial Officer. Mr. Kyle is accountable for all financial matters across The Stars Group and plays a key leadership role in advancing the company’s strategic initiatives. He has more than 25 years of financial management experience with leading multinational technology companies. Prior to joining The Stars Group, Mr. Kyle held a number of senior executive financial roles, including as Chief Financial Officer at Pivot Technology Solutions Inc. (TSX: PTG), a leading information technology infrastructure and services provider, from August 2016 to June 2017, Chief Financial Officer at D+H Corporation (TSX: DH), a global payments and lending technology provider, from June 2009 to August 2014, and Teranet Inc., a provider of integrated land‑based information systems and software services, from May 2002 to May 2009. Following his role at D+H and prior to joining Pivot, Mr. Kyle was a partner and co‑founder of ALSA Capital Ltd, a specialized asset management firm, from August 2014 to August 2016. Mr. Kyle is a member of the Chartered Professional Accountants of Ontario, holds an MBA from Queen’s University School of Business and has an Honorary Doctorate in Laws from Assumption University.

David Lazzarato, FCA, C.A., ICD.D

Mr. David Lazzarato, 63, is a current director, Chairman of the Audit Committee, and a member of the Corporate Governance and Nominating Committee, and is a media and broadcast industry consultant who assists companies in the areas of strategy development, mergers and acquisitions and financing. He served as a member of the board of directors and chair of the audit committee of Yellow Pages Limited (TSX: Y) from December 2012 to May 2018 and was Senior Vice President, Finance at Bell Canada in 2010 and 2011. From 2009 until 2013, Mr. Lazzarato served on the board of directors and was the chair of the audit committee of LED Roadway Lighting and from 2004 to 2013, he was vice chair of the Trillium Health Centre Foundation. In 2008, Mr. Lazzarato was Chief Executive Officer of Craig Wireless Systems. Prior to joining Craig Wireless Systems, Mr. Lazzarato served as Executive Vice President and Chief Financial Officer of Alliance Atlantis Communications Inc. and Chairman of Motion Picture Distribution from 2005 to 2007. From 1999 to 2004, Mr. Lazzarato served as Executive Vice President and Chief Financial Officer of Allstream Inc. (formerly, AT&T Canada Inc.) and was Chief Corporate Officer of MTS Allstream Inc. in 2004. Mr. Lazzarato is past Chair of the McMaster University Board of Governors and of the Council of Chairs of Ontario Universities. Mr. Lazzarato is currently a director and chair of the Resources and Audit Committees of Hamilton Health Sciences, a medical group of seven hospitals and one cancer center located in Ontario, Canada. Mr. Lazzarato earned a Bachelor of Commerce degree from McMaster University and is a Chartered Accountant, having received the FCA designation from the Ontario Institute of Chartered Accountants in 2006. Mr. Lazzarato received the ICD.D certification from the Institute of Corporate Directors in 2008 and has also completed the Senior Executive Program at the Massachusetts Institute of Technology.

Alfred F. Hurley, Jr.

Mr. Alfred F. Hurley, Jr., 64, is the Lead Director of The Stars Group, Chairman of the Compensation Committee, and a member of the Audit Committee, and has been a director of New Mountain and has been a director of New Mountain Finance Corporation, a NYSE‑listed business development company (“NMFC”), since 2010. He is the Chairman of NMFC's Nomination and Governance and Compensation Committees and a member of its Audit and Valuation Committees. Mr. Hurley has also been a director of Merrill

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Corporation, which is a privately held company that provides outsourced solutions for complex, regulated and confidential business information since 2013. He serves as Chairman of Merrill’s Compensation and Governance and Human Resources Committee and as a member of the Audit Committee. He has also been the Fortress Voting Proxy to, a member of the Board of Managers, and a member of the Audit Committee of Ligado Networks Corporation, a privately held company (“Ligado”), since December 2017. Ligado is a satellite communications company that is developing a satellite‑terrestrial network. He also has been the Chairman of privately held TSI Holdings, which is the holding company for TransWorld Systems, Inc. (“TWS”) since May 2018. TWS is a leading analytics driven provider of accounts receivable management, healthcare revenue cycle and loan servicing solutions. Mr. Hurley is also the sole member of a consulting business, Alfred F. Hurley, Jr. & Company, LLC, which he started in 2014. He previously was Vice Chairman of Emigrant Bank and Emigrant Bancorp (collectively, the “Bank”) from 2007 and 2009, respectively, to December 2012, and was a consultant at the Bank during 2013. His responsibilities at the Bank included advising the Bank's Chief Executive Officer on strategic planning, acquisitions and divestitures, asset/liability management, on‑line banking and new products. In addition, he was Chairman of the Bank's Credit and Risk Management Committee from November 2008 to January 2012 and the Bank's acting Chief Risk Officer from January 2009 until January 2012. Before joining the Bank, Mr. Hurley was the Chief Executive Officer of M. Safra & Co., a private money management firm, from 2004 to 2007. Prior to joining M. Safra & Co., Mr. Hurley worked at Merrill Lynch (“ML”) from 1976 to 2004. His latest management positions prior to his departure included serving as Senior Vice President of ML & Co. and Head of Global Private Equity Investing, Managing Director and Head of Japan Investment Banking and Capital Markets, Managing Director and Co‑Head of the Global Manufacturing and Services Group, and Managing Director and Head of the Global Automotive, Aerospace, and Transportation Group. As part of his management duties, he was a member of the Corporate and Institutional Client Group (“CICG”) Executive Committee which had global responsibility for ML’s equity, debt, investment banking and private equity businesses, a member of the Japan CICG Executive Committee, and a member of the Global Investment Banking Management and Operating Group Committees. Mr. Hurley graduated from Princeton University with an A.B. in History, cum laude.

Harlan Goodson

Mr. Harlan Goodson, 71, is a current director, member of each of the Compensation Committee and the Corporate Governance and Nominating Committee, the Board’s representative to the Compliance Committee and served as a member of the Audit Committee until June 2017. He served as the Director of California’s Division of Gambling Control from 1999 to 2003, during which time he led the implementation of California’s Tribal‑State Class III gaming compacts. Prior to forming his own law practice, The Law Office of Harlan W. Goodson, in Sacramento, California, Mr. Goodson was with the national law firm of Holland and Knight, LLP where his practice concentrated on Gaming Law and Gaming Regulation and Governmental Affairs. Mr. Goodson’s biography has been published in Who’s Who in American Law since 2000 and Who’s Who in the World since 2018. In 2002, his work gained him international distinction when he was the recipient of the International Masters of Gaming Law inaugural Regulator of the Year award in 2001. Prior to being appointed to the position of Director of California’s Division of Gambling Control, Mr. Goodson worked in the California State Senate as a legislative consultant for Senator Bill Lockyer from 1994 to 1999. While serving as a consultant in the state legislature, Mr. Goodson drafted legislation in the areas of criminal law, correctional law, juvenile law and insurance law. Since 1996, Mr. Goodson has been an adjunct law professor teaching classes on the legislative process and statutory interpretation at John F. Kennedy University, School of Law. He has been a national speaker at conferences, symposia, law schools and before governmental bodies on the subjects of gaming regulation, Tribal government gaming, and Tribal‑State relations. Mr. Goodson is a member of the California State Bar, the International Masters of Gaming Law and the International Association of Gaming Advisors. In 2007, Mr. Goodson also served as a Judge Pro Tempore for the Superior Court in Sacramento, California. Mr. Goodson has also been listed in America’s Best Lawyers annually since 2005 and was selected by his peers as the Northern California 2012 Attorney of the Year for Gaming Law. Mr. Goodson graduated with a Bachelor of Arts from Golden Gate University and a Juris Doctor from the John F. Kennedy School of Law.

Mary Turner, FCPA, FCA, C. Dir

Ms. Mary Turner, 65, is a current director, Chair of the Corporate Governance and Nominating Committee and member of each of the Audit Committee and the Compensation Committee. Ms. Turner served as President and Chief Executive Officer and board member of Canadian Tire Bank, a subsidiary of Canadian Tire Corporation (TSX: CTC), from 2012 until her retirement in 2016. She has over 25 years of experience in financial services, payments, customer service, credit risk management, enterprise risk management, operations, finance and information technology at Canadian Tire. Prior to joining Canadian Tire, Ms. Turner was a partner at Deloitte & Touche (now Deloitte LLP) in Toronto from 1985 to 1992. Throughout her career, Ms. Turner has been a member of several boards of directors, including Mackenzie Financial Corporation, a subsidiary of IGM Financial Inc. (TSX: IGM), where she is a member of the Fund Oversight Committee. She also currently serves on the boards of directors of YMCA Canada, where she is a member of its Governance Committee, Niagara College, where she chairs its New Member Search Committee and is a member of its Audit Committee, Canadian Tire Jumpstart Charities, where she chairs its Audit Committee, and the 2021 Canada Games Host Society. Ms. Turner has an honours B.Sc and is a graduate of the Chartered Director Program at McMaster University. She is a Chartered Accountant and received the FCA designation from the Ontario Institute of Chartered Accountants in 2003.

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Marlon D. Goldstein

Mr. Marlon Goldstein, 45, joined The Stars Group in January 2014 and serves as its Executive Vice‑President, Chief Legal Officer and Secretary. Prior to joining The Stars Group, Mr. Goldstein was a principal shareholder in the corporate and securities practice at the international law firm of Greenberg Traurig P.A., where he practiced as a lawyer from 2002 until 2014 (since 2006 as a shareholder). Mr. Goldstein’s practice focused on corporate and securities matters, including mergers and acquisitions, securities offerings, and financing transactions. Mr. Goldstein was also the co‑chair of the firm’s Gaming Practice, a multi‑disciplinary team of attorneys representing owners, operators and developers of gaming facilities, manufacturers and suppliers of gaming devices, investment banks and lenders in financing transactions, and Indian tribes in the development and financing of gaming facilities. Mr. Goldstein earned a B.B.A. with a concentration in accounting from Emory University in Atlanta, Georgia in 1996 and a J.D. from the University of Florida, Levin College of Law in Gainesville, Florida in 1999.

Jerry Bowskill

Dr. Jerry Bowskill, 53, joined The Stars Group in June 2017 and currently serves as its Chief Technology Officer. Dr. Bowskill is responsible for the overall technology performance and strategy of the business. Immediately prior to joining The Stars Group, Dr. Bowskill was a technology consultant for Partis Solutions, a global leader in the provision of corporate services to the interactive gaming industry from January 2017 to June 2017. Prior to that, Dr. Bowskill was the Chief Technology Officer of TouchTunes Interactive Networks, the largest in‑venue interactive music and entertainment platform, from September 2015 to November 2016. From May 2012 to September 2015, Dr. Bowskill served in a variety of roles at Scientific Games, a leading developer of technology‑based products and services and associated content for worldwide gaming and lottery markets, including as its Chief Architect and as a founding stakeholder and the Chief Technology Officer of SG Interactive, the Internet product division of Scientific Games. Prior to Scientific Games, Dr. Bowskill was the Technology and Solutions Director at Playtech following its acquisition of Gaming Technology Solutions in 2009, where he was a co‑founder and served as the Director of Technology and Division Chief Executive Officer while the company created a leading open‑platform based online gaming development ecosystem. Dr. Bowskill began his professional career as a research scientist, holding several roles within British Telecom’s advanced applications & technology research group. As a researcher, he authored over 40 academic publications and was a research associate, investigating wearable and contextual computing, at the Massachusetts Institute of Technology's “Media Lab”. Dr. Bowskill has a BSc (Honours) degree in Microelectronics and Information Processing and a Ph.D in image processing, each from the University of Brighton in the United Kingdom.

Robin Chhabra

Mr. Robin Chhabra, 48, joined The Stars Group in September 2017 and currently serves as its Chief Corporate Development Officer, where he is responsible for leading and overseeing The Stars Group’s corporate development function. Mr. Chhabra is an experienced online gaming executive, who most recently served as Group Director of Strategy and Corporate Development for William Hill since May 2010, and as Director of Corporate Development for Inspired Gaming Group plc (later merged with Inspired Entertainment, Inc. (Nasdaq: INSE)) from 2006 to 2009. Prior to that, Mr. Chhabra spent 12 years in various executive roles at major financial, consultancy and auditing firms, including Evolution Securities (later acquired by Investec plc (LSE: INVP)), Dresdner Kleinwort Wasserstein Securities LLC (now part of Commerzbank), Andersen Business Consulting and PricewaterhouseCoopers. Mr. Chhabra earned a BSc (Econ.) degree from London School of Economics and Political Science in 1993.

Guy Nigel Templer

Mr. Guy Nigel Templer, 50, has been Chief Operating Officer of Stars Interactive Group since December 21, 2016. Mr. Templer joined Stars Interactive Group in 2011 and held various senior positions within Stars Interactive Group, being appointed Chief Strategy Officer in March 2016 prior to his appointment as COO. Prior to working with Stars Interactive Group, Mr. Templer served as Chief Operating Officer and Board Director of NetPlay TV plc from April 23, 2010 to March 31, 2011. Mr. Templer served as Commercial Director of Two Way Media Limited since 2003 and Managing Director of its subsidiary Two Way Gaming Limited (since 2008). He has over ten years of experience in the gaming industry. Prior to working with Two Way, he ran an internet company after starting his career in management consultancy in the public sector. Mr. Templer joined PokerStars in 2011 as Director of Business Development and has directed key initiatives including PokerStars’ re‑entry into the U.S. market; the launches of the Casino and Sportsbook verticals; and the local licensing of the company's brands across Europe. The regulatory work has established the company as the leading advocate for online poker regulation and the most‑licensed online gaming operator in the world. He has an MBA from Cranfield School of Management, an MSc from Bath University and a degree in Psychology from Bristol University.

Richard Flint

Mr. Richard Flint, 47, currently serves as Executive Chairman of SBG. Mr. Flint is responsible for supporting The Stars Group Chief Executive Officer and focusing on external matters, in particular safer gambling, regulation and industry collaboration. Prior to his appointment as Executive Chairman of SBG in October 2018, Mr. Flint served as Chief Executive Officer of SBG for 10 years. He was awarded Glassdoor’s No. 1 CEO in 2018. Mr. Flint has over 20 years’ experience in online businesses, starting as a Channel Director

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at FT.com and then as the Product Director of online start-up flutter.com, which merged with Betfair in 2001. Prior to that, he worked as a consultant at McKinsey & Company from 1997 to 1999. Mr. Flint is also currently the CBI Chair for Yorkshire and Humber and a Director of the Senet Group for Responsible Gambling. Mr. Flint graduated from Keble College, Oxford with a 1^st class degree in Engineering, Economics and Management. He also graduated with a Master’s in public policy from the Kennedy School of Government, Harvard University on a Fulbright Scholarship.

Ian Proctor

Mr. Ian Proctor, 53, currently serves as the Chief Executive Officer of SBG. Mr. Proctor is responsible for overall strategy and leadership of SBG. Prior to becoming SBG’s Chief Executive Officer in October 2018, Mr. Proctor served as SBG’s Chief Financial Officer since 2008. Prior to that and since 1993, Mr. Proctor held various senior financial roles at Sky plc. Mr. Proctor graduated with a degree in Business Studies from Robert Gordon University and is a member of the Association of Chartered Accountants.

Conor Grant

Mr. Conor Grant, 42, currently serves as the Chief Operating Officer of SBG. Mr. Grant is responsible for the daily operations of SBG. Prior to becoming SBG’s Chief Operating Officer in October 2018, Mr. Grant served as the Head of Sportsbook Products and Director of Products since 2010, and then as Director of SBG’s gaming brands since 2014. Mr. Grant has nearly 20 years’ experience in the gaming sector, having previously worked for Paddy Power, Blue Square and Boylesport. Mr. Grant graduated from Queens University, Belfast with a degree in History of Politics and also has a post-graduate degree in business from University College, Dublin.

Appointment of Observer to the Board

As previously disclosed, in January 2018 the Corporation entered into an agreement (the “Nominee Agreement”) with Mr. Tang Hao and his affiliated entity Discovery Key Investments Limited, which at the time based on publicly available information collectively held approximately 17.9% of the outstanding Common Shares of the Corporation, pursuant to which Mr. Tang appointed Mr. Melvin Zhang as his nominee to be an observer to the Board. Mr. Zhang will serve as an observer to the Board until such time as he and Mr. Tang have received certain licenses and approvals from certain of the Corporation’s gaming regulatory authorities, at which point Mr. Zhang will serve on the Board as a director.

Pursuant to the Nominee Agreement, Mr. Tang will continue to hold the right to nominate a director to the Board, subject to certain conditions, until the earlier of the day following the 2020 annual general meeting of the Corporation’s shareholders and the date on which his direct and indirect ownership of the Corporation’s issued and outstanding Common Shares falls below 10 percent (on a non-diluted basis). The Nominee Agreement also provides that Mr. Tang will not acquire greater than 20% of the outstanding Common Shares prior to the 2020 annual general meeting of shareholders other than by way of a negotiated transaction approved by Board or by way of formal takeover bid for all of the outstanding Common Shares.

As a result of the Corporation’s issuance of Common Shares in 2018 in connection with Acquisitions and an entity offering. Mr. Tang’s direct and indirect ownership of the Corporation’s issued and outstanding Common Shares decreased to below 10% (on a non-diluted basis), which would have had the effect of terminating Mr. Tang’s right to appoint an observer or director. Notwithstanding this decrease in percentage ownership, the Corporation and Mr. Tang agreed to continue to abide by all terms of the Nomination Agreement until at least one day after the Corporation’s Annual General Meeting in 2019.

Mr. Yan Min “Melvin” Zhang, 63, is a current observer to the Board. Mr. Zhang has over 30 years of management experience across a range of industries, including commercial development and investment, and is currently an Executive Director of International Entertainment Corp. (HKG: 1009), a Hong Kong‑based real estate developer with interests in hotel and entertainment properties across Asia, since May 2017. Mr. Zhang also served as the Chief Operations Officer of Goldenway Capital Management Hong Kong Ltd., a Hong Kong‑based capital management firm and a member of Goldenway Investments Holdings Limited, from June 2016 to May 2017. Prior to that, Mr. Zhang served as the General Manager of Lloyd’s Register Industrial Technical Services Shanghai Co., an engineering and technology professional services company, from 2011 to 2016. From 2002 to 2010, Mr. Zhang was the Country Manager and Investment Director of China at Saudi Basic Industries Corporation, a global petrochemical company. Mr. Zhang served as the General Manager of Amylum Asia Ltd. from 1995 to 2002, and oversaw business development and operations in the United States and China at Safer Industrial Group from 1989 to 1995. Mr. Zhang has a bachelor degree in Foreign Language & International Trade from Zhongshan University in Guangzhou, China, and a masters degree in Marketing & Business Administration from Oklahoma State University.

Interests in Common Shares

The Corporation’s current directors, executive officers and other key senior officers own, or have the right to exercise direction or control over, a total of 1,251,148 Common Shares, representing approximately 0.46% of the total issued and outstanding Common Shares as of the date of this annual information form. Additionally, as of the date of this annual information form, a total of 830,250 options, of which 814,250 are currently exercisable, and 838,012 other equity-based awards, the settlement of which is subject to

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conditions, have been granted to the Corporation’s directors, executive officers and other key senior officers to purchase or settle in an equal amount of Common Shares under the Corporation’s stock option and/or equity incentive plan. With respect to any performance share units included in the foregoing amount of other equity-based awards, the number of performance share units is calculated based on the target performance level for each metric being met, which would result in 100% of the granted performance share units vesting during the relevant periods. See the 2018 Annual Financial Statements and the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation, each of which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov, for additional information about performance share units.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the knowledge of the Corporation, none of the directors or executive officers of the Corporation is, or within ten years before the date hereof, has been:

To the knowledge of the Corporation, none of the directors or executive officers of the Corporation have been subject to:

Notwithstanding the foregoing, see below under “Legal Proceedings and Regulatory Actions”.

Conflicts of Interest

The directors and officers of the Corporation are required by law to act honestly and in good faith with a view to the best interest of the Corporation and to disclose any interests which they may have in any transaction, project or opportunity of the Corporation. However, the Corporation’s directors and officers may serve on the boards and/or as officers of other companies that may compete in the same industries as the Corporation, giving rise to potential conflicts of interest, including, without limitation, with respect to negotiating terms of and consummating certain transactions in which such companies and the Corporation may participate. Conflicts of interest that arise at a meeting of the Board must be disclosed at such meeting, and the conflicted director must recuse himself or herself from the meeting and abstain from participating and voting for or against the approval of any transaction, project or opportunity in which such director has an interest. The remaining directors will determine whether or not the Corporation will participate in any such transaction, project or opportunity. Subject to such disclosure and recusal and any limitations in the Corporation’s organizational documents, a transaction would not be void or voidable because it was made between the Corporation and one or more of its directors or officers who have a conflict of interest or by reason of such director or officer being present at the meeting at which such transaction, project or opportunity was approved.

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To the best of the Corporation’s knowledge and other than as disclosed in this annual information form, as of the date hereof there is no known existing or potential material conflict of interest among the Corporation or a subsidiary of the Corporation and the current directors, officers or other members of management of the Corporation or a subsidiary of the Corporation as a result of their respective outside business interests.

The directors and officers of the Corporation are aware of the existence of laws governing accountability of directors and officers for usurping corporate opportunities and requiring disclosures by directors or officers of conflicts of interest, and the Corporation will rely upon such laws in respect of any conflict of interest or breach of duty.

For additional information, see also “Interest of Management and Others in Material Transactions” below.

Corporate Social Responsibility and Sustainability

As an employer and as a business, the Corporation recognizes its responsibilities to its personnel, customers and the communities in which it operates. The Corporation has a long history of active participation in and support for the issues that transcend the Corporation and which reflect positively on the entire online betting and gaming industry. This means behaving responsibly and ethically in all areas of the Corporation’s business, meeting the high standards and expectations of its customers and stakeholders, and championing the benefits of a safe and enjoyable regulated online betting and gaming industry. In addition, the Corporation believes that as a global company it plays a key role in seeking sustainable solutions to help limit climate change. For this reason, the Corporation is committed to consistently reviewing and reducing its potential impact on the environment, taking positive steps to lessen its environmental footprint and encourages its personnel, the communities in which it operates (both locally and globally), as well as its suppliers and vendors to do the same.

To this end, the Corporation has adopted a number of practices, policies, programs and initiatives that highlight its commitment to corporate social responsibility and that seek to promote sustainability in the operation of its business. Such practices, policies, programs and initiatives include, among others, an enterprise-wide environmental policy, equality and diversity policy, anti-harassment and bullying policy, anti-slavery and human trafficking policy, charities policy, data protection policy, global health and safety policy, a responsible gaming policy, and “Green Stars”, which are environmental and sustainability initiatives committees championed by locally based executive-sponsored working groups.

These practices, policies, programs and initiatives are built on a foundation of transparency, governance, and ethics, and create value for the Corporation and its shareholders by helping it mitigate risks, reduce costs, build brand value and identify new market opportunities. The Corporation is committed to the socially, ethically and environmentally responsible operation of its business and has undertaken initiatives to reduce its environmental impact and carbon footprint, ensure a healthy and safe workplace, safeguard its and its customers’ data, and promote diversity and inclusion. The Corporation enforces a number of related policies in its workplace and encourages its suppliers and business partners to adhere to these requirements and to promote these values. The Corporation constantly strives to identify areas of future opportunity or development with respect to its practices.

Ethical Business Conduct

The Corporation has adopted a code of business conduct (“Code of Conduct”) for its directors, officers and employees. The Corporation is committed to operating in accordance with the highest ethical standards and conducting business in an honest and transparent manner that is in compliance with applicable law, the Code of Conduct and applicable internal policies. The Code of Conduct constitutes written standards that are designed to deter wrongdoing and promote, among other things: (i) honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships, including, in particular, with regard to public officials, (ii) avoidance of conflicts of interest, including disclosure to the Corporation of any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest, (iii) safeguarding of the Corporation’s confidential information and integrity and protection of business information, (iv) maintaining a healthy and safe work environment that is free of discrimination and harassment, (v) protection of employee privacy and personal information, (vi) dealing responsibly with persons outside the Corporation, including compliance with anti-corruption laws and lobbying legislation, including any applicable limitations on political activities, (vii) compliance with other applicable governmental laws, rules and regulations, and that such compliance with laws always take precedence over customs or social requirements, (viii) the prompt reporting either anonymously through the Corporation’s whistleblower hotline or to a supervisor, director or officer (or if appropriate, to the appropriate authorities) of violations of the Code of Conduct, and (ix) accountability and responsibility by all directors, officers and employees for adherence to the Code of Conduct.

The Corporation monitors compliance with the Code of Conduct and recommends disclosures as and when appropriate and required in accordance therewith. In addition, the Corporation reviews the Code of Conduct with a view of complying with all applicable rules and regulations, receiving reports from management with respect to compliance with the Code of Conduct when necessary and appropriate, and satisfying itself that management has established a system to disclose the Code of Conduct (and any amendments thereto) to the extent required. The Corporation monitors compliance with the Code of Conduct by, among other things, reserving the

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right to audit such compliance and through the Corporation’s existing “whistleblower” policy, which provides a procedure for the submission of information by persons relating to, among other things, possible violations of the Code of Conduct. In addition to the Code of Conduct, the Corporation has adopted a number of other policies and practices related to appropriate business conduct, including, without limitation, an Anti-Bribery Policy and Anti-Fraud Policy for all employees, directors and officers of the Corporation.

On August 9, 2018, the Corporation amended its Code of Conduct. The substantive amendments made to the Code of Conduct: (i) contemplate that one or more of the Corporation’s subsidiaries also may have their own separate code of business conduct or ethics applicable to an individual and (ii) include new or additional detail about certain matters such as reporting of concerns, human rights, safe working environment, anti-discrimination, conservation and environmental protection, cyber security and supplier compliance with the Code of Conduct. The Code of Conduct, as amended, is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and the Corporation’s website at www.starsgroup.com.

Moreover, The Stars Group has a formal compliance committee (the “Compliance Committee”) comprised of current and/or former independent directors and external advisors, including formal law enforcement and regulatory professionals. The Compliance Committee is charged with overseeing all aspects of compliance with gaming regulatory and other corporate compliance matters. The Compliance Committee strives to ensure the good character, honesty and integrity of The Stars Group, its subsidiaries and employees, and that it conducts its business affairs in an honest, moral and ethical fashion and in compliance with applicable laws, rules, regulations and other conditions imposed by applicable gaming and related regulatory authorities. The Compliance Committee also strives to protect The Stars Group’s reputation and prevent it from taking any action that could jeopardize its existing licenses and approvals or its ability to obtain any additional licenses or approvals. The members of the Compliance Committee are listed on the Corporation’s website at www.starsgroup.com.

The Stars Group and its subsidiaries also have numerous policies and practices, including the Code of Conduct, a Disclosure, Confidentiality & Trading Policy, an Anti-Bribery Policy, an Anti-Fraud Policy and a Whistleblower Policy, that are collectively designed to deter and detect wrongdoing and promote, among other things, legal, honest, ethical, healthy and safe conduct, good governance, and transparency and effective communication between and among employees, management and the public. The Code of Business Conduct and The Stars Group’s Anti-Bribery Policy and relevant policies of certain subsidiaries, as applicable, also provide rules and guidelines regarding compliance with Canada’s Corruption of Foreign Public Officials Act (the “CFPOA”), the U.S. Foreign Corrupt Practices Act (the “FCPA”), and any local anti-bribery or anti-corruption laws that may be applicable, such as the UK Bribery Act (2010) (the “UK Bribery Act”) and the Isle of Man Bribery Act (2013) (the “IOM Bribery Act”), and to evidence The Stars Group’s commitment to full compliance, including compliance by its officers, directors and employees, therewith. The Stars Group is committed to operating in accordance with the highest ethical standards and conducting business in an honest and transparent manner that complies with applicable law, its Code of Business Conduct and applicable internal policies. In addition, The Stars Group has a practice of entering into confidentiality and non-disclosure agreements with its employees and limiting access to and dissemination of its proprietary technology and confidential information.

Audit Committee

Audit Committee Charter

The current Audit Committee Charter was adopted on January 25, 2019.  The full text of the charter is attached hereto as Schedule A. The disclosure provided in this section of this annual information form is qualified in its entirety by reference to the full text of the charter.

Purpose

The Audit Committee is established to fulfil applicable public company obligations respecting audit committees and to assist the Board in discharging its oversight responsibilities with respect to financial reporting to ensure the transparency and integrity of the Corporation’s published financial information. The Audit Committee’s responsibilities include overseeing: (i) the integrity of the Corporation’s financial statements and financial reporting process, including the audit process and the Corporation’s internal controls over financial reporting, disclosure controls and procedures, and compliance with other related legal and regulatory requirements, (ii) the qualifications, independence, retention, compensation and work of the Corporation’s external auditors, (iii) the work of the Corporation’s financial management, internal auditors and external auditors, (iv) enterprise risk management, privacy and cybersecurity and information security, and to monitor the same, and (v) the auditing, accounting and financial reporting process generally. The Audit Committee is also responsible for pre-approving all non-audit services to be provided by the Corporation’s independent external auditor, procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters and the confidential anonymous submission by employees of the Corporation and its subsidiaries of concerns regarding questionable accounting or auditing matters and for any additional matters delegated to the Audit Committee by the Board. In addition, the Audit Committee is responsible for reviewing, discussing with management and assessing the Corporation’s privacy and

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cybersecurity risk exposures, including, among other things, the potential impact of the same, steps management has taken to monitor and mitigate the same, the Corporation’s governance and cybersecurity policies and programs, and its cybersecurity strategy.

The Audit Committee has the right, for the purposes of performing its duties, to maintain direct communication with the Corporation’s external auditor and the Board, to inspect all books and records of the Corporation and its subsidiaries, to seek any information it requires from any employee of the Corporation and its subsidiaries or the chairperson or other designated member of the Compliance Committee, and to retain independent outside counsel or other advisors.

The Audit Committee is required to be comprised of a minimum of three directors, each of whom must be “independent”, “financially literate” (within the meaning of the applicable Canadian securities laws) and otherwise qualified within the meaning of applicable securities law and the rules of any applicable stock exchange. At least one member of the Audit Committee must be financially sophisticated (within the meaning of the applicable NASDAQ Rules) and at least one member must qualify as an “audit committee financial expert” (within the meaning of the applicable rules of the U.S. Securities and Exchange Commission). A member who is an “audit committee financial expert” is presumed to qualify as “financially sophisticated”. The Audit Committee meets regularly and as often as it deems necessary to perform the duties and discharge its responsibilities in a timely manner, but is required to meet at least four times a year. The Audit Committee is also required to hold unscheduled or regularly scheduled meetings, or portions thereof, at which management is not present. The Audit Committee also conducts a self-evaluation at least annually to determine whether it and its members are functioning effectively, and reports its conclusion to the Board.

Composition

The Audit Committee is currently composed of Messrs. Lazzarato and Hurley and Ms. Turner, each of whom is “independent” and “financially literate”. Mr. Lazzarato is the “audit committee financial expert” and is “financially sophisticated”.

Relevant Education and Experience

Each member of the Corporation’s Audit Committee has an understanding of the generally accepted accounting principles applicable to the Corporation, i.e., International Financial Reporting Standards (as issued by the International Accounting Standards Board), and has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation’s financial statements. All three members of the Corporation’s Audit Committee serve or have served on a number of other boards of directors and have acquired financial education and/or experience that would result in them being qualified as set forth above.

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Pre-approval Policies and Procedures

The Audit Committee has established a practice of pre-approving all audit, audit-related, non-audit, tax and certain other services provided by the external auditor, in each case in compliance with applicable rules and guidance on the qualification and independence of external auditors. This practice is also set forth in a pre-approval policy adopted by the Audit Committee. In accordance with the Audit Committee’s pre-approval practice and policy, before the Corporation or any of its subsidiaries engages the external auditor to render a service, the engagement must be either (i) specifically approved by the Audit Committee, or (ii) entered into pursuant to the pre-approval policy. This is intended to ensure, among other things, that the provision of such services does not impair the external auditor’s independence. The Audit Committee has delegated to its Chairman, Mr. Lazzarato, the authority, between regularly scheduled meetings of the Audit Committee, to pre-approve such services to the extent they were not previously presented at a meeting of the Audit Committee. All such pre-approvals by the Chairman of the Audit Committee are reported by him at the next meeting of the Audit Committee following the pre-approval. The Audit Committee may not delegate to management the Audit Committee’s responsibilities to pre-approve services performed by the external auditor.

External Auditor Service Fees

The Corporation’s current independent external auditor is Deloitte LLP, London, United Kingdom (“Deloitte”).

The aggregate fees billed by Deloitte and all its affiliates for the fiscal years ended December 31, 2018 and 2017, respectively, were as follows:

 

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The aggregate fees billed by Deloitte and all its affiliates for the fiscal year ended December 31, 2018 increased over those billed for the prior fiscal year primarily due to the Acquisitions, the SBG Financing and other financing-related activities in connection with the Australian Acquisition.

Corporate Governance and Nominating Committee and Compensation Committee

On November 6, 2018, the Board divided the Corporate Governance, Nominating and Compensation Committee of the Board into two separate committees, the Corporate Governance and Nominating Committee (the “Corporate Governance and Nominating Committee”) and the Compensation Committee (the “Compensation Committee”).

The Corporate Governance and Nominating Committee was established to assist the Board in overseeing corporate governance and nomination matters. In addition, the Corporate Governance and Nominating Committee is responsible for, among other things, identifying, recruiting and recommending to the Board qualified nominees for election as directors of The Stars Group, making an annual assessment of the overall performance and effectiveness of the Board and each committee, and oversight of The Stars Group’s approach to environmental and social responsibility matters.

The Compensation Committee was established to take the principal role of establishing The Stars Group’s executive compensation plans and policies. In addition, the Compensation Committee is responsible for, among other things, assisting the Board in discharging its oversight responsibilities relating to the compensation and retention of key senior management employees with the skills and expertise needed to enable the Corporation to achieve its goals and strategies at a fair and competitive compensation, including appropriate performance incentives.

For more information on the Corporation’s Corporate Governance and Nominating Committee and the Compensation Committee, please see the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation, which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Legal Proceedings and Regulatory Actions

Other than as set forth herein, The Stars Group is currently not, and was not during twelve months ended December 31, 2018, a party to any material legal proceedings, and its property and assets are not currently, and were not during the same period, the subject of material legal proceedings. The Stars Group is not aware of any other material legal proceedings, individually or in the aggregate, outstanding, threatened or pending as of the date hereof by or against The Stars Group. Notwithstanding the foregoing, given the nature of its business, The Stars Group is, and may from time to time in the future be, party to various, and at times numerous, legal, administrative and regulatory inquiries, investigations, proceedings and claims that arise in the ordinary course of business, including, without limitation, various tax audits by domestic and foreign tax authorities, and gaming regulatory reviews and inquiries. The outcome of litigation, legal proceedings and regulatory actions is inherently uncertain. See “Risk Factors and Uncertainties”.

In addition, and except as set forth herein, the Corporation is not currently, and was not during the year ended December 31, 2018, subject to: (i) penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority, (ii)  any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision, or (iii) settlement agreements entered into before a court relating to Canadian securities legislation or with a Canadian securities regulatory authority.

In the normal course of business, to facilitate transactions of services and products, The Stars Group has agreed to indemnify certain parties with respect to certain matters. The Stars Group has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, The Stars Group is a party to certain indemnification agreements with its current and certain former officers and directors, and certain employees, and its constituting documents contain similar indemnification obligations. It is not possible to determine the maximum potential amount

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under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

Kentucky Proceeding

Prior to the Stars Interactive Group Acquisition, the Commonwealth of Kentucky, ex. rel. J. Michael Brown, Secretary of the Justice and Public Safety Cabinet, filed a legal proceeding against Oldford Group and certain affiliates thereof (the “Oldford Parties”) and various other defendants (the “Kentucky Proceeding”), pursuant to which the Commonwealth sought to recover alleged gambling losses on behalf of Kentucky residents who played real-money poker on the PokerStars website during the period between October 12, 2006 and April 15, 2011. On August 12, 2015, the trial court in the Kentucky Proceeding entered a default judgment against the Oldford Parties following certain alleged discovery failures, including by certain former owners of Oldford Group, and partial summary judgment on liability in favor of the Commonwealth. On December 23, 2015, the trial court entered an order for damages in the amount of approximately $290 million, which the trial court trebled to approximately $870 million.

The Stars Group, through certain subsidiaries, filed a notice of appeal to the Kentucky Court of Appeals and posted a $100 million supersedeas bond to stay enforcement of the order for damages during the pendency of the appeals process. In connection with the posting of the bond, the Corporation delivered cash collateral in the amount of $5 million and letters of credit in the aggregate amount of $65 million. On December 21, 2018, the Kentucky Court of Appeals ruled in The Stars Group’s favor and reversed in its entirety the $870 million judgment issued against The Stars Group by the trial court judge in December 2015.

On January 18, 2019, the Commonwealth filed a motion for discretionary review with the Kentucky Supreme Court asking the Court to determine if it will hear an appeal of the decision issued by the Kentucky Court of Appeals. As of the date of this annual information form, a decision regarding the Commonwealth’s motion for discretionary review is still pending with the Kentucky Supreme Court. If the Kentucky Supreme Court decides to hear the Commonwealth’s appeal, The Stars Group will vigorously dispute the liability as it believes the action is frivolous. To the extent the Oldford Parties may be ultimately obligated to pay any amounts pursuant to a final adjudication following exhaustion of all appeals and other legal options, The Stars Group intends to seek recovery against the former owners of Oldford Group.

In late-January 2016, pursuant to and in accordance with the procedures set forth in the merger agreement governing the Stars Interactive Group Acquisition, a subsidiary of The Stars Group submitted a notice of claim to the sellers’ representative and escrow agent seeking indemnification for losses and potential losses caused by breaches under the merger agreement and requesting, among other things, that the escrow agent retain the then-remaining balance of the escrow fund established under the merger agreement in an aggregate amount equal to $300 million. With the exception of the claim relating to the Kentucky Proceeding, all such claims have since been settled. The escrow fund was reduced accordingly and continues to be held by the escrow agent. The remaining disputed claim regarding the Kentucky Proceedings and release of the outstanding escrow funds will be resolved in accordance with the provisions of the merger and escrow agreements related to the Stars Interactive Group Acquisition, and there can be no assurance that such claim will result in any amounts in the escrow fund being remitted to The Stars Group or that any of The Stars Group’s estimates of potential losses will reimbursed by the sellers or otherwise.

AMF Investigation and Related Matters

As announced on December 11, 2014, the Autorité des marchés financiers, the securities regulatory authority in the Province of Quebec (the “AMF”), is investigating trading activities in The Stars Group’s securities surrounding its announcement of the Stars Interactive Group Acquisition (the “2014 AMF Investigation”). Related to the 2014 AMF Investigation, on March 23, 2016, the AMF charged Mr. David Baazov, along with a former financial advisor to The Stars Group and a former employee of The Stars Group, with various violations of Quebec securities laws, including insider trading, insider tipping and market manipulation. The AMF has not made any allegation of wrongdoing by The Stars Group or any of its subsidiaries or other directors or officers in these charges. On June 6, 2018, the Court of Quebec (criminal and penal division) ordered a permanent stay of these charges. The AMF did not appeal the decision of the Court of Quebec and the period to do so has expired.

On March 23, 2016, the Board also became aware of a decision of the Tribunal administratif des marchés financiers (formerly known as the Bureau de décision et de révision ) (the “TMF”), the administrative tribunal in Quebec that hears certain AMF applications, which disclosed additional AMF investigations into the alleged conduct of Mr. Baazov and 12 individuals which are beyond the scope of the charges and of the internal investigation referred to in The Stars Group’s March 23, 2016 and prior press releases and public disclosure. None of these individuals targeted by the TMF decision are currently employees, officers or directors of The Stars Group.

Also in connection with the AMF investigation and related matters, in October 2017 The Stars Group became aware of an AMF search of certain third-party premises that occurred in September 2017. To The Stars Group’s knowledge, the AMF is now also investigating whether Mr. David Baazov and certain third parties entered into a nominee agreement in January 2007 that provided for such third parties to be the beneficial owners of a substantial portion of The Stars Group’s common shares that Mr. Baazov previously disclosed he personally owned and whether certain other third parties were trading The Stars Group’s securities during a period between

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2010 and 2012 for the benefit of Mr. Baazov. The affidavit supporting the September 2017 search asserts that Mr. Baazov, the third parties to the alleged nominee agreement, and The Stars Group committed certain offenses under the Securities Act (Quebec) by not disclosing the existence of such agreement. Prior to learning of the September 2017 search, none of The Stars Group’s current executive officers or directors were aware of the existence of the alleged nominee agreement and a copy of such agreement, if it exists, has not been provided to The Stars Group. The Board, with its outside counsel, continues to closely monitor developments of the AMF investigation and related matters.

The Stars Group continues to cooperate with the AMF as it has done since 2014, which is consistent with its practice.

Foreign Payments Matter

During its internal investigation with respect to the AMF matters, the Board became aware in 2016 of certain information which led it to undertake a review of whether the Corporation or any of its subsidiaries or personnel has made improper payments, directly or through external consultants, to governmental officials in certain jurisdictions outside of Canada and the United States.

The Board, with the involvement of external counsel, is reviewing these matters.  This review includes reviewing historic and current operations, reviewing the Corporation’s use of external consultants in foreign markets, and revising internal policies and procedures.  As a result of this review, the Corporation initially voluntarily contacted the Royal Canadian Mounted Police (“RCMP”) in Canada and the Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) in the United States in 2016.  These authorities are investigating these matters and the Corporation continues to cooperate with them, including, without limitation, by cooperating with the RCMP regarding matters related to a search warrant executed at the Corporation’s former Pointe-Claire, Quebec office in 2016 responding to information requests from the RCMP, the DOJ and the SEC, and voluntarily providing records and information to these authorities. This review and cooperation is ongoing.

Class Actions

U.S. Class Action

On August 31, 2016, the lead plaintiffs in Carmack v. Amaya Inc., et. al. (Case No. 1:16-cv-01884-JHR-JS) filed an amended class action complaint (the “Amended Complaint”) in the United States District Court, District of New Jersey (the “U.S. Class Action”). The Amended Complaint named as defendants the Corporation, the Corporation’s former Chief Executive Officer, Mr. Baazov, the Corporation’s former Chief Financial Officer, Daniel Sebag, and two directors, Divyesh (Dave) Gadhia and Harlan Goodson, and alleged a class period beginning on May 26, 2015 and ending on March 22, 2016 (the day prior to the announcement of the filing of charges brought by the AMF against Mr. Baazov).

The Amended Complaint generally alleged that the defendants violated certain U.S. securities laws by misrepresenting or failing to disclose that Mr. Baazov allegedly was engaged in an insider trading scheme as charged by the AMF.  The U.S. Class Action sought damages stemming from losses that the plaintiffs and the alleged class claim to have suffered as a result of the foregoing.

On August 3, 2018, the parties filed a stipulation of settlement with the court and on December 21, 2018, the court entered a Final Judgment and Order of Dismissal with Prejudice with respect to the Amended Complaint and settlement, which was funded entirely by the Corporation’s insurance carrier.

Quebec Class Action

On or about July 25, 2018, a re-re-amended motion for authorization of a class action and for authorization to bring an action pursuant to Quebec securities law (the “Re-Re-Amended Derome Class Action”), Derome v. The Stars Group Inc. et al. (Case No. 500-06-000785), was filed in the Superior Court of Quebec, Province of Quebec, Canada, District of Montreal, amending a prior class action complaint previously filed in early 2016. The Re-Re-Amended Derome Class Action names The Stars Group, Mr. Baazov, Mr. Sebag, certain of The Stars Group’s current directors, Mr. Gadhia and Mr. Goodson, and a former director, General Wesley K. Clark, as defendants. It was filed by an individual shareholder on behalf of himself and a class of persons, composed of a sub-class of primary market purchasers and a sub-class of secondary market purchasers, who purchased The Stars Group’s securities between March 31, 2014 and March 22, 2016 (the day before the announcement of the filing of charges brought by the AMF against Mr. Baazov).

The plaintiff generally alleges that throughout the class period the defendants violated certain Canadian securities laws by misrepresenting or failing to disclose (or acquiescing in the same), among other things, that Mr. Baazov allegedly was engaged in an insider trading scheme which allegedly made possible certain acquisitions of The Stars Group. The plaintiff also alleges that The Stars Group did not properly disclose that it had inadequate or ineffective internal controls, that one or more of its directors and Mr. Baazov were in breach of its Code of Business Conduct and that certain public statements made by The Stars Group in respect of the AMF Investigation were false or misleading.

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The Re-Re-Amended Derome Class Action seeks damages stemming from losses the plaintiffs claim to have suffered as a result of the foregoing. The Stars Group believes that the Re-Re-Amended Derome Class Action is without merit and intends to vigorously defend itself against it; however, there can be no assurance that The Stars Group will be successful in its defense.

Preferred Shares Mandatory Conversion Matter

On July 18, 2018, The Stars Group completed the previously announced mandatory conversion of all its issued and outstanding Preferred Shares as of such date and issued 51,999,623 Common Shares to the holders thereof. All Preferred Shares were cancelled and all rights associated therewith were terminated. Prior to completion of the conversion, Polar Multi-Strategy Master Fund (and certain affiliated funds) and Verition Canada Master Fund Ltd. applied to the Ontario Superior Court of Justice for a declaration that the mandatory conversion would contravene The Stars Group’s articles of continuance. On July 17, 2018, the Superior Court ruled in favor of The Stars Group and dismissed the application. As a result, The Stars Group proceeded with the conversion as indicated above. The applicants subsequently appealed the Superior Court decision and in the appeal are seeking, among other relief, rescission of the conversion or potential damages and costs.

The Stars Group believes the appeal is baseless and remains of the view that it was entitled to convert the Preferred Shares on July 18, 2018. The Stars Group will vigorously defend the appeal; however, there can be no assurance that its defense will be successful.

SBG Regulatory Matter

On October 28, 2016, SBG informed the Gaming Commission that it had carried out an internal review into its duplicate account verification process as it had become aware of a customer who had used the same first name and surname to open a duplicate account after having self-excluded. The individual used a different date of birth and postcode to open the duplicate account. SBG subsequently commenced a further review to determine the scale of fraudulent duplicate accounts and its investigation highlighted deficiencies in SBG’s duplicate account verification processes, following which it has refunded almost half of the account balances identified. Following a detailed investigation, the Gambling Commission provided SBG with a statement of fact on December 21, 2017, which described SBG’s failures to adhere to social responsibility codes as they relate to self-exclusion requirements. SBG accepted the facts as set out by the Gambling Commission and agreed to a regulatory settlement despite the majority of its customers using incorrect details in order to bypass the self-exclusion detection system.

SBG’s regulatory settlement with the Gambling Commission was confirmed pursuant to a statement published by the Gambling Commission on March 28, 2018. SBG’s final settlement with the Gambling Commission includes a payment in lieu of a financial penalty of £750,000 and payment of the Gambling Commission’s investigative costs of £16,700. In addition, SBG has contributed approximately £250,000 to the charity GambleAware, to use in the context of research relating to the causes of problem gambling and how this manifests itself in customer behavior. SBG does not expect any further costs or settlements to be required in connection with the matter.

Interest of Management and Others in Material Transactions

To the Corporation’s knowledge and other than as set forth herein, there are no material interests, direct or indirect, of directors, executive officers, any shareholder who beneficially owns, directly or indirectly, more than 10% of any class or series of voting securities of the Corporation, or any associate or affiliate of such persons, in any transaction within the last three most recently completed fiscal years or in any proposed transaction which has materially affected or would reasonably be expected to materially affect the Corporation. See also “Directors and Officers—Conflicts of Interest” above.

Transfer Agent and Registrar

The transfer agent and registrar for the Common Shares in Canada is Computershare Investor Services Inc. at its offices in Montréal, Québec and Toronto, Ontario and in the United States is Computershare Trust Company, N.A. at its offices in Canton, Massachusetts, Jersey City, New Jersey and Louisville, Kentucky. The transfer agent and registrar for the Preferred Shares is Computershare Trust Company of Canada Inc. at its offices in Montréal, Québec and Toronto, Ontario.

Material Contracts

The following is a list of the Corporation’s material contracts required to be listed under applicable Canadian securities laws that the Corporation or the subsidiaries of the Corporation have entered into since January 1, 2018 or prior thereto but which are still in effect:

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Copies of these agreements may be inspected at the Corporation’s headquarters located at 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario, M5J 2J3, Canada during normal business hours and on SEDAR at www.sedar.com and Edgar at www.sec.gov.

Interest of Experts

The Corporation’s independent external auditor for the years ended December 31, 2018 and 2017 was Deloitte. For the years ended December 31, 2018 and 2017 and throughout the period covered by the financial statements of the Corporation on which Deloitte reported, Deloitte was independent with respect to the Corporation within the applicable rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board (United States) (PCAOB).

Additional Information

Additional information relating to The Stars Group and its business including, without limitation, the 2018 Annual Financial Statements, 2018 Annual MD&A and other filings that The Stars Group has made and may make in the future with applicable securities authorities, may be found on SEDAR at www.sedar.com, Edgar at www.sec.gov and on The Stars Group’s website at www.starsgroup.com.  Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of The Stars Group securities and securities authorized for issuance under equity compensation plans, is contained in the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation. Additional financial information is provided in the 2018 Annual Financial Statements and the 2018 Annual MD&A.

In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on its website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable securities laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings and public conference calls and webcasts. This list may be updated from time to time.

 

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SCHEDULE A

THE STARS GROUP INC.

AUDIT COMMITTEE CHARTER

PURPOSE

PROCEDURES OF THE COMMITTEE

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AUDIT RESPONSIBILITIES OF THE COMMITTEE

Selection and Oversight of the External Auditors

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Appointment and Oversight of Internal Auditors

Oversight and Monitoring of Audits

Oversight and Review of Accounting Principles and Practices

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Oversight and Monitoring of Internal Controls Over Financial Reporting

Oversight and Monitoring of the Company’s Financial Reporting and Disclosures

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Such reviews shall be conducted prior to the release of any summary of the financial results or the filing of such reports with applicable regulators.

Oversight of Finance Matters

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Risk Oversight, Privacy and Cybersecurity

Committee Reporting

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Additional Authority and Responsibilities

THIS CHARTER

The Committee shall review and reassess annually the adequacy of this Charter as required by applicable laws or by the applicable rules of NASDAQ, the TSX or the SEC. This Charter shall be posted on the Company’s website.

DATED January 25, 2019

 

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Exhibit 99.2

 

 

AUDITED ANNUAL FINANCIAL STATEMENTS

FOR THE YEAR ENDED
DECEMBER 31, 2018

March 6, 2019

 

 

 

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TABLE OF CONTENTS

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of The Stars Group Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of The Stars Group Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of (loss) earnings, comprehensive (loss) income, changes in equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and its financial performance and cash flows for each of the two years in the period ended December 31, 2018, in conformity with the International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2019, expressed an adverse opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 4 to the financial statements, effective January 1, 2018, the Company has changed its method of accounting for financial instruments due to adoption of IFRS 9, Financial Instruments.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte LLP

London, United Kingdom

March 6, 2019

We have served as the Company's auditor since 2015.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London, EC4A 3HQ, United Kingdom.

 

Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

 

© 2019 Deloitte LLP. All rights reserved.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of The Stars Group Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of The Stars Group Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 6, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change its method of accounting for financial instruments due to adoption of IFRS 9, Financial Instruments.

 

As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at TSG Australia Pty Ltd and its subsidiaries and affiliates, including TSGA Holdco Pty Limited and its subsidiaries and affiliates (“BetEasy”) and Cyan Blue Topco Limited and its subsidiaries and affiliates (“SBG”), which were acquired on February 27, 2018 and July 10, 2018, respectively. In respect of BetEasy, its financial statements constitute (1.0)% and 4.5% of net and total assets, respectively, 9.7% of revenue, and 18.1% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2018. In respect of SBG, its financial statements constitute 113.5% and 48.2% of net and total assets, respectively, 19.4% of revenue, and 111.9% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at BetEasy and SBG.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London, EC4A 3HQ, United Kingdom.

 

Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

 

© 2019 Deloitte LLP. All rights reserved.

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Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Material Weaknesses

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following two material weaknesses have been identified and included in management's assessment: i) the design of the control over the appropriate re-translation of foreign currency intercompany loans at each reporting period, and ii) the design of the control over the key inputs and assumptions used in the valuation of an embedded derivative.

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2018, of the Company, and this report does not affect our report on such financial statements.

 

/s/ Deloitte LLP

London, United Kingdom

March 6, 2019

 

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS

 

* Certain amounts were reclassified in the comparative period. See note 2.

See accompanying notes.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

 

* Net of income tax recovery of $53,000 for the year ended December 31, 2018 (December 31, 2017 – net of income tax expense of $nil).

** Net of income tax of $nil for the year ended December 31, 2018 (December 31, 2017 - net of income tax of $160,380).

*** Net of income tax of $nil for the year ended December 31, 2018 (December 31, 2017 - $nil).

See accompanying notes.

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

* Certain amounts were reclassified in the comparative period during the three months ended June 30, 2018. See note 2.

See accompanying notes.

Approved and authorized for issue on behalf of the Board on March 6, 2019.

 

 

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2018 and 2017:

 

 

* During the year ended December 31, 2018, the Corporation made an adjustment totaling $3.7 million to the amounts recognized in common stock in respect of a previous reversal of deferred tax recognized through the consolidated statements of (loss) earnings.

See accompanying notes.

 

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

See accompanying notes.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Stars Group Inc. (“The Stars Group” or the “Corporation”) is a global leader in the online and mobile gaming and interactive entertainment industries, entertaining millions of customers across its online real- and play-money poker, gaming and betting product offerings. The Stars Group offers these products directly or indirectly under several ultimately owned or licensed gaming and related consumer businesses and brands, including, among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, BetEasy, Sky Bet, Sky Vegas, Sky Casino, Sky Bingo, Sky Poker, and Oddschecker, as well as live poker tour and events brands, including the PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK.

As at December 31, 2018, The Stars Group had three reportable segments, the international business (“International”), the United Kingdom business (“United Kingdom”) and the Australian business (“Australia”), each as described below, as well as a corporate cost center (“Corporate”). There are up to four major lines of operations within the Corporation’s reportable segments, as applicable: real-money online poker (“Poker”), real-money online betting (“Betting”), real-money online casino gaming and bingo (“Gaming”), and other gaming-related revenue, including, without limitation, from social and play-money gaming, live poker events, branded poker rooms, Oddschecker and other nominal sources of revenue (“Other”). As it relates to these lines of operations, online revenue includes revenue generated through the Corporation’s real-money online, mobile and desktop client platforms, as applicable.

The Stars Group’s primary business and main source of revenue is its online gaming businesses. These currently consist of the operations of Stars Interactive Holdings (IOM) Limited and its subsidiaries and affiliates (collectively, “Stars Interactive Group”), which it acquired in August 2014 (the ‘‘Stars Interactive Group Acquisition’’), the operations of Cyan Blue Topco Limited and its subsidiaries and affiliates (collectively, “Sky Betting & Gaming” or “SBG”), which it acquired in July 2018 (the “SBG Acquisition”), and TSG Australia Pty Ltd (formerly CrownBet Holdings Pty Limited) and its subsidiaries and affiliates, including TSGA Holdco Pty Limited (formerly William Hill Australia Holdings Pty Ltd) and its subsidiaries and affiliates (“TSGA” and where the context requires, collectively, “BetEasy”), which it acquired an 80% equity interest in between February 2018 and April 2018 (BetEasy acquired TSGA in April 2018) (collectively, the “Australian Acquisitions”). The Stars Interactive Group is headquartered in the Isle of Man and operates globally; SBG is headquartered in and primarily operates in the United Kingdom; and BetEasy is headquartered in and primarily operates in Australia.

The International segment currently includes the Stars Interactive Group business, and operates across all lines of operations and in various jurisdictions around the world, including the United Kingdom, under the brands identified above in this note 1; the United Kingdom segment currently consists of the business operations of Sky Betting & Gaming, including those outside of the United Kingdom, and operates across all lines of operations primarily in the United Kingdom; and the Australia segment currently consists of the business operations of BetEasy, and operates within the Betting line of operation and primarily in Australia under the BetEasy brand. Prior segmental results for the year ended December 31, 2017 have been recast to be presented in a manner consistent with the changed reporting segments. See note 7.

The Stars Group was incorporated on January 30, 2004 under the Companies Act (Quebec) and continued under the Business Corporations Act (Ontario) on August 1, 2017. The registered head office is located at 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario, Canada, M5J 2J3 and its common shares (“Common Shares”) are listed on the Toronto Stock Exchange (the “TSX”) under the symbol “TSGI”, and the Nasdaq Global Select Market (“Nasdaq”) under the symbol “TSG”.

For reporting purposes, the Corporation prepares its consolidated financial statements in U.S. dollars. Unless otherwise indicated, all dollar (“$”) amounts and references to “USD” or “USD $” in these consolidated financial statements are expressed in U.S. dollars. References to ‘‘EUR’’ or “€” are to European Euros, references to ‘‘CDN’’ or “CDN $” are to Canadian dollars, references to “GBP” or “₤” are to British Pound Sterling and references to “AUD” or “AUD $” are to Australian dollars. Unless otherwise indicated, all references to a specific “note” refer to these notes to the consolidated financial statements of the Corporation for the year ended December 31, 2018. References to “IFRS” and “IASB” are to International Financial Reporting Standards and the International Accounting Standards Board, respectively.

 

Basis of Accounting

The Corporation’s consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB and have been approved and authorized for issuance by the Board of Directors on March 6, 2019.

The consolidated financial statements of the Corporation have been prepared on the historical cost basis, except derivative financial instruments, financial instruments at fair value through profit or loss as well as financial instruments at fair value through other comprehensive income, each of which are measured at fair value.

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On January 1, 2018, the Corporation adopted the provisions in Financial Instruments (“IFRS 9”) and Revenue from Contracts with Customers (“IFRS 15”). See note 4. Significant accounting policies in relation to these adoptions are detailed below.

As previously announced, in response to changes in the business following the Australian Acquisitions (as defined below and further detailed in note 7), and to align with financial measures commonly used in the industry, the Corporation made certain reclassifications during the second quarter to the comparative interim condensed consolidated financial statements to enhance their comparability with the current period’s presentation. Consistent reclassifications have been made to the comparative balances in the consolidated financial statements for the year ended December 31, 2018. As a result, certain line items have been amended in the comparative consolidated statement of earnings and financial position and the related notes to the consolidated financial statements. These reclassifications are outlined below:

Consolidated Statements of (Loss) Earnings

The following financial statement line items, which the Corporation first introduced during the second quarter of 2018, resulted in a re-classification of the comparative period: Cost of revenue (excluding depreciation and amortization), Gross profit (excluding depreciation and amortization) and Operating income.

Consolidated Statements of Financial Position

The following re-classifications to the comparative period, which the Corporation first made during the second quarter of 2018, include the following:

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Consolidated Statements of Cash Flows

There were no material reclassifications to the comparative period.

Going Concern

The Board of Directors of the Corporation (the “Board”) have, at the time of approving the consolidated financial statements, a reasonable expectation that the Corporation has adequate resources to continue in operational existence for the foreseeable future. As such, the Corporation continues to adopt the going concern basis of accounting in preparing the consolidated financial statements.

Principles of Consolidation

A subsidiary is an entity controlled by the Corporation. As such, the Corporation is exposed, or has rights, to variable returns from its involvement with such entity and has the ability to affect those returns through its current ability to direct such entity’s relevant activities (i.e., control over the entity).

The existence and effect of substantive voting rights that the Corporation potentially has the practical ability to exercise (i.e., substantive rights) are considered when assessing whether the Corporation controls another entity.

The Corporation’s consolidated financial statements include the accounts of the Corporation and its subsidiaries. Upon consolidation, management eliminated all inter-entity transactions and balances.

Non-controlling interests in subsidiaries are identified separately from the Corporation’s equity therein. Those non-controlling interests that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the subsidiary’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. “Total comprehensive income” is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Upon the loss of control of a subsidiary, the Corporation’s profit or loss on disposal is calculated as the difference between (i) the fair value of the consideration received and of any investment retained in the former subsidiary and (ii) the previous carrying amount of the assets (including any goodwill) and liabilities of the subsidiary and any non-controlling interests.

Revenue Recognition

The Corporation has applied IFRS 15 from January 1, 2018. As permitted, the Corporation applied IFRS 15 using the modified retrospective approach, whereby the cumulative impact of adoption is recognized in opening retained earnings. Comparative information for 2017 has not been restated. See note 4. The adoption of IFRS 15 did not have a material impact on the timing and amount of revenue recognized by the Corporation and the Corporation did not apply the available optional practical expedients.

Revenue from contracts with customers is recognized when control of the Corporation’s services is transferred to the customer at an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those services. The Corporation has concluded that it is the principal in its revenue arrangements because it controls the services before transferring them to the customer.

The Corporation has disclosed disaggregated revenue recognized from customers and revenue from other online activities in note 7.

The Company evaluates all contractual arrangements it enters into and evaluates the nature of the promised goods or services, and rights and obligations under the arrangement, in determining the nature of its performance obligations. Where such performance obligations are capable of being distinct and are distinct in the context of the contract, the consideration the Corporation expects to be entitled under the arrangement is allocated to each performance obligation based on its relative estimated stand-alone selling prices. Performance obligations that the Corporation concludes are not distinct are combined together into a single combined performance obligation. Revenue is recognized at an amount equal to the transaction price allocated to the specific performance obligation when it is satisfied, either at a point in time or over time, as applicable, based on the pattern of transfer of control.

The Company’s principal arrangements include the following sources of revenue:

Revenue from customers within the scope of IFRS 15

Poker revenue

Poker revenue represents primarily the commission charged at the conclusion of each poker hand in cash games (i.e., rake) and entry fees for participation in poker tournaments, and is net of certain promotional expenses, which are treated as a reduction to the transaction price. In poker tournaments, entry fee revenue is recognized when the tournament has concluded.

Gaming revenue

Gaming revenue primarily represents the difference between the amounts of bets placed by customers less amounts won (i.e., net house win) and is presented net of certain promotional expenses which are treated as a reduction to the transaction price. Gaming transactions are instantaneously settled and revenue is recognized at a point in time.

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Poker and Gaming each consist of a single revenue performance obligation, notwithstanding the impact customer loyalty programs as noted below. Revenue is recognized at a point in time upon completion of the performance obligation as noted above. Poker and Gaming are each presented as revenue gross of applicable gaming duties, which are presented within cost of revenue.

Conversion margins

Revenue from conversion margins is the revenue earned on the processing of real-money deposits and cash outs in specified currencies. Revenue from customer cross currency deposits and withdrawals is recognized when the transaction is complete at a point in time. Revenue is recognized with reference to the underlying arrangement and agreement with the players and represents a single performance obligation and is recorded within the applicable line of operations.

Other revenue from customers

Play-money gaming revenue - Customers can participate in online poker tournaments and social casino games using play-money, or virtual currency. Customers can purchase additional play-money chips online to participate in the poker tournaments and social casino games. The revenue is recognized at a point in time when the customer has purchased such chips as control has been transferred to the customer and no further performance obligations exist. Once a customer has purchased such chips they are non-refundable and non-cancellable.

Other - The Corporation sponsors certain live poker tours and events, uses its industry expertise to provide consultancy and support services to the casinos that operate the events, and has marketing arrangements for branded poker rooms at various locations around the world. The Corporation also provides customers with access to odds comparisons, tips and other information to assist with betting, and provides other media and advertising services, and limited content development services with revenue generated by way of affiliate commissions, revenue share arrangements and advertising income as applicable. Revenue is recognized upon satisfying the applicable performance obligations, at a point in time or over time as applicable.

Revenue from customers out of the scope of IFRS 15

Betting revenue

The Corporation’s income generated from Betting product offerings does not fall within the scope of IFRS 15. Income generated from these online transactions is disclosed as revenue although these transactions are accounted as derivative instruments in accordance with IFRS 9 where the income meets the definition of gains or losses, as applicable.

Betting revenue primarily represents the difference between the amounts of bets placed by customers less amounts won (i.e., net house win). Open betting positions are carried at fair value, and gains and losses arising on these positions are recognized in revenue.

Betting is presented as revenue gross of applicable gaming duties, which are presented within cost of revenue.

Customer loyalty programs

The Corporation operates loyalty programs for its customers within each of its reporting segments that reward customers based on a number of factors, including volume of play, player impact on the overall ecosystem, whether the player is a net withdrawing or net depositing player, and product and game selection. For customer loyalty programs operated by the Corporation, applicable revenue received for which loyalty rights earned by our customers are recorded as a contract liability based on the rewards’ allocated amount and are subsequently recognized as revenue in a future period when the rewards are redeemed. Customer loyalty rewards are included in accounts payable and other liabilities on the consolidated statements of financial position.

The estimated selling price of loyalty rewards is determined using an equivalent cash cost approach which uses historical data of award redemption patterns considering the alternative goods or services for which the rewards can be redeemed. The estimated selling price of rewards is adjusted for an estimate of rewards that will not be redeemed based on historical redemption patterns. Historically non-redeemed loyalty rewards have not been significant.

Other sources of revenue

Income from player funds

A portion of customer deposits is held as current investments. Income generated from current investments and dormant accounts does not fall within the scope of IFRS 15. Income generated from investments is disclosed as revenue despite being accounted for in accordance with IFRS 9 where it meets the definition of gains or losses, as applicable.

Income (loss) from dormant accounts

When a customer deposit account becomes dormant in accordance with Corporation’s terms and conditions, the deposit is removed from customer liabilities and recorded within accounts payable and other liabilities. Income is generated from dormant accounts that are not expected to be re-activated based on historical information and re-activation rates. Losses are recorded on dormant accounts that are re-activated. Income (loss) generated from dormant accounts is disclosed as revenue despite being accounted for in accordance with IFRS 9 where it meets the definition of gains or losses, as applicable.

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Cost of Revenue

Cost of revenue includes direct costs associated with revenue generating activities. Such direct costs include gaming duty, processor costs, and royalties. Cost of revenue does not include depreciation and amortization.

Financial Instruments

The Corporation applied IFRS 9 retrospectively from January 1, 2018. In accordance with the practical expedients permitted under the standard, comparative information for 2017 has not been restated. As permitted by IFRS 9, the Corporation elected to continue to apply the hedge accounting requirements of International Accounting Standard (“IAS”) 39, Financial Instruments (“IAS 39”) rather than the new requirements of IFRS 9 and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7, Financial Instruments: Disclosures (“IFRS 7”).

For further information regarding the impact of the adoption of IFRS 9, see note 4.

Financial Assets

Recognition and Measurement

At initial recognition, the Corporation measures a financial asset at its fair value plus, in the case of a financial asset not measured at FVTPL (as defined below), transaction costs that are directly attributable to the acquisition of the financial asset. From January 1, 2018, the Corporation classifies financial assets into one of the following measurement categories:

The classification depends on the Corporation’s business model for managing the financial assets and the contractual terms of the cash flows. Except in very limited circumstances, the classification may not be changed subsequent to initial recognition. The Corporation only reclassifies debt instruments when its business model for managing those assets changes.

Debt instruments

Subsequent measurement of debt instruments depends on the Corporation’s business model for managing the asset and the cash flow characteristics of that asset. There are three measurement categories into which the Corporation classifies its debt instruments:

Equity instruments

The Corporation subsequently measures all equity instruments at fair value, except for equity instruments for which equity method accounting is applied. The classification of equity instruments depends on whether the Corporation has made an irrevocable election at the time of initial recognition to account for the equity instruments at FVOCI. There are two measurement categories into which the Corporation classifies its equity instruments:

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Impairment of financial assets

At the end of each reporting period, the Corporation assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The impairment provision recorded in respect of debt instruments carried at amortized cost and FVOCI is determined at 12-months expected credit losses on the basis that the Corporation considers these instruments as low risk.

The Corporation applies the simplified approach permitted by IFRS 9 for trade receivables and other financial assets held at amortized cost, which requires expected lifetime losses to be recognized from initial recognition of the receivables.

The forward-looking element in determining impairment for financial assets is derived from comparison of current and projected macroeconomic indicators covering primary markets in which the Corporation operates.

Financial Liabilities

Recognition and measurement

Financial liabilities are classified, at initial recognition, as either financial liabilities at FVTPL or other financial liabilities.

Debt modifications

The Corporation may pursue amendments to its credit agreements based on, among other things, prevailing market conditions. Such amendments, when completed, are considered by the Corporation to be debt modifications. For debt repayable at par with nominal break costs, the Corporation elected to account for such debt modifications as equivalent to repayment at no cost of the original financial instrument and an origination of a new debt at market conditions. Resetting the debt to market conditions with the same lender has the same economic substance as extinguishing the original financial instrument and originating new debt with a third-party lender at market conditions. The transaction is accounted for as an extinguishment of the original debt instrument, which is derecognized and replaced by the amended debt instrument, with any unamortized costs or fees incurred on the original debt instrument recognized as part of the gain or loss on extinguishment.

For all other debt, the accounting treatment of debt modifications depends upon whether the modified terms are substantially different than the previous terms. The terms of an amended debt agreement are considered substantially different when either: (i) the discounted present value of the cash flows under the new terms, discounted using the original effective interest rate, are at least ten percent different from the discounted present value of the remaining cash flows of the original debt or (ii) management determines that other changes to the terms of the amended agreement, such as a change in the environment in which a floating interest rate is determined, are substantially different. If the modification is considered to be substantially different, the transaction is accounted for as an extinguishment of the original debt instrument, which is derecognized and replaced by the amended debt instrument, with any unamortized costs or fees incurred on the original debt instrument recognized as part of the gain or loss on extinguishment. If the modification is not considered to be substantially different, an adjustment to the carrying amount of the original debt instrument is recorded, which is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate with the difference recognized in net financing changes on the consolidated statements of (loss) earnings.

Transaction costs

Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities (other than financial assets and financial liabilities that are classified as FVTPL) are added to or deducted from, as applicable, the fair value of the financial instrument on initial recognition. These costs are expensed to financial expenses on the consolidated statements of (loss) earnings over the term of the related interest bearing financial asset or financial liability using the effective interest method. When a debt facility is retired by the Corporation, any remaining balance of related debt transaction costs is expensed to financial expenses in the period that the debt facility is retired. Transaction costs related to financial instruments at FVTPL are expensed when incurred.

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Classification and impairment of financial assets other than derivatives prior to January 1, 2018 under IAS 39

Financial assets are initially recognized at fair value and are classified as either FVTPL, “available-for-sale” or as “loans and receivables”. The classification depends on the purpose for which the financial instruments were acquired and their respective characteristics.

Fair value through profit or loss

Financial assets at FVTPL are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or as otherwise determined by management to be in this category. Financial assets classified at FVTPL are measured at fair value with the realized and unrealized changes in fair value recognized each reporting period in the consolidated statements of (loss) earnings. The Corporation classified certain short-term investments as FVTPL as at December 31, 2017.

Available-for-sale

Available-for-sale assets are financial assets that are either designated in this category or not classified in any of the other categories. Such assets are included in other non-current financial assets unless management intends to dispose of them within 12 months of the date of the consolidated statements of financial position. Financial assets classified as available-for-sale are carried at fair value with changes in fair value recorded in the consolidated statements of comprehensive (loss) income. Interest on available-for-sale assets is calculated using the effective interest rate method and is recognized in the consolidated statements of (loss) earnings. When a decline in fair value is determined to be significant or prolonged, the cumulative loss included in accumulated other comprehensive income (loss) is reclassified as such and then recognized in the consolidated statements of (loss) earnings. Gains and losses realized on the disposal of available-for-sale assets are recognized in the consolidated statements of (loss) earnings. The Corporation classifies certain current and noncurrent investments as available-for-sale.

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments but which are not quoted in an active market. All such assets with maturities equal to or less than 12 months from the date of the consolidated statements of financial position are classified as current assets, while those with maturities greater than 12 months from such date are classified as non-current assets. Financial instruments classified as loans and receivables are initially recorded at fair value and subsequently measured at amortized cost using the effective interest method. The Corporation classifies accounts receivable and promissory notes as loans and receivables.

Impairment

At the end of each reporting period, the Corporation assesses whether a financial asset or a group of financial assets, other than those classified as FVTPL, is impaired. If there is objective evidence that impairment exists, the loss is recognized in the consolidated statements of (loss) earnings. The impairment loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of (loss) earnings.

Derivatives

As permitted by IFRS 9, the Corporation elected to continue to apply the hedge accounting requirements of IAS 39 rather than the new requirements of IFRS 9 and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7.

The Corporation uses derivative instruments for risk management purposes and does not use derivative instruments for speculative trading purposes (except for derivatives with respect to the Corporation’s Betting line of operations, which are transactions within the scope of IFRS 9 but reported as revenue as discussed above). All derivatives are recorded at fair value in the consolidated statements of financial position. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not designated as hedging instruments, the re-measurement of those derivatives each period is recognized in the consolidated statements of (loss) earnings.

Derivatives may be embedded in other financial liabilities and non-financial instruments (i.e., the host instrument). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined instrument (i.e., the embedded derivative plus the host instrument) is not held-for-trading or designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in the consolidated statements of (loss) earnings.

A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately under IFRS 9. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at FVTPL.

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Hedge accounting

The Corporation designates certain derivatives as either:

At inception of the hedge relationship, the Corporation formally documents how the hedging relationship meets the hedge accounting criteria. It also records the economic relationship between the hedged item and the hedging instrument, including the nature of the risk, the risk management objective and strategy for undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship at inception and on an ongoing basis.

Cash flow hedges

The Corporation uses derivatives for cash flow hedges. The effective portion of the change in fair value of the hedging instrument is recorded in other comprehensive income and accumulated in the cash flow hedging reserve, while the ineffective portion is recognized immediately in the consolidated statements of (loss) earnings. Gains and losses on cash flow hedges accumulated in other comprehensive (loss) income are reclassified to the consolidated statements of (loss) earnings in the same period the hedged item affects the consolidated statements of (loss) earnings. If the forecast transaction is no longer expected to occur, the hedge no longer meets the criteria for hedge accounting, the hedging instrument expires or is sold, terminated or exercised, or the designation is revoked, the hedge accounting is discontinued prospectively.  If the forecast transaction is no longer expected to occur, then the amount accumulated in equity is reclassified to the consolidated statements of (loss) earnings.

Net investment hedges

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging item relating to the effective portion of the hedge is recognized in other comprehensive income and accumulated under the heading cumulative translation adjustments reserve. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statements of (loss) earnings. Gains and losses accumulated in other comprehensive income are reclassified to the consolidated statements of (loss) earnings when the foreign operation is partially disposed of or sold.

Determination of fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the applicable measurement date. When measuring the fair value of an asset or a liability, the Corporation uses market observable data to the extent possible. If the fair value of an asset or a liability is not directly observable, it is estimated by the Corporation using valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs (e.g., by the use of the market comparable approach that reflects recent transaction prices for similar items, discounted cash flow analysis, or option pricing models refined to reflect the Corporation’s specific circumstances). Inputs used are consistent with the characteristics of the asset or liability that market participants would take into account.

For the Corporation’s financial instruments which are recognized in the consolidated statements of financial position at fair value, the fair value measurements are categorized based on the lowest level input that is significant to the fair value measurement in its entirety and the degree to which the inputs are observable. The significance levels are classified as follows in the fair value hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 – Inputs for the asset or liability that are not based on observable market data.

Transfers between levels of the fair value hierarchy are recognized by the Corporation at the end of the reporting period during which the transfer occurred.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, bank deposits and other short-term highly liquid investments with maturities of three months or less, which are generally used by the Corporation to meet short-term liquidity requirements.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Corporation assessed all its leases to be operating leases.  

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The Corporation as lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

The Corporation as lessee

Rents payable under operating leases are recognized as an expense on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of any such incentive is recognized as a reduction of rental expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Prepaid Expenses and Deposits

Prepaid expenses and deposits consist of amounts paid in advance or deposits made for which the Corporation will receive goods or services.

Property and Equipment

Property and equipment which have finite lives are recorded at cost less accumulated depreciation and impairment losses. Depreciation is expensed from the month the particular asset is available for use, over the estimated useful life of such asset at the following rates, which in each case are intended to reduce the carrying value of the asset to the estimated residual value:

 

 

Intangible Assets

Intangible assets which have finite lives are recorded at cost less accumulated amortization and impairment losses. Amortization is expensed from the month the particular asset is available for use, over the estimated useful life of such asset at the following rates, which in each case are intended to reduce the carrying value of the asset to the estimated residual value:

 

 

The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the consolidated statements of financial position and any gain or loss is reflected in the consolidated statements of (loss) earnings. Expenditures for repairs and maintenance are expensed as incurred.

The Corporation determined that its owned brands have indefinite useful lives as they have no foreseeable limit to the period over which such assets are expected to contribute to the Corporation’s cash flows. In addition, the Corporation expects to continue to support its brands with ongoing marketing efforts.

The Corporation tests its owned brands for impairment at least annually, or more frequently if circumstances such as significant declines in expected sales, net earnings or cash flows indicate that the cash-generating units (“CGUs”) to which such brands relate might be impaired.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

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Goodwill is tested for impairment at least annually, or more frequently if circumstances such as significant declines in expected sales, net earnings or cash flows indicate that that the CGUs or group of CGUs to which goodwill is allocated might be impaired. The Corporation monitors and tests goodwill for impairment at the operating segment level.

Research and Development

Research and development costs are expensed except in cases where development costs meet certain identifiable criteria for deferral. Deferred development costs, which have probable future economic benefits, can be clearly defined and measured, and are incurred for the development of new products or technologies, are capitalized. These development costs, net of related research and development investment tax credits, are not amortized until the products or technologies are commercialized or when the asset is available for use, at which time, they are amortized over the estimated life of the commercial production of such products or technologies.

The amortization method and the life of the commercial production are assessed annually and the assets are tested for impairment whenever an indication exists that an asset might be impaired.

The Corporation claims research and development investment tax credits as a result of incurring scientific research and experimental development expenditures. Research and development investment tax credits are recognized when the related expenditures are incurred and there is reasonable assurance of their realization. Investment tax credits are accounted for by the cost reduction method whereby the amounts of tax credits are applied as a reduction of the expense or deferred development costs.

Investments

Investments are stated at the lower of cost and fair market value. Cost is determined on a weighted average basis at a consolidated level.

Investments in Associates

An associate is an entity over which the Corporation has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not the control or joint control over those policy decisions.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

Under the equity method, an investment in an associate is initially recognized in the consolidated statements of financial position at cost and adjusted thereafter to recognize the Corporation’s share of the profit or loss and other comprehensive income of the associate. When the Corporation's share of losses of an associate exceeds the Corporation's interest in that associate (which includes any long-term interests that, in substance, form part of the Corporation's net investment in the associate), the Corporation discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Corporation has incurred legal or constructive obligations or made payments on behalf of the associate.

An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate.  On acquisition of the investment in an associate, any excess of the cost of the investment over the Corporation's share of the net fair value of the identifiable assets and liabilities of the associate is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Corporation's share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in the consolidated statements of (loss) earnings in the period in which the investment is acquired.

The requirements of IAS 36, Impairment of Assets (“IAS 36”) are applied to determine whether it is necessary to recognize any impairment loss with respect to the Corporation’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount, any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

Impairment of Non-Current Assets

Management assesses, at the end of the reporting period, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Corporation estimates the asset’s recoverable amount. An asset’s or CGU’s recoverable amount is the higher of the asset’s or CGU’s fair value less costs of disposal and its value in use. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

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The Corporation bases its impairment calculation on detailed budgets and forecast calculations, which are prepared for the Corporation’s assets or CGU to which such assets are allocated. These budgets and forecast calculations generally cover a period of three to five years. A long-term growth rate is calculated and applied to project future cash flows after the final year included in the forecast.

Impairment losses of continuing operations are recognized in the consolidated statements of (loss) earnings in expense categories consistent with the function of the impaired asset. An impairment loss recognized for goodwill may not be reversed. At the end of the reporting period, the Corporation assesses if there is an indication that impairment losses recognized in previous periods for other assets have decreased or no longer exist. Where an impairment loss is subsequently reversed, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Taxation

Income tax expense represents the sum of current and deferred taxes. Current and deferred taxes are recognized in the consolidated statements of (loss) earnings, except to the extent they relate to items recognized in the consolidated statements of comprehensive (loss) income or directly in the consolidated statements of changes in equity.

Current tax

Current tax payable is based on taxable income for the year. Taxable income differs from earnings as reported in the consolidated statements of (loss) earnings because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Corporation’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the particular reporting period.

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the Corporation’s consolidated financial statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable income nor the accounting earnings.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments and interests in subsidiaries and associates, except where the Corporation is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable income against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of any such asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, in each case based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Corporation expects, at the end of the particular reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Corporation intends to settle its current tax assets and liabilities on a net basis. Deferred tax assets and liabilities are not discounted. Current and deferred tax are recognized in the consolidated statements of (loss) earnings, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Share based payments

The Corporation maintains an equity-based long-term incentive award program to align interests of its management team with those of its Shareholders by focusing the management team on long-term objectives over a multi-year period, with the value of the award fluctuating based on stock price appreciation. The Corporation has two equity-based award plans and accounts for grants under these plans in accordance with the fair value-based method of accounting for stock-based compensation for the applicable period. The Corporation currently makes its equity grants under its Equity Incentive Plan dated June 22, 2015 (the “2015 Equity Incentive Plan”), which provides for grants of stock options (“Options”), Restricted Share Units (“RSU”), Deferred Share Units (“DSU”), Performance

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Share Units (“PSU”), Restricted Shares (“RS”), and other Common Share-based awards as the Board may determine. Prior to the Corporation’s 2015 annual shareholder meeting (the “2015 Annual Meeting”), equity-based awards were granted solely under the Corporation’s 2010 stock option plan, as amended from time to time (the “2010 Stock Option Plan” and together with the 2015 Equity Incentive Plan, the “Plans”) and consisted only of Options. The Corporation no longer grants Options under the 2010 Stock Option Plan, but it remains in effect only to govern the terms of outstanding Options granted prior to the date of the 2015 Annual Meeting.

Effective for 2017, the Corporation replaced the stock option component of the long-term incentive program for its management team with a regular, annual grant program that is comprised of PSUs and RSUs. The RSUs are subject to service vesting conditions and the PSUs are subject to service, market and non-market vesting conditions. The Corporation also offers DSUs, RSUs and RS for members of its Board of Directors.

Non-employee equity-settled share-based payments are measured at the fair value of the goods and services received, except where that fair value cannot be estimated reliably. If the fair value cannot be measured reliably, non-employee equity-settled share-based payments are measured at the fair value of the equity instrument granted as measured at the date the entity obtains the goods or the counterparty renders the service. Stock-based compensation expense is recognized over the contract life of the options or the option settlement date, whichever is earlier.

Stock Options

Compensation expense for equity-settled stock options awarded to participants under the Plans is measured at the fair value at the grant date using the Black-Scholes-Merton valuation model and is recognized using the graded vesting method over the vesting period of the options granted. Stock-based compensation expense recognized is adjusted to reflect the number of options that have been estimated by management for which conditions attaching to service will be fulfilled as of the grant date until the vesting date so that the recognized expense corresponds to the options that have vested. Stock-based compensation expense is recorded in the equity reserve when the expense is recognized in the consolidated statements of (loss) earnings. When options are exercised, any consideration received from participants as well as the related compensation cost recorded within the equity reserve are credited to share capital.

Other equity-settled share based payments

Restricted Share Units

An RSU is a unit equivalent in value to a Common Share which entitles the holder to receive Common Shares after a specified vesting period determined by the Plan Administrator of the 2015 Equity Incentive Plan (the “Plan Administrator”), in its sole discretion. Upon settlement, holders will receive one fully paid Common Share in respect of each vested RSU. Generally, the RSUs vest in equal annual installments over a three or four-year period (graded vesting method), and subject to continued employment through each vesting date.

Performance Share Units

A PSU is a unit equivalent in value to a Common Share which entitles the holder to receive Common Shares based on the achievement of performance goals established by the Plan Administrator, including in consultation with management, over a performance period. Generally, the PSUs vest on the third anniversary of the date of the grant (cliff vesting), and based on a weighted mix of revenue and Adjusted EBITDA targets of the Corporation for the applicable three-year performance period as well as the individual remaining employed by, or continuing to provide services to, the Corporation. The grantee is eligible for additional PSUs (the “Additional PSUs”) up to 50% of the PSUs granted on the grant date, subject to an additional total shareholder return condition (the “TSR Condition”), and to the extent the other service and performance conditions are met. The Additional PSUs have service, non-market and market (i.e., the TSR Condition) vesting conditions, all of which must be satisfied to vest.

Upon settlement, holders will receive fully paid Common Shares in proportion to the number of vested PSUs held and the level of performance achieved. Any unearned PSUs will be forfeited.

 

Deferred Share Units

The Corporation offers DSU grants to the members of the Board. Upon settlement, holders will receive one fully paid Common Share in respect of each vested DSU. The Corporation recognizes services received in a share-based payment transaction as an expense over the requisite service period and recognizes a corresponding increase in equity as the services are received. DSUs vest immediately or over either a one-, two- or three-year period. The grant date is the date on which the Corporation and the Directors have a shared understanding of all the terms and conditions of the arrangement. If the grant date occurs after the service commencement date, then the Corporation estimates the grant-date fair value of the DSUs for the purpose of recognizing the expense from the service commencement date until the accounting grant date. All grants are subject to forfeiture if the director ceases to serve as a director prior to vesting and vested DSUs can only be settled at such time.

Restricted Shares

An RS is a fully paid Common Share that is subject to restrictions on transfer and a risk of forfeiture for a period of time, and which shall be held by the Corporation or its designee in escrow until such time as the restricted period lapses. The Plan Administrator shall have the authority to determine at the time of grant, the duration of the restricted period and other restrictions applicable to the restricted Common Shares. Except for the restrictions applicable to the restricted Common Shares, during the restricted period, the holder shall have all the rights and privileges of a holder of Common Shares as to the restricted Common Shares, including the right to vote. All previously outstanding RS vested and were settled during the year ended December 31, 2017.

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With respect to RS, RSUs, PSUs and DSUs, the Corporation doesn’t currently expect to pay any dividends during the vesting period. Therefore, the fair market value of a RS, RSU, PSU or DSU is equal to the market price of the underlying Common Share at the grant date. On the grant date, the fair value of the awards is measured using the closing TSX stock price, or the closing Nasdaq stock price if the Common Shares are not traded on the TSX. The fair market value of the Additional PSUs is determined using a simulation based valuation to reflect the probability of the market condition being met. The service and non-market conditions, do not affect the fair value of the awards at grant date. Market conditions are reflected as an adjustment (discount) to the initial estimate of fair value at grant date of the instrument to be received and there is no true-up for differences between estimated and actual vesting due to market conditions.

Share-based compensation expense is recognized over the vesting period in the consolidated statements of (loss) earnings with a corresponding increase to the equity reserve. Once the awards vest and are settled with the counterparty, the related amount recorded within the equity reserves is credited to share capital.

Dividend Equivalents

RS, RSUs, PSUs and DSUs may be credited with dividend equivalents in the form of additional RS, RSUs, PSUs, DSUs and other share-based awards, as applicable. Dividend equivalents shall vest in proportion to the awards to which they relate. Such dividend equivalents shall be computed by dividing: (i) the amount obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of RS, RSUs, PSUs, DSUs or other share-based awards, as applicable, held by the participant on the record date for the payment of such dividend, by (ii) the highest closing price of the Common Shares on any stock exchange on which the Common Shares are then listed on the date of grant, at the close of the first business day immediately following the dividend record-date.

Provisions

Provisions represent liabilities of the Corporation for which the amount or timing of payment is uncertain. Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at the present value of the expected expenditures required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provisions due to the passage of time is recognized in interest accretion within net financing charges on the consolidated statements of (loss) earnings.

Contingent liabilities

Contingent liabilities are possible obligations the existence of which will be confirmed by uncertain future events that are not wholly within the control of the entity. Contingent liabilities also include obligations that are not recognized because their amount cannot be measured reliably or because settlement is not probable. A contingent liability is not recognized in the consolidated statements of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes.

Translation of Foreign Operations and Foreign Currency Transactions

Functional and presentation currency

IFRS requires entities to consider primary and secondary indicators when determining functional currency. Primary indicators are closely linked to the primary economic environment in which the entity operates and are given more weight. Secondary indicators provide supporting evidence to determine an entity’s functional currency. Once the functional currency of an entity is determined, it should be used consistently, unless significant changes in economic factors, events and conditions indicate that the functional currency has changed.

A change in functional currency is accounted for prospectively from the date of the change by translating all items into the new functional currency using the exchange rate at the date of the change.

Based on an analysis of the primary and secondary indicators, the functional currency of each of the Corporation and its subsidiaries have been determined. The functional currency of the Corporation is CDN. The Corporation’s consolidated financial statements are presented in U.S. dollars.

Transactions and balances

Foreign currency transactions are translated into the applicable functional currency using the exchange rates prevailing on the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within general and administrative expenses.

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Group companies

The results and financial position of the Corporation’s subsidiaries that have a functional currency different from the Corporation’s presentation currency are translated into the presentation currency as follows:

Business Combinations

Business combinations are accounted for using the acquisition method. Under this method, the identifiable assets acquired and liabilities assumed, including contingent liabilities, are recognized in the consolidated statements of financial position at their respective fair values. Goodwill is recorded based on the excess of the fair value of the consideration transferred over the fair value of the Corporation’s interest in the acquiree’s net identifiable assets on the date of the acquisition. Any excess of the identifiable net assets over the consideration transferred is immediately recognized in the consolidated statements of (loss) earnings.

The consideration transferred by the Corporation to acquire control of an entity is calculated as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred and equity interests issued by the Corporation, including the fair value of all the assets and liabilities resulting from a deferred contingent payment arrangement. Acquisition-related costs are expensed as incurred.

Operating Segments

Segments are reported in a manner consistent with the internal reporting provided to the Corporation’s Chief Operating Decision Maker (“CODM”). The Corporation’s CODM consists of its Chief Executive Officer, Chief Financial Officer and Chief Corporate Development Officer, as this group is responsible for allocating resources to, and assessing the performance of, the operating segments of the Corporation.

Key sources of estimation uncertainty

Determining the carrying amounts of some assets and liabilities requires estimation of the effects of uncertain future events on those assets and liabilities at the end of the reporting period. The following discussion sets forth key sources of estimation uncertainty at the end of the reporting period, that management believes have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Goodwill impairment

At least annually, the Corporation tests whether goodwill is subject to any impairment in accordance with the applicable accounting policy set forth in note 2.

The Corporation applied judgment in the allocation of goodwill to the identified cash-generating units (“CGUs”). Prior to the SBG Acquisition, the Corporation identified potential synergy benefits that management estimated would be realized in both the International and United Kingdom CGUs and accordingly attributed a portion of the goodwill recognized from the SBG Acquisition to the International CGU for impairment testing purposes, given the synergies were taken into account when determining an appropriate purchase price. The annual recurring synergy benefit applicable to each CGU was calculated and the net present value of this recurring benefit to each CGU was used to allocate the appropriate proportion of goodwill accordingly.

The recoverable amount for any CGU or group of CGUs is determined based on the higher of fair value less costs to sell and value in use. Both valuation approaches require management to use judgments and estimates. Goodwill impairment exists when the carrying value of a CGU or group of CGUs exceeds its recoverable amount. Estimates used in determining the recoverable amount include but are not limited to expected cash flows, growth rates, capital expenditures and discount rates. A change in future earnings or any other assumptions may have a material impact on the fair value of the CGU or group of CGUs, and could result in an impairment loss. See note 11.

Valuation of deferred contingent payment on acquisition of non-controlling interest

As part of the incremental acquisition of an 18% equity interest in BetEasy, BetEasy’s management team will be entitled to an additional payment of up to AUD 239 million in 2020, subject to certain performance conditions primarily related to its EBITDA, and payable in cash and/or additional Common Shares at The Stars Group’s discretion. The Corporation considered this additional payment to be a contingent consideration and accounted for it as part of the purchase price related to the acquisition of the 18% equity interest in BetEasy. The deferred contingent payment is subsequently recorded at fair value at each balance sheet date, with re-measurements recorded within net financing charges in the consolidated statements of (loss) earnings. In valuing the deferred contingent payment as at December 31,

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2018, the Corporation used a discount rate of 10.5%, considering the term of the deferred contingent payment period and credit risk. The Corporation applied a volatility of historical EBITDA for comparable companies of 25%, which was based on historical performance and market indicators. See notes 5 and 26.

Uncertain tax positions

Determining the Corporation’s income tax and its provisions for income taxes involves a significant degree of estimation and judgment, particularly in respect of open tax returns relating to prior years where the liabilities remain to be agreed with the local tax authorities. The Corporation is also subject to tax authority audits and has a number of open tax enquiries. As a result, it has recognized a number of provisions against uncertain tax positions that are recognized based on management’s best estimate of the outcome after taking into consideration all available evidence, and where appropriate, after taking external advice. The tax provisions recorded in the Corporation’s consolidated financial statements in respect of prior years relate to intercompany trading and financing arrangements entered into in the normal course of business and tax audits that are currently in progress with fiscal authorities. Due to the uncertainty associated with such tax items it is possible that at a future date, on resolution of the open tax matters, the final outcome may vary significantly and there is the potential for a material adjustment to the carrying amounts of the liability recorded as a result of this estimation uncertainty.

Critical accounting estimates and judgments

The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions concerning the future. It also requires management to exercise its judgment in applying the Corporation’s accounting policies. Estimates and judgments are continuously evaluated and are based on historical experience, general economic conditions, and trends and other factors, including expectations of future events.

Estimates and their underlying assumptions are reviewed on a regular basis and the effects of any changes are recognized immediately. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the consolidated financial statements and actual results could differ from the Corporation’s estimates.

The following discussion sets forth what management believes to be the most significant estimates and assumptions in determining the value of assets and liabilities and the most significant judgments in applying the Corporation’s accounting policies.

Determination of purchase price allocations and deferred contingent payments

Management makes certain judgments and estimates in the recognition and measurement of assets and liabilities, including separately identifiable intangibles acquired as part of a business combination. Further, management also makes judgments and estimates in determining the value of deferred contingent payments that should be recorded as part of the consideration on the date of acquisition and changes in deferred contingent payments payable in subsequent reporting periods. The deferred contingent payment relating to the incremental acquisition of an 18% equity interest in BetEasy is discussed above in key sources of estimation uncertainty and in note 26.

Business combinations may result in the recognition of certain intangible assets, recognized at fair value, including but not limited to, software technology, customer relationships, below market significant contracts, and brands. Judgment is applied in the identification of “identifiable” intangible assets which requires that an asset must be separable or must arise from contractual or other legal rights to distinguish it from goodwill. Specifically, customer relationships recognized in respect of the SBG Acquisition and the Australian Acquisitions are primarily in respect of non-contractual relationships from which the acquired companies have a practice and history of establishing contracts (i.e., customers that have previously engaged in online gaming transactions and are expected to engage in future online gaming transactions)

Key estimates made by management in connection with the measurement of acquired intangible assets relating to the SBG Acquisition and the Australian Acquisitions, included:

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Acquisition of BetEasy – Control assessment

The Corporation acquired a 62% equity interest in BetEasy on February 27, 2018, and a further 18% equity interest on April 24, 2018. As is typical, the shareholders agreement entered into with the minority shareholders of BetEasy in connection with these transactions includes a number of rights and protections for the minority shareholders in certain circumstances that are directly harmful to the minority, including as it relates to significant changes to business scope, material acquisitions or financing. In the Corporation’s judgment such minority shareholder rights are protective rights and the Corporation has control in accordance with IFRS 3, Business Combinations.

Useful lives of long-lived assets

Estimates are used for each component of an asset’s useful life and is based on an analysis of all pertinent factors including, but not limited to, the expected use of the asset and, in the case of intangible assets, where applicable, contractual provisions that enable the renewal or extension of the asset’s legal or contractual life without substantial cost, as well as renewal history or the expected period of future benefit of the intangible asset. Incorrect estimates of useful lives could result in an increase or decrease in the annual amortization expense and future impairment charges.

As noted above, the Corporation acquired significant intangible assets in connection with the SBG Acquisition and the Australian Acquisition. Management used estimates in determining the useful lives for these acquired intangible assets using information regarding, among other things, details of the contractual terms, historical customer activity and attrition, forecasted cash flow information, and market conditions and trends.

Debt extinguishment

The Corporation applied judgment in determining whether transactions related to its long-term debt during the period should be classified as an extinguishment or modification of such debt. The Corporation considers long-term debt that is pre-payable with no significant termination costs as being extinguished when contractual amendments are made. As discussed in note 17, on April 6, 2018, the Corporation amended its long-term debt in connection with the Australian Acquisitions and recorded the amendment as an extinguishment for accounting purposes as the debt was repayable at par, and no termination costs were incurred. On July 10, 2018, the Corporation’s previous first lien term loans were repaid in full and the transaction was recorded as an extinguishment for accounting purposes. No termination costs were incurred upon repayment.

Recognition and valuation of embedded derivatives

The Senior Notes (as defined below) include certain embedded features allowing the Corporation to redeem the Senior Notes or allowing the holders to require a redemption of the Senior Notes. The Corporation applied its judgment in determining whether the features represent embedded derivatives required to be bifurcated from the carrying value of the Senior Notes, including in relation to the assessment of whether the features are closely related to the host contract (i.e., the Indenture (as defined below) governing the Senior Notes). The Corporation considers redemption features with fixed redemption prices over a series of redemption dates as a single feature for assessing whether the feature is closely related to the host contract. The Corporation also considers embedded features with the same underlying risk exposure (i.e., interest rate risk exposure) as a combined derivative instrument for measurement, presentation and disclosure. Certain features were bifurcated from the carrying value of the Senior Notes. Management used estimates, including an implied credit spread of 3.8% as at December 31, 2018, in determining the fair value of the embedded derivatives. See notes 17, 19 and 26.

Functional currency

The Corporation’s worldwide operations expose the Corporation to transactions denominated in a number of different currencies, which are required to be translated into one currency for consolidated financial statement reporting purposes. The Corporation’s foreign currency translation policy is designed to reflect the economic exposure of the Corporation’s operations to various currencies. The functional currencies of the Corporation’s subsidiaries are assessed on a regular basis as the operations of the Corporation evolve or as result of business combinations or expansions. The functional currency of an operation or subsidiary is the currency of the primary economic environment to which it is exposed.

Following the SBG Acquisition and the Australian Acquisitions, management applied judgment in determining the functional currencies of the acquired subsidiaries and considered the impact of the acquisitions on the primary economic environment of the acquiring subsidiaries. To determine the functional currencies, management considered the currency that influences sales prices of the goods and services provided by the operations and the currency that influences the costs incurred by the operations. Where as a result of these primary factors, the functional currency was not obvious, management examined secondary factors such as the currency in which funds from financing are obtained, the currency in which cash receipts are retained and the levels of interactions with the parent company.

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Contingent liabilities

The Corporation reviews outstanding legal cases following developments in legal proceedings at each balance sheet date, considering, among other things: the nature of the litigation, claim or assessment; the legal processes and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought; the progress of the case (including progress after the date of the consolidated financial statements but before those statements are issued); the opinions or views of legal counsel and other advisors; experience of similar cases; and any decision of the Corporation’s management as to how it will respond to the litigation, claim or assessment. The Corporation assesses the probability of an outflow of resources to settle the obligation as well as if the outflow can be reliably measured. If these conditions are not met, no provision will be recorded and the relevant facts will be disclosed as a contingent liability. To the extent that the Corporation’s assessments at any time do not reflect subsequent developments or the eventual outcome of any claim, its future consolidated financial statements may be materially affected, with a favourable or adverse impact on the Corporation’s business, financial condition or results of operations. See note 28.

 

New accounting pronouncements - not yet effective

IFRS 16, Leases

In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”) replacing IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lease accounting model for lessees that requires on-balance sheet recognition and measurement. Lessees are required to recognize right-of-use assets representing the right to use the underlying assets and a lease liability representing the obligation to make lease payments. At the commencement date of a lease, a lessee will measure the present value of in substance fixed future lease payments as right-of-use assets and lease liabilities. Lessees will be required to recognize the interest expense related to recognizing the lease liability and the depreciation expense on the right-of-use asset. IFRS 16 substantially carries forward the lessor accounting requirements from IAS 17.

IFRS 16 became effective for the Corporation on January 1, 2019 for reporting periods after that date. The Corporation intends to adopt the standard by applying the requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at January 1, 2019 using a modified retrospective approach with no restatement of the comparative period.  

The Corporation will make use of the practical expedient available on transition to IFRS 16, that does not require it to reassess whether a past contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and related interpretations will continue to apply to the Corporation’s leases entered into or modified before January 1, 2019. The Corporation will also elect to use the exemptions provided by the standard on lease contracts with durations of 12 months or less as of the date of initial application and for leases of underlying assets with low value. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36. This will replace the previous requirement to recognize a provision for onerous lease contracts. However, as a transition practical expedient, the Corporation elected to rely on the assessment of whether leases are onerous by applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review.

In preparation for the first-time adoption of IFRS 16, the Corporation has also carried out an implementation project which has led management to conclude that that the new definition in IFRS 16 will not change significantly the scope of contracts that meet the definition of a lease for the Corporation.

On initial application of IFRS 16, for all leases for which the Corporation is a lessee, the Corporation expects to recognize a right-of-use asset in the range of $54.0 million to $58.0 million and a corresponding lease liability in the range of $57.0 million to $61.0 million in the consolidated statements of financial position, initially measured at the present value of the future lease payments.

Subsequent to initial application of IFRS 16, there will be a decrease in rent expense and an increase in depreciation and net finance charges. For short-term leases and leases of low-value assets, the Corporation will opt to recognize a lease expense on a straight-line basis as permitted by IFRS 16. For the year ending December 31, 2019, the corporation currently expects an decrease to net (loss) earnings in the form of a reduction to operating rental expenses of between $14.0 million and $16.0 million and an increase in depreciation expenses of between $12.5 million to $14.5 million, each as reported in general and administrative expenses on the consolidated statements of (loss) earnings as well as an increase to interest accretion expense of between $1.5 million to $2.5 million reported in net financing charges on the consolidated statements of (loss) earnings.

At the date of finalizing these consolidated financial statements, management are completing their reviews across certain non-material contracts. Some of these contracts may be identified as leases under IFRS 16 and if so, the right of use asset and lease liability may increase accordingly. As the corporation has no finance leases, there will be no impact as a result of the adoption of IFRS 16 with respect to the same.

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International Financial Reporting Interpretations Committee 23, Uncertainty over Income Tax Treatments (“IFRIC 23”)

In June 2017, the IASB published IFRIC 23, effective for annual periods beginning on or after January 1, 2019. The interpretation requires an entity to assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings and to exercise judgment in determining whether each tax treatment should be considered independently or whether some tax treatments should be considered together. The decision should be based on which approach provides better predictions of the resolution of the uncertainty. An entity also has to consider whether it is probable that the relevant authority will accept each tax treatment, or group of tax treatments, assuming that the taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so.

The Corporation intends to adopt the interpretation by applying the requirements retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at January 1, 2019 using a modified retrospective approach with no restatement of the comparative period. The Corporation believes that the adoption of the interpretation will not have a material impact to the consolidated financial statements.

 

 

IFRS 9, Financial Instruments

 

As referenced in note 2 above, the Corporation adopted IFRS 9 on January 1, 2018. As permitted by IFRS 9, the Corporation elected to continue to apply the hedge accounting requirements of IAS 39 rather than the new requirements of IFRS 9 and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7. The impact of the Corporation’s transition to IFRS 9 is summarized below.

 

Classification of financial assets

 

As of January 1, 2018, management assessed which business models apply to the financial assets held by the Corporation and classified those financial assets into the appropriate IFRS 9 categories as follows:

 

 

Impairment of financial assets

 

The Corporation holds three types of financial assets subject to the new expected credit losses model applicable under IFRS 9 as follows: (i) Trade receivables carried at amortized cost; (ii) Debt instruments carried at FVOCI; and (iii) Other financial assets carried at amortized cost.

 

The Corporation was required to revise its impairment methodology upon adoption of IFRS 9 for each of these classes of financial assets. The impact of the change in impairment methodology on the opening carrying amounts of these financial assets and the opening balance of retained earnings is disclosed in the measurement of financial instruments table below.

 

The nature of the Corporation’s business does not generate significant receivables and its investments are considered low risk as it pursues an investment strategy that only permits highly liquid investments with reputable financial institutions.

 

Financial liabilities – debt modification

 

The Corporation was required to adjust the carrying amount of its existing long-term debt in respect of historic debt modifications upon adoption of IFRS 9. The adjustment required in respect of each of the historic debt modifications was calculated as the difference between the present value of the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. This differs from the treatment under IAS 39, which required an adjustment to the prevailing effective interest rate on the loan rather than an adjustment to the carrying amount.

 

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The impact of the change in treatment of historic debt modifications on the carrying amount of long-term debt and the opening balance of retained earnings is disclosed in the measurement of financial instruments table below.

 

Measurement of financial instruments

 

The table below illustrates the result of adoption of IFRS 9 as of January 1, 2018, and the measurement impact on the respective categories of financial instruments:

 

 

The Corporation has not designated any financial assets that meet the criteria for classification at amortized cost or FVOCI as FVTPL on initial recognition. Prior to the application of IFRS 9, the Corporation did not have a material impairment allowance recorded in respect of financial instruments. The adoption of IFRS 9 did not have a material impact on the impairment allowance recorded.

 

IFRS 15, Revenue from contracts with customers

 

As referenced in note 2 above, the Corporation adopted IFRS 15, Revenue from contracts with customers on January 1, 2018. The adoption of IFRS 15 did not have a material impact on the timing and amount of revenue recognized by the Corporation.

 

The Corporation amended the presentation and disclosure of total revenue as a result of the requirement under IFRS 15 to show revenue from contracts with customers separately from other sources of revenue. See note 6. Notwithstanding the presentation and disclosure requirement of IFRS 15 for total revenue, the Corporation presents disaggregated revenue disclosures within the segmental information note including details by segment, major line of operation and geographical region. See note 7.

 

BetEasy

As previously announced on February 27, 2018, a subsidiary of the Corporation acquired a 62% controlling equity interest in BetEasy, which it increased to an 80% controlling equity interest on April 24, 2018 as described below. Pursuant to a shareholders agreement (the “Shareholders Agreement”), the Corporation is entitled to, among other things, appoint a majority of the directors on the board of directors of BetEasy. The Corporation therefore obtained control through acquiring the majority equity interest in combination with such rights. The non-controlling interest in BetEasy is measured at the proportionate share of net assets of the subsidiary. The Corporation believes the Australian Acquisitions provide the Corporation with a strong market position in Australia and creates an opportunity for cost synergies.

In connection with the 62% equity interest in BetEasy, the Corporation entered into a put option deed with an exercise price equal to the purchase price of the 62% equity interest in BetEasy, $117.7 million (AUD$150.0 million), plus interest. The put option was set to expire on the earlier of February 28, 2019 or the completion of BetEasy’s purchase of TSGA (the latter occurred on April 24, 2018 as described above). On expiration, the $0.6 million mark to market of this put option previously recognized was derecognized and recorded in general and administrative in the consolidated statements of (loss) earnings.

On April 24, 2018, the Corporation acquired a further 18% equity interest in BetEasy for a total consideration of $229.2 million, comprising cash of $48.2 million (AUD$63.2 million), newly issued Common Shares valued at $96.4 million, see note 24, and deferred contingent payment valued at $84.6 million (AUD$111.0 million) at acquisition, which is included in other long-term liabilities on the consolidated statements of financial position. See note 26 for details regarding the valuation of the deferred contingent payment. To finance the cash portion of the purchase price for the transaction, the Corporation obtained incremental financing as part of the April 2018 Amend and Extend. In addition, a shareholder loan was issued to certain non-controlling shareholders of BetEasy. See note 17. The acquisition of the additional equity interest in BetEasy had no impact on the fair values of the goodwill and intangible assets acquired on February 27, 2018; however, the excess of the total consideration compared to the carrying value of the 18% non-controlling interest was recognized directly in equity as acquisition reserve. See note 25.

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Also on April 24, 2018, in connection with the Corporation’s acquisition of the additional 18% interest in BetEasy, the Corporation entered into a non-controlling interest put-call option in relation to the 20% interest in BetEasy held by its minority interest shareholders, with an exercise price based on certain future operating performance conditions of the acquired business. This was determined to be a non-controlling interest put-call option with a variable settlement amount that can be settled in either cash or shares or a combination of both, and because the put-call option does not clearly grant the Corporation with present access to returns associated with the remaining 20% ownership interest, the Corporation recognized this put-call option as a net liability derivative. As at each of the acquisition date and December 31, 2018, the Corporation determined that the fair value of this non-controlling interest derivative was $nil.

The provisional amounts recognized in respect of the identifiable assets acquired and liabilities assumed upon acquisition of BetEasy are set out in the table below:

 

 

The fair value of the financial assets includes receivables with a fair value of $4.7 million and a gross contractual value of $7.8 million. The Corporation’s best estimate at the acquisition date of the contractual cash flows not to be collected is $3.1 million.

Included in the amounts recognized is a deferred tax liability of $19.4 million, comprised of a $26.1 million deferred tax liability related to acquired intangible assets as well as a deferred tax asset of $6.7 million wholly related to other temporary differences.

The main factors leading to the recognition of goodwill as a result of the acquisition are the value inherent in the acquired business that cannot be recognized as a separate asset under IFRS, including future incremental earnings potential resulting from further diversification of the Corporation’s business geographically and the expansion of its online betting product offerings. The goodwill is not deductible for tax purposes.

The Corporation has not completed its assessment or valuation of certain assets acquired and liabilities assumed in connection with the acquisition. Therefore, the information disclosed above for identifiable intangible assets, financial assets, financial liabilities and deferred tax liability is completed on a provisional basis and is subject to change based on further review of assumptions and if any new information is obtained about facts and circumstances that existed as of the acquisition date.

TSGA

On April 24, 2018, BetEasy acquired 100% of TSGA.

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The provisional amounts recognized in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:

 

 

The fair value of the financial assets includes receivables with a fair value of $16.7 million and a gross contractual value of $33.1 million. The Corporation’s best estimate at the acquisition date of the contractual cash flows not to be collected is $16.4 million.

Included in the amounts recognized is a deferred tax liability of $76.6 million, comprised of a $79.0 million deferred tax liability related to acquired intangible assets and a $0.4 million deferred tax liability related to other temporary differences as well as a deferred tax asset of $2.8 million wholly related to other temporary differences.

The main factors leading to the recognition of goodwill as a result of the acquisition are the value inherent in the acquired business that cannot be recognized as a separate asset under IFRS, including future incremental earnings potential resulting from further diversification of the Corporation’s business geographically and the expansion of its online betting product offerings. The goodwill is not deductible for tax purposes.

Acquisition-related costs directly related to the Australian Acquisitions were $11.5 million and were included within general and administrative expenses in the consolidated statements of (loss) earnings.

The Corporation has not completed its assessment or valuation of certain assets acquired and liabilities assumed in connection with the acquisition. Therefore, the information disclosed above for identifiable intangible assets, financial assets, financial liabilities and deferred tax liability is completed on a provisional basis and is subject to change based on further review of assumptions and if any new information is obtained about facts and circumstances that existed as of the acquisition date. During the quarter ended September 30, 2018, the Corporation made an adjustment totalling $31.7 million as a reduction to the amounts recognized as non-controlling interest in relation to the acquisition of TSGA with a corresponding reduction to goodwill.

During the third quarter, the Corporation substantially completed its migration and integration of TSGA into BetEasy. As a result, revenue and earnings cannot be attributed to the individual acquired entities for the period subsequent to the migration and integration. On a combined basis, BetEasy contributed $196.9 million of revenue and a loss of $16.7 million to the Corporation for the period between the respective dates of acquisition and December 31, 2018. BetEasy revenue has been reported in Betting revenue in the Australia segment. See note 7.

SBG

As previously announced, on July 10, 2018, the Corporation completed the SBG Acquisition, acquiring 100% of SBG. The Corporation believes that this acquisition improves the Corporation’s revenue diversity across its major lines of operations; increases the Corporation’s presence in locally regulated or taxed markets; develops sports betting as a second customer acquisition channel and creates an opportunity to cross-sell customers across multiple lines of operations; and enhances the Corporation’s products and technology.

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The provisional amounts recognized in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:

 

 

The fair value of the financial assets includes receivables with a fair value of $2.9 million and a gross contractual value of $3.0 million. The Corporation’s best estimate at the acquisition date of the contractual cash flows not to be collected is $0.1 million.

Financial liabilities include assumed liabilities for long-term debt and shareholder loans payable of $1.08 billion and $663.4 million, respectively, SBG preferred shares of $10.9 million. Included in derivatives are cross-currency swap and interest rate swap instruments with an aggregate fair value of $(5.0) million. The Corporation redeemed the preferred shares and repaid the long-term debt and shareholder loans payable immediately upon closing of the SBG Acquisition. Subsequently during the quarter, the applicable cross-currency and interest rate swaps were settled for a net cash payment of $1.0 million.

Included in the amounts recognized is a deferred tax liability of $514.3 million, comprised of $515.7 million deferred tax liability related to acquired intangible assets and deferred tax assets of $1.0 million related to plant and equipment and $0.4 million related to other temporary differences.

As at July 10, 2018, SBG had future financial commitments for marketing, technology and IT contracts of $110.2 million.

The main factors leading to the recognition of goodwill as a result of the acquisition are the value inherent in the acquired business that cannot be recognized as a separate asset under IFRS, including future incremental earnings potential resulting from further diversification of the Corporation’s business geographically, expansion of its online betting, primarily sports betting, gaming and other product offerings, the ability to cross-sell across these product offerings, and the ability to achieve cost synergies across the Corporation. The goodwill is not deductible for tax purposes.

Acquisition-related costs directly related to the SBG Acquisition were $42.8 million and were included within general and administrative expenses on the consolidated statements of (loss) earnings.

SBG contributed $394.1 million of revenue and a loss of $121.9 million to the Corporation for the period between the date of acquisition and December 31, 2018. SBG revenue has been reported as part of the United Kingdom segment across all revenue categories in the segmental reporting. See note 7.

The Corporation has not completed its assessment or valuation of certain assets acquired and liabilities assumed in connection with the acquisition. Therefore, the information disclosed above for identifiable intangible assets, financial assets, financial liabilities and deferred tax liability is completed on a provisional basis and is subject to change based on further review of assumptions and if any new information is obtained about facts and circumstances that existed as of the acquisition date.

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Other

During the year ended December 31, 2018, a subsidiary of the Corporation also acquired 100% of the equity interests in two subsidiaries, Publipoker S.R.L. and Keiem Ltd, for a total consideration, net of cash acquired, of $2.6 million, satisfied by cash consideration of $1.0 million and deferred consideration of $1.6 million. The balance outstanding on the deferred consideration as at December 31, 2018 is $0.3 million.

If the above noted acquisitions had been completed on the first day of the financial year, the Corporation’s revenue for the year ended December 31, 2018 would have been $2.6 billion and net loss for the year ended December 31, 2018 would have been $188.0 million.

The following tables shows acquired intangibles by asset class:

 

 

 

 

Revenue from contracts with customers have not been further disaggregated as the nature of the revenue streams, contract duration and timing of transfer of services are all largely homogenous. For further information regarding revenue, including segment revenue by major line of operations and geographic region. See note 7.

As at December 31, 2018, there are no significant contract assets or liabilities and no significant unsatisfied performance obligations. In addition, there are no significant capitalized costs to obtain a contract.

 

As a result of its previously announced Australian Acquisitions and SBG Acquisition, the Corporation revised the composition of its reporting segments and the manner in which it has reported its operating results beginning with the unaudited interim condensed consolidated financial statements for the second quarter of 2018. The Corporation believes that the new presentation better reflects its current and expected management and operational structure. Earlier periods have been presented in a manner consistent with the revised segmentation. The segmentation reflects the way the CODM evaluates performance of, and allocates resources within, the business.

The CODM considers the Corporation’s business from both a geographic and product offering or lines of operation perspective. Giving effect to the reporting segment changes, for the years ended December 31, 2018 and 2017, the Corporation had three reportable segments: International, United Kingdom and Australia, as well as a Corporate cost center. Revenue within these operating segments is further divided into the Poker, Gaming, Betting and Other lines of operation, as applicable. The CODM receives geographic and lines of operation revenue information throughout the year for the purpose of assessing their respective performance. Certain costs are included in Corporate. “Corporate” in itself is not a reporting segment, but it comprises costs which are not directly allocable to any of the operating segments or relate to a corporate function (tax and treasury).

Further, each reporting segment incurs certain costs, which are not segregated among major lines of operations within each reporting segment as they share the same office infrastructure, the same workforce and the same administrative resources. The Corporation cannot develop or produce reports that provide the true costs by major lines of operations within each reporting segment without unreasonable effort or expense.

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The primary measure used by the CODM for the purpose of decision making and/or evaluation of a segment is Adjusted EBITDA. The Corporation defines Adjusted EBITDA as net earnings before financial expenses, income taxes expense (recovery), depreciation and amortization, stock-based compensation, restructuring, net earnings (loss) on associate and certain other items as set out in the reconciliation table below.

However, the CODM also uses other key measures as inputs, including, without limitation, revenue and capital expenditures, to supplement the decision-making process.

Segmental net earnings for the year ended December 31, 2018:

 

 

Segmental net earnings for the year ended December 31, 2017:

 

 

* Adjusted EBITDA is used internally by the CODM when analyzing underlying segment performance.

 

** The Corporation has excluded from its consolidated results $2.0 million of Other revenue included in the International segment related to certain non-gaming related transactions with the United Kingdom segment. A corresponding exclusion in the consolidated results is recorded to sales and marketing expense in the United Kingdom segment.

 

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A reconciliation of Adjusted EBITDA to Net earnings (loss) is as follows:

 

 

The distribution of the Corporation’s assets by reporting segment is as follows:

 

 

The distribution of some of the Corporation’s non-current assets (goodwill, intangible assets and property and equipment) by geographic region is as follows:

 

 

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The Corporation also evaluates revenue performance by geographic region based on the primary jurisdiction where the Corporation is licensed or approved to offer, or offers through third party licenses or approvals, its products and services. The following tables set out the proportion of revenue attributable to each gaming license or approval (as opposed to the jurisdiction where the customer was located) that either generated a minimum of 5% of total consolidated revenue for the year ended December 31, 2018 or 2017, or that the Corporation otherwise deems relevant based on its historical reporting of the same or otherwise:           

 

 

 

* The Corporation has excluded from its consolidated results $2.0 million of Isle of Man revenue included in the International segment related to certain non-gaming related transactions with the United Kingdom segment. A corresponding exclusion in the consolidated results is recorded to sales and marketing expense in the United Kingdom segment.

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¹ See notes 5 and 26 for details regarding the recognition and measurement of the deferred contingent payment.

² See notes 17, 19 and 26 for details regarding the recognition and measurement of the Embedded Derivative (as defined below).

During the year ended December 31, 2017, the Corporation received $5.8 million in indemnification proceeds from the sellers of Stars Interactive Group for gaming duty, professional fees and taxes owed for periods prior to the Stars Interactive Group Acquisition. The amounts received from the sellers were classified as gaming duty, professional fees and income taxes. In addition, the Corporation received a refund of $2.9 million in taxes and penalties from the Belgian tax authorities, and insurance indemnification proceeds of $2.9 million in respect of Autorité des marchés financiers (AMF) and other investigation professional fees. During the year ended December 31, 2018, the Corporation received an additional $8.0 million in insurance indemnification proceeds in respect of AMF and other investigation professional fees. The amount received from the Belgian tax authorities was classified as income taxes and the insurance indemnification was classified as professional fees.

The Corporation participates in defined contribution retirement plans for all qualifying employees, as applicable, across its segments. The assets of the plans are held separate from those of the Corporation in funds under the control of the Corporation’s pension providers. The obligations of the Corporation are limited to make the specified contributions in accordance with the plans. Included within salaries and wages is $9.2 million recorded in respect of these plans.

 

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Details of income tax expense were as follows:

 

 

The Corporation’s applicable Canadian statutory tax rate is equal to the Federal and Provincial combined tax rate for the period applicable in the jurisdiction within Canada where the Corporation’s head office is registered (i.e., Ontario where the provincial tax rate is 11.5%, and Quebec, where the provincial tax rate is 11.7%) which resulted in a decrease of 0.2% in the statutory tax rate in 2018 compared to the prior year. The Corporations primary operations were previously in the Isle of Man and Malta and subsequent to the Australian Acquisitions and SBG Acquisition, are now also in Australia and the United Kingdom. Income taxes reported differ from the amount computed by applying the Canadian statutory rates to earnings before income taxes primarily due to differences in statutory rates across the countries where the Corporation operates and where the Corporation is incorporated, among other factors. The reconciliation is as follows:

 

 

The Corporation’s effective income tax rate for the year ended December 31, 2018, was 0.9% (December 31, 2017 – 9.5%) The income tax recovery for the year ended December 31, 2018 includes $27.3 million (December 31, 2017 – nil) in relation to the income tax recovery on the amortization expense of acquired intangible assets from the Australian Acquisitions and the SBG Acquisition.

 

The Corporation’s income taxes for the current year ended December 31, 2018 were impacted by the tax recovery on amortization of intangible assets and the geographic diversity of its taxable earnings. The Corporation expects that this will continue in future periods following the Australia Acquisitions and the SBG Acquisition, which have operations primarily in Australia and the United Kingdom, respectively, where statutory corporate income tax rates are higher than the corporate income tax rates in the Isle of Man and Malta, where the Corporation primarily operated from prior to these acquisitions.

During the year ended December 31, 2017, the Corporation received notification of a proposed tax assessment from the Canadian tax authorities relating to transfer pricing. The proposed assessment covered periods prior to the Stars Interactive Group Acquisition covering the 2003 to 2007 tax years. For the year ended December 31, 2017 the Corporation recorded a tax provision based on the proposed assessments for both Federal and Provincial tax of $26.5 million including interest. During the year ended December 31, 2018 the Corporation received the Federal and Provincial tax assessments and submitted an objection to the relevant authorities regarding the same. The Corporation intends to vigorously defend its position against the assessments. During the year ended December 31, 2018 the provision was reduced to $24.2 million as a result of adjustments for interest, foreign exchange movements and a pre-payment made in relation to the provincial assessment.

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Deferred Tax

Recognized deferred tax assets and liabilities

Significant components of the Corporation’s deferred income tax asset balance at December 31, 2018 and 2017 are as follows:

 

 

Significant components of the Corporation’s deferred income tax liability balance at December 31, 2018 and 2017 are as follows:

 

 

* Deferred taxes by category above are presented on a gross basis. The statements of financial position present deferred taxes net for amounts included within the same jurisdiction.

Unrecognized deferred tax assets

Deferred tax assets have not been recognized in respect of the items shown below. The amounts shown are the gross temporary differences and to calculate the potential deferred asset it is necessary to multiply the amounts by the tax rates in each case.

 

 

Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available in these jurisdictions against which the Corporation can utilize the benefit from them.

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Included in tax losses not recognized as at December 31, 2018 are Canadian non-capital tax losses of $129.2 million (December 31, 2017 - $100.2 million) that may be applied against earnings for up to 20 years from the end of the year the losses were generated and the first year of expiry is 2034 for $13.9 million of the carried forward tax losses. Tax losses also include foreign subsidiary non-capital losses of $1.49 billion (December 31, 2017 - $1.19 billion) that may be applied against future years. The majority of these losses of $1.44 billion (December 31, 2017 - $1.17 billion) can be carried forward for up to 9 years from the end of the year the tax losses were generated and the first year of expiry is 2023 for $401.5 million of the carried forward tax losses.

As a result of exemptions from taxation (corporate tax and withholding tax) applicable to dividends from subsidiaries, there are no significant taxable temporary differences associated with investments in subsidiaries, branches, associates and interests in joint arrangements and no material deferred tax liability arises on unremitted earnings totaling $1.87 billion (December 31, 2017 - $1.13 billion).

 

The following table sets forth the computation of basic and diluted earnings per Common Share for the following periods:

 

 

* The effect of dilutive securities for instruments that resulted in the issuance of Common Shares during the years ended December 31, 2018 and 2017 is included for the period during the applicable year prior to the issuance of the related Common Shares.

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For the year ended December 31, 2018:

 

 

For the year ended December 31, 2017:

 

 

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Impairment Testing

During the year ended December 31, 2018 the Corporation recognized impairment losses (classified in general and administrative expenses) of $4.8 million for deferred development costs and other intangibles, related to discontinued development and other projects within the International and United Kingdom segments and $0.8 million for Goodwill in certain of the Corporation’s subsidiaries within the International segment (December 31, 2017 - $nil).

The Corporation performed an annual impairment test for its operations in connection with the preparation of its consolidated financial statements for the year ended December 31, 2018. Goodwill is monitored at the operating segment and this is consistent with the lowest level of CGU except as noted below.

 

 

* The United Kingdom segment includes a non-significant CGU which includes the indefinite lived brand as noted in the table above. The Corporation has not identified any impairment in relation to the indefinite lived brand.

The recoverable amount of each CGU tested for impairment is determined from value in use calculations which are categorized as Level 3 fair value measures and use discounted cash flow projections. The key assumptions for the value in use calculations are the future cash flow and growth projections (including estimates of future capital expenditures), discount rates, and perpetual growth rates. Management estimates discount rates using post-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU, including economic risk assumptions and estimates of the likelihood of achieving forecasted cash flow results. The pre tax discount rate is then inferred by recalculation. The Corporation considers a range of reasonably possible amounts to use for key assumptions and applies amounts that represent management’s best estimate of future outcomes.

The Corporation prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years.

The cash flows are discounted based on the discount rates as presented below. The estimated perpetual growth rates are based on independent country specific market reports for online gaming growth projections.

The following table shows key assumptions used in the value in use calculations:

 

 

Based on the impairment test performed, the recoverable amount of the CGUs were in excess of their carrying amount and accordingly, there is no impairment of the carrying value of the goodwill (except as noted above in respect of in certain of the Corporation’s subsidiaries).

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The Corporation believes that a reasonable change to the key assumptions applied to International would not cause its carrying value to exceed its recoverable amounts. With respect to the United Kingdom and Australia, the recoverable amount exceeds the carrying amount by $111 million and $152 million, respectively. The impairment assessment is highly sensitive to reasonably possible changes in a number of key assumptions in the value in use calculation. The following table shows the changes to key assumptions used in the impairment review that would be required for the carrying amount to equal the recoverable amount:

 

 

A combination of reasonably possible changes in assumptions as set out in the table above could result in impairment in either or both of the United Kingdom and Australia.

 

For the year ended December 31, 2018:

 

 

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For the year ended December 31, 2017:

 

 

The Corporation held the following investments:

 

 

Investments relate primarily to customer deposits held in accounts segregated from investments held for operational purposes. Investments held in relation to customer deposits are liquid investments and are classified as current assets consistent with the current classification of customer deposits to which the investments relate. Management’s investment strategy for the portfolio results in many of the bonds being held to maturity. As of December 31, 2018, Customer deposits were covered by $103.2 million in investments and $328.2 million in cash.

There were no impairments recognized on investments during the year ended December 31, 2018 (December 31, 2017: $nil). See note 29 for details on credit risk.

During the year ended December 31, 2017, the Corporation completed the disposition of all its securities of NYX Gaming Group Limited (“NYX Gaming Group”) for net cash proceeds of $27.9 million resulting in a gain of $14.0 million. During the year ended December 31, 2017, the Corporation also completed the sale of its ordinary shares in Jackpotjoy plc (LSE: JPJ) for net cash proceeds of $59.8 million resulting in a gain of $15.0 million. These gains were recorded within loss (gain) on disposal of investments and other assets included in general and administrative expenses

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The Corporation’s investments held by maturity date are as follows:

 

 

For the year ended December 31, 2018, the Corporation recognized gains (losses) from investments as follows:

 

 

Investment income from bonds includes interest income and premium and discount amortization. There was neither investment income nor gains or losses in the year ended December 31, 2018 for available for sale funds or equity in quoted companies.

Subsidiaries

As at December 31, 2018, the Corporation had the following significant subsidiaries:

 

 

 

The Corporation’s accounts receivable balances at December 31, 2018 and December 31, 2017 consist of the following;

 

 

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Cash and cash equivalents

Cash and cash equivalents – operational includes an amount of $40.1 million (2017 - $24.7 million) held by a subsidiary of the Corporation that is subject to exchange controls in the country of operation. This balance is not available for general use by the Corporation or any of its other subsidiaries.

Restricted cash advances and collateral

Restricted cash held by the Corporation consists of the following components:

 

 

* As at December 31, 2018, $5 million of restricted cash was collateralized as part of the Kentucky Bond Collateral (as defined in note 28 below). The Kentucky Bond Collateral will be held until a court order is issued authorizing the release of the bonds.

 

 

 

Prepaid royalties include prepaid revenue share paid to business partners. Prepaid expenses are included within selling and general and administrative expenses when recognized as an expense. Deferred financing costs relate to capitalized transaction costs in respect of the Revolving Credit Facility.

 

 

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The following is a summary of long-term debt outstanding at December 31, 2018, and 2017 (all capitalized terms used in the table below relating to such long-term debt are defined below in this note):

 

 

During the year ended December 31, 2018, the Corporation incurred the following interest on its then-outstanding long-term debt excluding its loan payable to non-controlling interests which is non-interest bearing:

 

 

During the year ended December 31, 2017, the Corporation incurred the following interest on its then-outstanding long-term debt:

 

* The effective interest rate calculation excludes the impact of the debt extinguishments in respect of the April 2018 Amend and Extend and the repayment of the previous first lien term loans as well as the impact of the Swap Agreements.

** Interest accretion for the year ended December 31, 2018 includes a loss on debt extinguishment of $147.0 million included within net financing charges in respect of the amendment and extension and subsequent repayment of the Corporation’s prior first lien term loans.

 

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The Corporation’s debt balance for the year ended December 31, 2018 was as follows:

 

The Corporation’s debt balance for the year ended December 31, 2017 was as follows:

 

 

* Adjustments to amortized cost includes transaction costs incurred on the issuance or incurrence of each of the financial instruments and, with respect to the Senior Notes (as defined below), the bifurcation of embedded features in 2018 as described below and debt forgiveness in relation to the loan payable to non-controlling interests. In addition, unamortized deferred financing costs of $6.8 million were reclassified to prepaid expenses and other non-current assets on the consolidated statements of financial position following the repayment of $100.0 million previously drawn on the Revolving Facility.

** Interest accretion represents interest expense calculated at the effective interest rate less interest expense calculated at the contractual interest rate and is recorded in net financing charges in the consolidated statements of (loss) earnings.

 

As at December 31, 2018, the contractual principal repayments of the Corporation’s outstanding long-term debt over the next five years amount to the following:

 

 

As previously disclosed, on July 10, 2018, the Corporation completed the SBG Acquisition. To finance the cash portion of the purchase price, repay the Corporation’s previous first lien term loans and repay SBG’s existing long-term debt, which was assumed by the Corporation as part of the acquisition, the Corporation used existing cash resources and raised $4.567 billion in First Lien Term Loans, $1.00 billion in Senior Notes (each as defined below) and $621.8 million of net proceeds (before expenses), excluding the overallotment, from the issuance of additional Common Shares as a result of the Equity Offering (as defined below). The Corporation also obtained a new Revolving Facility (as defined below) of $700.0 million, of which it had drawn $100 million as of completion of the acquisition (collectively with the foregoing, the “SBG Financing”). The debt portion of the SBG Financing is described below. For further details on the Equity Offering portion of the SBG Financing, see note 24.

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Revolving Facility

On July 10, 2018, as part of the SBG Financing, the Corporation replaced its previous revolving facility with a new first lien revolving facility of $700 million (the “Revolving Facility”). Maturing on July 10, 2023, the Revolving Facility includes a margin of 3.25% for borrowings which is subject to leverage-based step-downs. The commitment fee on the Revolving Facility varies from 0.250% to 0.375% based on first lien leverage. Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of a default and compliance with certain representations and warranties. The Revolving Facility requires, subject to a testing threshold, that the Corporation comply on a quarterly basis with a maximum net first lien senior secured leverage ratio of 6.75 to 1.00.

The Revolving Facility can be used for working capital needs and for general corporate purposes. As at December 31, 2018 and December 31, 2017 there were no amounts outstanding under the Revolving Facility and the Corporation’s previous revolving facility, respectively. The Corporation had $74.2 million of letters of credit issued but undrawn as of December 31, 2018. Availability under the Revolving Facility as of December 31, 2018 was $625.8 million.

First Lien Term Loans

On July 10, 2018, as part of the SBG Financing, the Corporation repaid its previous first lien term loans and issued new First Lien Term Loans of $3.575 billion priced at LIBOR plus 3.50% (the “USD First Lien Term Loan”) and new EUR first lien term loans of €850 million priced at EURIBOR plus 3.75% (the “EUR First Lien Term Loan” and, together with the USD First Lien Term Loan, the “First Lien Term Loans”), each with a maturity date of July 10, 2025 and a LIBOR and EURIBOR floor, as applicable, of 0%. Starting on the last day of the first fiscal quarter ending after July 10, 2018, the USD First Lien Term Loan requires scheduled quarterly principal payments in amounts equal to 0.25% of the aggregate principal amount of the USD First Lien Term Loan, with the balance due at maturity. There is no amortization on the EUR First Lien Term Loan and the principal is due at maturity.

The Corporation, its lenders, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties also entered into a new credit agreement (the “Credit Agreement”) for the First Lien Term Loans and the Revolving Facility to, among other things, reflect the foregoing transactions and add certain operational and financial flexibility, particularly as it relates to the Corporation on a combined basis following the SBG Acquisition.

The Credit Agreement limits Stars Group Holdings B.V. and its subsidiaries’ ability to, among other things, (i) incur additional debt, (ii) grant additional liens on their assets and equity, (iii) distribute equity interests and/or distribute any assets to third parties, (iv) make certain loans or investments (including acquisitions), (v) consolidate, merge, sell or otherwise dispose of all or substantially all assets, (vi) pay dividends on or make distributions in respect of capital stock or make restricted payments, (vii) enter into certain transactions with affiliates, (viii) change lines of business, and (ix) modify the terms of certain debt or organizational documents, in each case subject to certain exceptions. The Credit Agreement also provides for customary mandatory prepayments, including a customary excess cash flow sweep if certain conditions are met.

Senior Notes

Also in connection with the SBG Financing, two of the Corporation’s subsidiaries, Stars Group Holdings B.V. and Stars Group (US) Co-Borrower, LLC (the “Issuers”), issued 7.00% Senior Notes due 2026 (the “Senior Notes”) on July 10, 2018 at par in an aggregate principal amount of $1.00 billion. The Senior Notes mature on July 15, 2026. Interest on the Senior Notes is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2019. The Senior Notes are guaranteed by each of the Issuers’ restricted subsidiaries that guarantees the Revolving Facility. The Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future senior unsecured indebtedness. The Senior Notes include the following features which were collectively identified as the Embedded Derivative (as defined below) that required bifurcation from the carrying value of the Senior Notes.

The fair value of the Embedded Derivative at issuance of the Senior Notes and at December 31, 2018 was $17.7 million and $11.6 million, respectively. See notes 19 and 26.

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The Senior Notes include, among other terms and conditions, limitations on the Issuers’ ability to create, incur or allow certain liens; create, assume, incur or guarantee additional indebtedness of certain of the Issuers’ subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Issuers’ and their subsidiaries’ assets, to another person.

In connection with the acquisition of a 62% equity interest in BetEasy, the Corporation acquired financial liabilities of $59.2 million, which included a loan of $15.5 million (AUD$19.7 million) from the minority shareholders of BetEasy. During the year ended December 31, 2018 a subsidiary of the Corporation repaid $6.2 million (AUD$8.2 million) of such loan and entered into an agreement with such minority shareholders to forgive and discharge $8.6 million (AUD$11.5 million) of the outstanding loan balance.

As previously reported, on March 6, 2018, a subsidiary of the Corporation entered into agreement with the holders of the non-controlling interest in BetEasy to increase its equity interest from 62% to 80% and for BetEasy to acquire TSGA. According to the agreement, the non-controlling interest of BetEasy made a loan of $35.1 million (AUD$47.4 million) and equity contribution of $12.1 million (AUD$15.8 million). During the year ended December 31, 2018, the non-controlling interest provided an additional shareholder loan of $1.8 million (AUD$2.5 million). As at December 31, 2018, the outstanding loan balance was $36.1 million (AUD$49.9 million). The loan is non-interest bearing and repayable on the earlier of 9 years and 364 days from the date of advance and the date of completion of the 20% put-call option. See note 19.

On April 6, 2018, the Corporation successfully increased, repriced and extended its previous first lien term loans and previous revolving facility and repaid its USD second lien term loan. The transaction was recorded as an extinguishment for accounting purposes. No termination costs were incurred. Subsequently, in connection with the SBG Acquisition and SBG Financing, on July 10, 2018, the Corporation repaid its previous first lien term loans, repaid the existing long-term indebtedness of SBG, entered into the new Credit Agreement with respect to First Lien Term Loans and Revolving Facility, and issued the Senior Notes. The transaction was recorded as an extinguishment for accounting purposes. No termination costs were incurred upon repayment.

 

The Corporation’s objective in managing capital is to ensure it has sufficient liquidity to manage its business and growth objectives while maximizing return to shareholders through the optimization of the use of debt and equity. Liquidity is necessary to meet the Corporation’s existing general capital needs, fund the Corporation’s growth and expansion plans, and undertake certain capital markets activities, including the repayment of debt.

The Corporation has historically met its liquidity needs through cash flow generated from operations and capital markets activities, including the incurrence and issuance of debt and issuance of capital stock. The Corporation’s current objective is to meet all of its current liquidity and existing general capital requirements from the cash flow generated from operations.

The capital structure of the Corporation and its subsidiaries consists of long-term debt, which is offset by cash balances, and total equity attributable to shareholders. The Corporation’s capital management objectives are to optimize its capital structure and cost of capital. The Corporation intends to deleverage by focusing on improving profitability and repaying of debt.

For additional information regarding the Corporation’s liquidity risks, see note 29.

 

19.DERIVATIVES AND HEDGE ACCOUNTING

The Corporation is exposed to interest rate and currency risk, refer to note 29. The Corporation uses derivative financial instruments for risk management purposes and anticipates that such instruments will mitigate interest rate and currency risk, as applicable. As such, any change in cash flows associated with derivative instruments is expected to be offset by changes in cash flows related to the hedged position. 

Upon completion of the SBG Acquisition, the Corporation made a net cash payment of $1.0 million to unwind and settle certain previously existing cross-currency swap agreements and interest rate swap agreements related to the hedging of SBG’s previously outstanding long-term debt that were no longer required following the repayment of the same.

Subsequent to the SBG Financing, and as part of managing the Corporation’s exposure to foreign exchange risk and interest rate risk, the Corporation entered into cross-currency interest rate swap agreements and interest rate swap agreements (collectively, the “Swap Agreements”), each as discussed below. At the time of entering into the Swap Agreements, the Corporation made a cash payment of $61.1 million to unwind and settle its previously existing swap agreements (the “Previous Swap Agreements)” as discussed below.

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Derivatives

Swap Agreements

During the year ended December 31, 2018, a subsidiary of the Corporation entered into USD-EUR cross-currency interest rate swap agreements (the “EUR Cross-Currency Interest Rate Swaps”) with a notional amount of €1.99 billion ($2.33 billion), which fix the USD to EUR exchange rate at 1.167 and fix the Euro interest payments at an average interest rate of 3.6%, as well as EUR-GBP cross-currency interest rate swap agreements (the “GBP Cross-Currency Interest Rate Swaps”) with a notional amount of £1.00 billion (€1.12 billion), which fix the EUR to GBP exchange rate at 0.889 and fix the GBP interest payments at an average interest rate of 5.4%. The cross-currency interest rate swaps have a profile that amortizes in line with the USD First Lien Term Loan and each are set to mature in July 2023. The Corporation also entered into an amortizing USD interest rate swap agreement (the “Interest Rate Swap”) with a notional amount of $700 million, which is set to mature in July 2023, and swaps USD three-month LIBOR to a fixed interest rate of 2.82%.

Previous Swap Agreements

The Previous Swap Agreements hedged the interest rate and foreign exchange risk on the Corporation’s previous first lien term loans. Therefore, in connection with the repayment of the previous first lien term Loans, the Corporation unwound and settled the remaining USD notional principal of $1.39 billion related to the Previous Swap Agreements for a cash payment of $61.1 million.

Embedded Derivative

See note 17 for a discussion of the features embedded in the Senior Notes that the Corporation bifurcated as it determined that the features were derivatives to be classified and recorded at fair value through profit or loss.

The fair value of the Embedded Derivative at issuance of the Senior Notes and at December 31, 2018 was $17.7 million and $11.6 million, respectively. The fair value of the Embedded Derivative was determined using an interest rate option pricing valuation model. The key assumptions include the implied credit spread of 3.8% at issuance and 4.6% at December 31, 2018. The Embedded Derivative is categorized as a Level 3 within the fair value hierarchy. The Corporation did not account for the Embedded Derivative as a qualifying hedge.

Unsettled bets

Unsettled bets represent bets that are staked but the event to which the bet relates have not yet concluded. See note 2 for further details regarding Betting revenue. The principal assumption used in the fair value determination of unsettled bets is the anticipated gross win margin on the outcome of the events to which the bets relate. The Embedded Derivative is categorized as a Level 3 within the fair value hierarchy.

Put and call options on 20% non-controlling interest in BetEasy

On April 24, 2018, in connection with the Corporation’s acquisition of the additional 18% interest in BetEasy, the Corporation entered into a non-controlling interest put-call option in relation to the 20% interest in BetEasy held by its minority interest shareholders, with an exercise price based on certain future operating performance conditions of the acquired business. This was determined to be a non-controlling interest put-call option with a variable settlement amount that can be settled in either cash or shares or a combination of both, and because the put-call option does not clearly grant the Corporation with present access to returns associated with the remaining 20% ownership interest, the Corporation recognized this put-call option as a net liability derivative. As at each of the acquisition date and December 31, 2018, the Corporation determined that the fair value of this non-controlling interest derivative was $nil as the fundamentals of the underlying business operations remain consistent with the acquisition date.

Deal contingent forwards

In connection with the SBG Acquisition and the Australian Acquisitions, to economically hedge its risk of foreign exchange fluctuations leading up to the acquisitions, the Corporation entered into deal contingent forward contracts. At the time of completion of the acquisitions, the Corporation settled the deal contingent forwards and recognized an aggregate realized loss of $61.5 million included in foreign exchange within the general and administrative category in the consolidated statements of (loss) earnings. The Corporation did not account for the deal contingent forward contracts as qualifying hedges under IAS 39.

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The following table summarizes the fair value of derivatives as at December 31, 2018 and 2017:

 

 

* The unsettled bets liability is recorded in accounts payable and other liabilities on the consolidated statement of financial position as at December 31, 2017 and is recorded in derivatives on the consolidated statement of financial position as at December 31, 2018.

 

Hedge Accounting

The Corporation’s exposure to market risks including interest rate risk (such as benchmark interest rates) and foreign exchange risk and its approach to managing those risks is discussed in note 29.

Cash flow hedge accounting

In accordance with the Corporation’s current risk management strategy, the Corporation entered into the Swap Agreements to mitigate the risk of fluctuation of coupon and principal cash flows due to changes in foreign currency rates and interest rates related to the USD First Term Lien Loan.

The Corporation assesses hedge effectiveness by comparing the changes in fair value of a hypothetical derivative reflecting the terms of the debt instrument issued due to movements in the applicable foreign currency exchange rate and benchmark interest rate with the changes in fair value of the cross-currency interest rate swaps and interest rate swaps used to hedge the exposure, as applicable. The Corporation uses the hypothetical derivative method to determine the changes in fair value of the hedged item. The Corporation has identified the following possible sources of ineffectiveness in its cash flow hedge relationships:

The EUR Cross-Currency Interest Rate Swaps and the Interest Rate Swap were designated in cash flow hedge relationships to hedge the foreign exchange risk and/or interest rate risk on the USD First Lien Term Loan bearing a minimum floating interest rate of 3.5% (USD three-month LIBOR plus a 3.5% margin, with a LIBOR floor of 0%).

As at December 31, 2018, $11.6 million of accumulated other comprehensive loss is included in the cash flow hedging reserve (see note 25) related to de-designated cash flow hedges and is reclassified to the statements of (loss) earnings as the hedged cash flows impact (loss) earnings.

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Net investment hedge accounting

In accordance with the Corporation’s current risk management strategy, the Corporation designates certain cross currency interest rate swap contracts and the carrying amount of certain debt instruments in net investment hedging relationships to mitigate the risk of changes in foreign currency rates with respect to the translation of assets and liabilities of subsidiaries with foreign functional currencies.

Upon entering into the GBP Cross-Currency Interest Rate Swaps, the Corporation designated these instruments as a hedge of the forward foreign exchange risk of its net investment in its GBP foreign operations. The Corporation assesses hedge effectiveness by comparing the changes in fair value of the net assets designated, due to movements in the foreign currency rate with the changes in fair value of the hedging instruments used to hedge the exposure. The Corporation uses the hypothetical derivative method to determine the changes in fair value of the hedged item. The only source of ineffectiveness is the effect of the counterparty and the Corporation’s own credit risk on the fair value of the derivative, which is not reflected in the fair value of the hypothetical derivative.

Upon completion of the SBG Financing, the Corporation designated the carrying amount of the USD First Lien Term Loan (excluding the carrying amount subject to the Swap Agreements) and the carrying amount of the Senior Notes as a hedge of the spot foreign exchange risk of its net investment in its USD functional subsidiaries. The Corporation assesses hedge effectiveness by comparing the currency and the carrying amount of the USD First Lien Term Loan with the currency and the net assets of its USD functional subsidiaries.

As at December 31, 2018, $60.6 million of accumulated other comprehensive income is included in the cumulative translation reserve (see note 25) related to de-designated net investment hedges and is reclassified to the statements of (loss) earnings upon disposition of the net investment in the applicable foreign subsidiaries.

Effects of hedge accounting

The following tables presents the effects of cash flow hedges and net investment hedges on the Corporation’s financial position and performance.

 

 

* Hedge ineffectiveness is recorded within net financing charges on the consolidated statements of (loss) earnings.

** For cash flow hedges that address interest rate risk and/or foreign currency exchange risk, the amount reclassified from accumulated other comprehensive income (loss) to earnings is recorded within interest expense included in net financing charges or foreign exchange (gain) loss included in general and administrative expenses on the consolidated statements of (loss) earnings.

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Reconciliation of accumulated other comprehensive income (loss):

 

 

* Net changes in other comprehensive income (loss) is recorded through the cash flow hedging reserve. See note 25.

** Net changes in other comprehensive income (loss) is recorded through the cumulative translation reserve. See note 25.

 

The Corporation as lessee and other contractual commitments

At December 31, 2018, the Corporation’s future minimum lease payments under non-cancellable operating leases and other obligations aggregate to $346.4 million and are payable as follows:

 

 

The Corporation as lessor

 

At December 31, 2018, the Corporation’s future minimum lease receipts under non-cancellable operating leases aggregate to $14.8 million and are receivable as follows;

 

 

Other commitments

 

The Corporation had $74.2 million of letters of credit issued but undrawn as of December 31, 2018. See note 17.

 

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The Corporation’s accounts payable and other liabilities comprise the following:

 

 

VAT Payable

A significant portion of the VAT payable relates to amounts owing for VAT for prior periods as a result of engagement with the Swiss tax authority on the application of the law. This is due to be settled by the end of first quarter of 2019.

The carrying amounts and the movements in the provisions during the year ended December 31, 2018 and 2017 are as follows:

 

 

 

Provision for jackpots

The Corporation offers progressive jackpot games. Each time a progressive jackpot game is played, a portion of the amount wagered by the player is contributed to the jackpot for that specific game or group of games. Once a jackpot is won, the progressive jackpot is reset with a predetermined base amount. The Corporation maintains a provision for the reset of each jackpot and the progressive element added as the jackpot game is played. The Corporation believes that its provisions are sufficient to cover the full amount of any required payout.

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Deferred payment

The acquisition-date fair value of any deferred payment is recognized as part of the consideration transferred by the Corporation in exchange for the acquiree. The Corporation estimates, based on expected future cash flows, the amount that would be required to settle the applicable obligation and recognizes the present value of the same. The provision for the then-outstanding deferred payment primarily related to the Stars Interactive Group Acquisition. The Corporation paid the remaining balance in full during the year ended December 31, 2017. The remaining deferred payment provision at December 31, 2018 relates to the previously disclosed acquisition of Diamond Game and is contingent on future events.

Restructuring provision

The Corporation recorded restructuring provisions during the year ended December 31, 2018 following the Australian Acquisitions and the SBG Acquisition in response to certain reorganizations as the Corporation focuses on enacting synergies. The provision primarily consists of personnel and facilities related costs and the Corporation believes that its provisions are sufficient to cover the full amount of any required payout.

Other

The other provisions consist of a minimum revenue guarantee, provisions for lease retirement costs, and other provisions for onerous contracts.

 

The Corporation holds customer deposits, along with winnings and any bonuses in trust accounts from which money may not be removed if it would result in a shortfall of such deposits. These deposits are included in current assets in the consolidated statements of financial position under Cash - customer deposits and Current investments – customer deposits and includes cash and short term, highly liquid investments. Customer deposits are segregated as follows:

 

 

Customer deposit liabilities relate to customer deposits which are held in multiple bank and investment accounts that are segregated from those holding operational funds.

 

24.SHARE CAPITAL

 

The authorized share capital of the Corporation consists of an unlimited number of Common Shares, with no par value, and an unlimited number of convertible preferred shares (“Preferred Shares”), with no par value, issuable in series. As at December 31, 2018, 273,177,244 shares were issued and fully paid (December 31, 2017 - 147,947,874).

 

 

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Equity Offering

On June 26, 2018, the Corporation closed an underwritten public offering of Common Shares (the “Equity Offering”) at a price of $38.00 per Common Share. The Corporation sold a total of 17,000,000 Common Shares and certain selling shareholders of the Corporation sold 8,000,000 Common Shares. The net proceeds to the Corporation (excluding the over-allotment proceeds), after underwriting discounts and commissions, but before expenses of the Equity Offering payable by the Corporation, were $621.8 million. The Equity Offering also included an over-allotment option granted to the underwriters to purchase an additional 1,875,000 Common Shares from the Corporation and 1,875,000 Common Shares from the selling shareholders at a price of $38.00 per Common Share. The underwriters exercised this over-allotment option in full on July 20, 2018, which closed on July 24, 2018 and resulted in additional net proceeds to the Corporation after underwriting discounts and commissions, but before expenses of the over-allotment option payable by the Corporation, of $68.6 million.

Preferred Share Conversion

On June 5, 2018, the Corporation announced that it elected to effect the conversion of all Preferred Shares pursuant to their terms (the “Preferred Share Conversion”) as a result of meeting the applicable price and liquidity conditions with respect to the same. As a result, on July 18, 2018, all of the Corporation’s outstanding Preferred Shares were converted into Common Shares at a rate of 52.7085 Common Shares per Preferred Share, resulting in the cancellation of all of the Preferred Shares and the issuance of 51,999,623 million Common Shares to the holders thereof. All the Preferred Shares were cancelled and all rights associated therewith were terminated.

Prior to completion of the Preferred Share Conversion, Polar Multi-Strategy Master Fund (and certain affiliated funds) and Verition Canada Master Fund Ltd. applied to the Ontario Superior Court of Justice for a declaration that the mandatory conversion would contravene the Corporation’s articles of continuance. On July 17, 2018 the Superior Court ruled in favor of the Corporation and dismissed the application. As a result, the Corporation proceeded with the conversion as indicated above. The applicants subsequently appealed the Superior Court decision and in the appeal are seeking, among other things, rescission of the conversion or potential damages.

In addition to the Common Shares issued in connection with the Equity Offering and Preferred Share Conversion as described above, during the year ended December 31, 2018:

During the year ended December 31, 2017:

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The following table highlights the classes of reserves included in the Corporation’s equity:

 

 

* During the year ended December 31, 2017, the principal reclassification made by the Corporation was $9.2 million from the Cumulative translation adjustments reserve to the “Available-for-sale investments” reserve to correct an error in a previous period.

** Upon adoption of IFRS 9, the Corporation reclassified amounts in the available for sale investments reserve to the financial assets at FVOCI reserve. The Corporation identified $5.4 million of other reserves not directly related to available for sale investments and reclassified this balance the other reserve.

Acquisition reserve

On February 27, 2018, a subsidiary of the Corporation completed its acquisition of a 62% interest in BetEasy. On April 24, 2018, a subsidiary of the Corporation acquired an additional 18% interest in BetEasy and on the same date, BetEasy completed its acquisition of 100% of TSGA. The carrying amounts of the controlling and non-controlling interest were adjusted to reflect the changes in the Corporation’s equity interest in BetEasy. The change in carrying amounts were recognized directly in equity in acquisition reserve and any difference between the amount by which the non-controlling interest was adjusted and the fair value of the consideration paid was attributed to the Corporation.

Cumulative translation adjustments

Exchange differences relating to the translation of the net assets of the Corporation’s foreign operations from their functional currency into the Corporation’s presentational currency are recognized directly in the Cumulative translation adjustment reserve. This reserve also recognizes the realized and unrealized gains and losses in derivative instruments designated as net investment hedges. See note 19.

Cash flow hedging reserve

This reserve recognizes realized and unrealized gains and losses in derivative instruments designated as cash flow hedges. See note 19.

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Stock Options

The following table provides information about outstanding stock options issued under the Plans:

 

 

No stock options were granted during the year ended December 31, 2018 (December 31, 2017 - the Corporation granted an aggregate of 202,000 stock options under the Plans).

The outstanding stock options issued under the Plans are exercisable at prices ranging from CDN$2.85 to CDN$35.30 per share and have a weighted average contractual term of 3.17 years.

 

The weighted average exercise price of options exercised during the year ended December 31, 2018 was CDN$23.23 (December 31, 2017 – CDN$7.47).

A summary of exercisable options per stock option grant under the Plans is as follows:

 

 

The Corporation recorded a compensation expense for the year ended December 31, 2018 of $12.8 million (December 31, 2017 – $10.6 million). As at December 31, 2018, the Corporation had $0.7 million of unrecognized compensation expense related to the issuance of stock options to be recorded in future periods.

The stock options issued during the year ended December 31, 2017 were accounted for at their grant date fair value of $579,000 as determined by the Black-Scholes-Merton valuation model using the following weighted-average assumptions:

 

 

The expected life of the options was estimated using the average of the vesting period and the contractual life of the options. The expected volatility was estimated based on the Corporation’s public trading history on the TSX for the 4.75 years preceding the grant. The expected forfeiture rate was estimated based on a combination of historical forfeiture rates and expected turnover rates.

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RSUs

The following table provides information about outstanding RSUs issued by the Corporation under the 2015 Equity Incentive Plan.

 

 

PSUs

The following table provides information about outstanding PSUs issued by the Corporation under the 2015 Equity Incentive Plan. In addition to the issued and outstanding PSUs, the Corporation will issue additional PSUs of up to 50% upon the achievement of market vesting conditions.

 

 

DSUs

The following table provides information about outstanding DSUs issued by the Corporation under the 2015 Equity Incentive Plan.

 

 

Dividend Equivalents

During the years ended December 31, 2018 and 2017, no dividends were declared.

Warrants

The following table provides information about outstanding warrants at December 31, 2018 and 2017:

 

 

The Corporation determined that the carrying values of its short-term financial assets and liabilities approximate their fair value because of the relatively short periods to maturity of these instruments and low risk of credit.

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Certain of the Corporation’s financial assets and liabilities are measured at fair value at the end of each reporting period. The following table provides information about how the fair values of these financial assets and liabilities are determined as at each of December 31, 2018 and December 31, 2017:

 

 

 

Refer to note 29 for details on credit risk for the above financial assets.

The fair values of other financial assets and liabilities measured at amortized cost on the consolidated statements of financial position as at each of December 31, 2018, and December 31, 2017 are as follows:

 

 

 

Transfers between levels of the fair value hierarchy are recognized by the Corporation at the end of the reporting period during which the transfer occurred as part of its periodic review of fair values. There were no transfers between levels of the fair value hierarchy during the year ended December 31, 2018. During the year end December 31, 2017, the Corporation reassessed the fair value hierarchy of its long-term debt and reclassified it from Level 1 to Level 2 fair value hierarchy. In addition, the Corporation reassessed the fair value hierarchy in respect of its previously held preferred shares of a subsidiary of NYX Gaming Group and reclassified it transferred it from Level 3 to Level 2. Following this transfer, the Corporation sold all of its securities of NYX Gaming Group.

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Valuation of Level 2 fair values

Long-Term Debt

The Corporation estimates the fair value of its long-term debt by using a composite price derived from observable market data for a basket of similar instruments.

Derivative Financial Instruments

Currently, the Corporation uses cross currency swap and interest rate swap agreements to manage its interest rate and foreign currency risk and foreign currency forward and option contracts to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, as well as spot and forward rates. 

To comply with the provisions of IFRS 13, Fair value measurement, the Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2018 and December 31, 2017, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, with the exception of the Embedded Derivative which is classified as Level 3, and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation determined that its valuations of the Swap Agreements and Previous Swap Agreements in their entirety are classified in Level 2 of the fair value hierarchy.

Reconciliation of Level 3 fair values

Some of the Corporation’s financial assets and liabilities are classified as Level 3 of the fair value hierarchy because the respective fair value determinations use inputs that are not based on observable market data. As at December 31, 2018 and December 31, 2017, for each Level 3 asset or liability the valuation techniques and key inputs used by the Corporation were as follows:

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The following table shows a reconciliation from opening balances to the closing balances for Level 3 fair values:

 

 

 

* The unsettled bets liability is recorded in accounts payable and other liabilities on the consolidated statement of financial position as at December 31, 2017 and is recorded in derivatives on the consolidated statement of financial position as at December 31, 2018.

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Changes in non-cash operating elements of working capital

 

 

Changes in liabilities arising from financing activities

The table below details changes in the Corporation’s liabilities (excluding derivative instruments) arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those which cash flows were, or future cash flows will be, classified in the Corporation’s consolidated statements of cash flows as net cash flows from financing activities.

 

 

 

* Adjusted on adoption of IFRS 9. See note 4.

As part of management’s ongoing regulatory compliance and operational risk assessment process, management monitors legal and regulatory developments and proceedings, and their potential impact on the business.

Kentucky

Prior to the Stars Interactive Group Acquisition, the Commonwealth of Kentucky, ex. rel. J. Michael Brown, Secretary of the Justice and Public Safety Cabinet, filed a legal proceeding against Oldford Group  and certain affiliates thereof (the “Oldford Parties”) and various other defendants (the “Kentucky Proceeding”), pursuant to which the Commonwealth sought to recover alleged gambling losses on behalf of Kentucky residents who played real-money poker on the PokerStars website during the period between October 12, 2006 and April 15, 2011. On August 12, 2015, the trial court in the Kentucky Proceeding entered a default judgment against the Oldford Parties following certain alleged discovery failures, including by certain former owners of Oldford Group., and partial summary judgment on liability in favor of the Commonwealth. On December 23, 2015, the trial court entered an order for damages in the amount of $290 million, which the trial court trebled to $870 million, plus interest at the statutory rate.  The Corporation, through certain subsidiaries, filed a notice of appeal to the Kentucky Court of Appeals and posted a $100 million supersedeas bond to stay enforcement of the order for damages during the pendency of the appeals process. In connection with the posting of the bond, the Corporation delivered cash collateral in the amount of $5 million and letters of credit in the aggregate amount of $65 million. On December 21, 2018, the Kentucky Court of Appeals ruled in the Corporation’s favor and reversed in its entirety the $870 million judgment.

On January 18, 2018, the Commonwealth filed a motion for discretionary review with the Kentucky Supreme Court asking the Court to determine if it will hear an appeal of the decision issued by the Kentucky Court of Appeals. As of the date of these consolidated financial statements, a decision regarding the Commonwealth’s motion for discretionary review is still pending with the Kentucky Supreme Court. If the Kentucky Supreme Court decides to hear the Commonwealth’s appeal, the Corporation will vigorously dispute the liability as it believes the action is frivolous. To the extent the Oldford Parties may be ultimately obligated to pay any amounts pursuant to a final adjudication following exhaustion of all appeals and other legal options, the Corporation intends to seek recovery against the former owners of Oldford Group.

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In late-January 2016, pursuant to and in accordance with the procedures set forth in the merger agreement governing the Stars Interactive Group Acquisition, a subsidiary of the Corporation submitted a notice of claim to the sellers’ representative and escrow agent seeking indemnification for losses and potential losses caused by breaches under the merger agreement and requesting, among other things, that the escrow agent retain the then-remaining balance of the escrow fund established under the merger agreement in an aggregate amount equal to $300 million. With the exception of the claim relating to the Kentucky Proceeding, all such claims have since been settled. The escrow fund was reduced accordingly and continues to be held by the escrow agent. The remaining disputed claim regarding the Kentucky Proceedings and release of the outstanding escrow funds will be resolved in accordance with the provisions of the merger and escrow agreements related to the Stars Interactive Group Acquisition, and there can be no assurance that such claim will result in any amounts in the escrow fund being remitted to the Corporation or that any of the Corporation’s estimates of potential losses will reimbursed by the sellers or otherwise.

Class Action

There is one currently pending class action complaint in Quebec, Canada (the “Quebec Class Action”) against the Corporation and certain other defendants, which was filed during the year ended December 31, 2016 and generally alleges, among other things, that the Corporation violated certain securities laws by misrepresenting or failing to disclose information related to the charges made by the Autorité des marchés financiers against the former Chief Executive Officer and that the Corporation did not properly disclose that it had inadequate or ineffective internal controls and that one or more of its directors and its former Chief Executive Officer were in breach of its Code of Business Conduct.

The Corporation believes that the Quebec Class Action is without merit and intends to vigorously defend itself; however, there can be no assurance that the Corporation will be successful in its defense. No provision has been recorded regarding this matter.  

Given the nature of the legal and regulatory landscape of the industry in which it operates, from time to time the Corporation has also received notices, communications and legal actions from regulatory authorities in various jurisdictions and other parties in respect of its activities. The Corporation has taken legal advice as to the manner in which it should respond and the likelihood of success of such actions. Based on this advice and the nature of the actions, no provisions have been recorded with respect to any such legal or regulatory notices, communications or actions for the year ended December 31, 2018.

 

Foreign Exchange Risk

The Corporation is subject to foreign currency exposure on its financial instruments and the translation of its subsidiaries with foreign functional currencies to USD. The Corporation primarily manages its foreign currency exposure through its hedging instruments. See note 19. As at December 31, 2018, the Corporation’s significant foreign exchange currency exposure on its financial instruments by currency was as follows (in U.S. dollar equivalents):

 

 

The table below details the effect on equity and earnings before tax of a 10% strengthening or weakening of the USD exchange rate at the balance sheet date for balance sheet items denominated in CDN, EUR, GBP and AUD after the effect of the Corporation’s hedging activities:

 

 

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The table below details the effect on equity of a 10% strengthening or weakening of the EUR:USD or the EUR:GBP exchange rates on the valuations of the Swap Agreements that hedge the USD First Lien Term Loan. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates.

 

 

Interest Rate Risk

The Corporation’s exposure to changes in interest rates (particularly, fluctuations in LIBOR) relates primarily to interest paid on the Corporation’s long-term indebtedness, as well as the interest earned on and market value of its cash and investments. The Corporation is also exposed to fair value interest rate risk with respect to its Senior Notes and cash flow interest rate risk on the unhedged elements of the USD First Lien Term Loan, and the EUR First Lien Term Loan which bear interest at variable rates. The Corporation manages its foreign currency exposure through its hedging instruments. See note 19.

The table below details the effect on earnings before tax of a 100 basis points strengthening or weakening of the LIBOR and EURIBOR interest rates on these loans after the effect of the Corporation’s hedging activities. 100 basis points sensitivity is the sensitivity rate used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates:

 

 

The USD First Lien Term Loan has a floor of 0% for the LIBOR and as such, the interest rate cannot decrease below 3.50% respectively. The EUR First Lien Term Loan has a floor of 0% for the EURIBOR and as such, the interest rate cannot decrease below 3.75%. Management monitors movements in the interest rates by reviewing the EURIBOR and LIBOR on a quarterly basis. During the year ended December 31, 2018 the EURIBOR was negative.

The table below details the effect on equity of a 100 basis points strengthening or weakening of the LIBOR and EURIBOR interest rates on the valuations of the Swap Agreements that hedge the USD First Lien Term Loan. 100 basis points is the sensitivity rate used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates:

 

 

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Corporation. The Corporation has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Corporation’s policy is to transact wherever possible with investment grade counterparties. This information is supplied by independent rating agencies where available, and if not available, the Corporation uses other publicly available financial information and its own trading records to rate its major customers. The Corporation’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is managed by the Corporation’s treasury and finance groups in accordance with the Corporation’s treasury investment policy, which was approved by the Corporation’s Audit Committee.

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Credit risk arises from cash and cash equivalents, contractual cash flows of investments carried at amortized cost, at FVOCI and at FVTPL, as applicable, favorable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures on outstanding accounts receivable. The Corporation does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics.

The Corporation subjects its accounts receivable, investments carried at FVOCI and cash and restricted cash to the expected credit loss model and specifically uses the simplified approach in respect of accounts receivable. The credit risk on cash and cash equivalents, investments and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Corporation’s treasury investment policy and related strategy is focused on the preservation of capital and supporting its liquidity requirements, not on generating trading profits. The Corporation’s receivables are primarily in relation to payment processors and credit risk associated with these receivables is limited. The application of the expected credit loss model did not result in material impairment losses recorded in respect of these instruments.

Age of receivables that are past due but not impaired:

 

 

The allowance for doubtful accounts is $16.8 million as at December 31, 2018 (December 31, 2017 – $166,000).

Age of impaired trade receivables:

 

 

Liquidity Risk

Liquidity risk is the Corporation’s ability to meet its financial obligations when they come due. The Corporation is exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Corporation manages liquidity risk by continuously monitoring forecasted and actual cash flows and matching maturity profiles of financial assets and liabilities. The Corporation’s objective is to maintain a balance between continuity of funding and flexibility through borrowing facilities available through the Corporation’s banks and other lenders. The Corporation’s policy is to seek to ensure adequate funding is available from operations, established lending facilities and other sources, including the debt and equity capital markets, as required.

The Corporation’s principal sources of liquidity are its cash generated from operations, Revolving Facility and certain other currently available funds. Currently available funds consist primarily of cash on deposit with banks and investments, which are comprised primarily of certain highly liquid, short-term investments, including money market funds. The Corporation’s working capital needs are generally minimal over the year as its current gaming business requires customers to deposit funds prior to playing or participating in its real-money product offerings. The Corporation believes that such deposits are typically converted to revenue efficiently and on a timely basis such that operating expenditures are sufficiently covered. Management also believes that investing is a key element necessary for the continued growth of the Corporation’s customer base and the future development of new and innovative product offerings. Based on the Corporation’s currently available funds, funds available from the Revolving Facility and its ability to access the debt and equity capital markets, if necessary, management believes that the Corporation will have the cash resources necessary to satisfy current obligations and working capital needs, and fund currently planned development and integration activities and other capital expenditures, as well as currently planned acquisitions, for at least the next 12 months. Notwithstanding, the state of capital markets and the Corporation’s ability to access them on favorable terms, if at all; micro and macro-economic downturns; and fluctuations of the Corporation’s operations, among other things, may influence its ability to secure the capital resources required to satisfy current or future obligations and fund future projects, strategic initiatives and support growth.

Customer deposit liabilities relate to customer deposits which are held in multiple bank accounts and highly liquid investments which are segregated from those holding operational funds. These deposits are included in current assets in the consolidated statements of financial position under Cash and cash equivalents – customer deposits and Current investments – customer deposits (see note 15).

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The following table provides information about the terms of the Corporation’s financial obligations and liabilities:

 

 

* Excludes VAT and other taxes as well as the interest accrual on Senior Notes, which are all included in accounts payable and other liabilities on the statements of financial position

** Includes principal and interest, including the interest accrual on Senior Notes

 

Key management of the Corporation includes the members of the Board, the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Corporate Development Officer, Executive Vice-President and Chief Legal Officer, Chief Technology Officer, and certain other key members of management.

The compensation of such key management for the years ended December 31, 2018 and 2017 included the following:

 

 

The remuneration of the Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Chief Operating Officer, Chief Corporate Development Officer, Executive Vice-President and Chief Legal Officer consists primarily of a salary, cash bonuses and share-based awards and was negotiated at arm’s length. Director retainers include both retainers, committee fees and share-based awards.

 

31.SUBSEQUENT EVENTS

Prepayment of First Lien Term Loans

On February 22, 2019, the Corporation prepaid $100.0 million of its USD First Lien Term Loan (as defined above), including accrued and unpaid interest, using cash on its balance sheet.

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Exhibit 99.3

 

 

 

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE YEAR ENDED
DECEMBER 31, 2018

March 6, 2019

 

 

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TABLE OF CONTENTS

 

 

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis (this “MD&A”) provides a review of the results of operations, financial condition and cash flows for The Stars Group Inc. on a consolidated basis for the quarter and year ended December 31, 2018. References to “The Stars Group” or the “Corporation” in this MD&A refer to The Stars Group Inc. and its subsidiaries or any one or more of them, unless the context requires otherwise. This document should be read in conjunction with the information contained in the Corporation’s audited consolidated financial statements and related notes for the year ended December 31, 2018 (the “2018 Annual Financial Statements”), and the Corporation’s annual information form for the year ended December 31, 2018 (the “2018 Annual Information Form” and together with this MD&A and the 2018 Annual Financial Statements, the “2018 Annual Reports”). These documents and additional information regarding the business of the Corporation are available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com, the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) at www.sec.gov, and the Corporation’s website at www.starsgroup.com.

For reporting purposes, the Corporation prepared the 2018 Annual Financial Statements in U.S. dollars and, unless otherwise indicated, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial information contained in this MD&A was derived from the 2018 Annual Financial Statements. Unless otherwise indicated, all references to “USD” and “$” are to U.S. dollars, “EUR” or “€” are to European Euros, “GBP” or “£” are to British pound sterling, “CDN” or “CDN $” are to Canadian dollars and “AUD” or “AUD $” are to Australian dollars. Unless otherwise indicated, all references to a specific “note” refer to the notes to the 2018 Annual Financial Statements.

As at December 31, 2018, the Corporation had three reporting segments, “International”, “United Kingdom” and “Australia”, each with certain major lines of operations, and a “Corporate” cost center, all as further described below. The International segment currently includes the business operations of Stars Interactive Group, the United Kingdom segment currently includes the business operations of Sky Betting & Gaming, and the Australia segment currently includes the business operations of BetEasy (each as defined below). Prior quarterly and annual segmental results and information presented in this MD&A have been recast to be presented in a manner consistent with these reporting segments. See “Segment Results of Operations” below and note 7 of the 2018 Annual Financial Statements for additional information on the Corporation’s reporting segments.

As at December 31, 2018, the Corporation had up to four major lines of operations within each of its reporting segments, as applicable: real-money online poker (“Poker”), real-money online betting (“Betting”), real-money online casino and, where applicable, bingo (collectively, “Gaming”), and other gaming-related revenue, including revenue from social and play-money gaming, live poker events, branded poker rooms, Oddschecker and other nominal sources of revenue (collectively, “Other”). As it relates to these lines of operation, online revenue includes revenue generated through the Corporation’s online, mobile and desktop client platforms, as applicable.

For purposes of this MD&A: (i) the term “gaming license” refers collectively to all the different licenses, consents, permits, authorizations, and other regulatory approvals that are necessary to be obtained in order for the recipient to lawfully conduct (or be associated with) gaming in a particular jurisdiction; and (ii) unless the context requires otherwise or otherwise defined (particularly as it relates to the Gaming line of operation as used in this MD&A and the 2018 Annual Financial Statements, which currently only includes real-money online casino and, where applicable, bingo revenue), all references in this MD&A to “gaming” include all online gaming (e.g., poker, casino and bingo) and betting.

Unless otherwise stated, in preparing this MD&A the Corporation has considered information available to it up to March 6, 2019, the date the Corporation’s board of directors (the “Board”) approved the 2018 Annual Reports, including this MD&A.

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

The 2018 Annual Reports, including this MD&A, contain certain information that may constitute forward-looking information and statements (collectively, “forward-looking statements”) within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including financial and operational expectations and projections. These statements, other than statements of historical fact, are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect the Corporation, its subsidiaries and their respective customers and industries. Although the Corporation and management believe the expectations reflected in such forward-looking statements are reasonable and are based on reasonable assumptions and estimates as at the date hereof, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, regulatory, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “imply” or the negative of these words or other variations or synonyms of these words or comparable terminology and similar expressions. For example, see “Non-IFRS Measures, Key Metrics and Other Data”, “Overview and Outlook”, “Liquidity and Capital Resources” and “Recent Accounting Pronouncements”.

Specific factors and assumptions include the following: the heavily regulated industry in which the Corporation carries on its business; risks associated with interactive entertainment and online and mobile gaming generally; current and future laws or regulations and new interpretations of existing laws or regulations, or potential prohibitions, with respect to interactive entertainment or online gaming or activities related to or necessary for the operation and offering of online gaming; potential changes to the gaming regulatory framework; legal and regulatory requirements; ability to obtain, maintain and comply with all applicable and required licenses, permits and certifications to offer, operate, and market its product offerings, including difficulties or delays in the same; significant barriers to entry; competition and the competitive environment within addressable markets and industries; impact of inability to complete future or announced acquisitions or to integrate businesses successfully, including Sky Betting & Gaming and BetEasy; the Corporation’s substantial indebtedness requires that it use a significant portion of its cash flow to make debt service payments; the Corporation’s secured credit facilities contain covenants and other restrictions that may limit the Corporation’s flexibility in operating its business; risks associated with advancements in technology, including artificial intelligence; ability to develop and enhance existing product offerings and new commercially viable product offerings; ability to mitigate foreign exchange and currency risks; ability to mitigate tax risks and adverse tax consequences, including changes in tax laws or administrative policies relating to tax and the imposition of new or additional taxes, such as value-added (“VAT”) and point of consumption taxes, and gaming duties; the Corporation’s exposure to greater than anticipated tax liability; risks of foreign operations generally; protection of proprietary technology and intellectual property rights; ability to recruit and retain management and other qualified personnel, including key technical, sales and marketing personnel; defects in product offerings; losses due to fraudulent activities; management of growth; contract awards; potential financial opportunities in addressable markets and with respect to individual contracts; ability of technology infrastructure to meet applicable demand and reliance on online and mobile telecommunications operators; systems, networks, telecommunications or service disruptions or failures or cyber-attacks and failure to protect customer data, including personal and financial information; regulations and laws that may be adopted with respect to the Internet and electronic commerce or that may otherwise impact the Corporation in the jurisdictions where it is currently doing business or intends to do business, particularly those related to online gaming or that could impact the ability to provide online product offerings, including as it relates to payment processing; ability to obtain additional financing or to complete any refinancing on reasonable terms or at all; customer and operator preferences and changes in the economy; dependency on customers’ acceptance of its product offerings; consolidation within the gaming industry; litigation costs and outcomes; expansion within existing and into new markets; relationships with vendors and distributors; natural events; contractual relationships of SBG (as defined below) or the Corporation with Sky plc and/or its subsidiaries; counterparty risks; failure of systems and controls of the Corporation to restrict access to its products; reliance on scheduling and live broadcasting of major sporting events; macroeconomic conditions and trends in the gaming industry; bookmaking risks; an ability to realize projected financial increases attributable to acquisitions and the Corporation’s business strategies; and an ability to realize all or any of the Corporation’s estimated synergies and cost savings in connection with acquisitions, including the SBG Acquisition and Australian Acquisitions (each as defined below). These factors are not intended to represent a complete list of the factors that could affect the Corporation; however, these factors, as well as those risk factors presented under the heading “Risk Factors and Uncertainties” in the 2018 Annual Information Form, elsewhere in this

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MD&A and the 2018 Annual Reports and in other filings that The Stars Group has made and may make in the future with applicable securities authorities, should be considered carefully.

The foregoing list of important factors and assumptions may not contain all the material factors and assumptions that are important to shareholders and investors. Shareholders and investors should not place undue reliance on forward-looking statements as the plans, assumptions, intentions or expectations upon which they are based might not occur. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Unless otherwise indicated by the Corporation, forward-looking statements in this MD&A describe the Corporation’s expectations as at March 6, 2019, and, accordingly, are subject to change after such date. The Corporation does not undertake to update or revise any forward-looking statements to reflect events and circumstances after the date hereof or to reflect the occurrence of unanticipated events, except in accordance with applicable securities laws.

 

RISK FACTORS AND UNCERTAINTIES

 

Certain factors may have a material adverse effect on the Corporation’s business, financial condition and results of operations. Current and prospective investors should carefully consider the risks and uncertainties and other information contained in this MD&A and the 2018 Annual Reports, particularly under the heading “Risk Factors and Uncertainties” in the 2018 Annual Information Form, and in other filings that the Corporation has made and may make in the future with applicable securities authorities, including those available on SEDAR at www.sedar.com, EDGAR at www.sec.gov or The Stars Group’s website at www.starsgroup.com. The risks and uncertainties described herein and therein are not the only ones the Corporation may face. Additional risks and uncertainties that the Corporation is unaware of, or that the Corporation currently believes are not material, may also become important factors that could adversely affect the Corporation’s business. If any of such risks actually occur, the Corporation’s business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of the common shares of the Corporation (the “Common Shares”) (or the value of any other securities of the Corporation) could decline, and the Corporation’s securityholders could lose part or all of their investment.

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NON-IFRS MEASURES, KEY METRICS AND OTHER DATA

This MD&A references non-IFRS financial measures and key metric operational performance measures, including those under the headings “Consolidated Results of Operations and Cash Flows”, “Segment Results of Operations”, and “Reconciliations” below. The Corporation believes these measures and metrics will provide investors with useful supplemental information about the financial and operational performance of its business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating its business, identifying and evaluating trends, and making decisions. The Corporation believes that such non-IFRS financial measures provide useful information about its underlying, core operating results and trends, enhance the overall understanding of its past performance and future prospects and allow for greater transparency with respect to metrics and measures used by management in its financial and operational decision-making.

Although management believes these non-IFRS financial measures and key metrics are important in evaluating the Corporation, they are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with IFRS. They are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. These measures may be different from non-IFRS financial measures and key metrics used by other companies and may not be comparable to similar meanings prescribed by other companies, limiting their usefulness for comparison purposes. Moreover, presentation of certain of these measures is provided for period-over-period comparison purposes, and investors should be cautioned that the effect of the adjustments thereto provided herein have an actual effect on the Corporation’s operating results.

Non-IFRS Measures

The Corporation presents the following non-IFRS measures in this MD&A, reconciliations of which to their nearest IFRS measures are provided, as applicable, under “Reconciliations” below:

Adjusted EBITDA

The Corporation defines Adjusted EBITDA as net earnings before financial expenses, income taxes expense (recovery), depreciation and amortization, stock-based compensation, restructuring, net earnings (loss) on associate and certain other items as set out in the reconciliation tables under “Reconciliations” below.

The Corporation believes Adjusted EBITDA is a useful performance measure as it provides information regarding the Corporation’s ongoing core operating activities, and trends in underlying performance and growth, and is used by management primarily to forecast and budget the allocation of applicable resources, particularly in light of its current strategic initiatives, including its geographic and product expansion strategy.

Adjusted EBITDA Margin

The Corporation defines Adjusted EBITDA Margin as Adjusted EBITDA as a proportion of total revenue.

The Corporation believes Adjusted EBITDA Margin is a useful performance measure as it is representative of the Corporation’s ongoing core business activities and assists management in monitoring the impact of any significant change in revenue generation (e.g., as a result of geographic or product changes, sporting results, or seasonality) or costs (e.g., a change in gaming duty rates or gaming regulatory fees or costs) on the Corporation’s operating performance.

Adjusted Net Earnings

The Corporation defines Adjusted Net Earnings as net earnings before interest accretion, amortization of intangible assets resulting from purchase price allocations following acquisitions, stock-based compensation, restructuring, net earnings (loss) on associate, and certain other items. In addition, as previously disclosed, the Corporation makes adjustments for (i) the re-measurement of contingent consideration, which was previously included in, and adjusted for through, interest accretion, but starting with the Corporation’s interim condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2018 (the “Q3 2018 Financial Statements”), it is a separate line item, (ii) the re-measurement of embedded derivatives and ineffectiveness on cash flow hedges, each of which were new line items in the Q3 2018 Financial Statements, and (iii) certain non-recurring tax adjustments and settlements. Each adjustment to net earnings is then adjusted for the tax impact, where applicable, in the respective

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jurisdiction to which the adjustment relates. Adjusted Net Earnings and any other non-IFRS measures used by the Corporation that relies on or otherwise incorporates Adjusted Net Earnings that was reported for previous periods have not been restated under the updated definition on the basis that the Corporation believes that the impact of the change to those periods would not be material.

The Corporation believes Adjusted Net Earnings is also a useful performance measure as, similar to Adjusted EBITDA, it provides meaningful information relating to the Corporation’s trends in underlying performance and growth, but it also takes into account the Corporation’s current capital structure, the impact of its geographic diversity on taxes and the Corporation’s historical investments in technology.

Adjusted Diluted Net Earnings per Share

The Corporation defines Adjusted Diluted Net Earnings per Share as Adjusted Net Earnings attributable to the Shareholders of The Stars Group Inc. divided by Diluted Shares. Diluted Shares means the weighted average number of Common Shares on a fully diluted basis, including options, other equity-based awards such as warrants and any convertible preferred shares of the Corporation then outstanding. The effects of anti-dilutive potential Common Shares are ignored in calculating Diluted Shares. Diluted Shares used in the calculation of diluted earnings per share may differ from diluted shares used in the calculation of Adjusted Diluted Net Earnings per Share where the dilutive effects of the potential Common Shares differ. See note 10 in the 2018 Annual Financial Statements. For the quarter and year ended December 31, 2018, Diluted Shares used for the calculation of Adjusted Diluted Net Earnings per Share equalled 273,294,532 and 242,768,766, respectively, compared with 206,807,485 and 203,707,589 for the same periods in 2017, respectively.

The Corporation believes Adjusted Diluted Net Earnings per Share is a useful measure for the same reasons as Adjusted Net Earnings as well as providing a per share measure that factors in the dilutive effect of the Corporation’s outstanding equity and equity-based awards and instruments.

Constant Currency Revenue

The Corporation defines Constant Currency Revenue as IFRS reported revenue for the relevant period calculated using the prior year’s monthly average exchange rates for its local currencies other than the U.S. dollar. Currently, the Corporation provides Constant Currency Revenue for the International segment and its applicable lines of operations. It does not currently provide Constant Currency Revenue for the United Kingdom and Australia segments because the Corporation does not have comparative periods for these segments.

The Corporation believes providing Constant Currency Revenue for the International segment is useful because it helps show the foreign exchange impact due to translation and purchasing power, and it facilitates comparison to its historical performance mainly because the U.S. dollar is the primary currency of gameplay on the International segment’s product offerings and the majority of the segment’s customers are from European Union jurisdictions. The Corporation is also exposed to foreign exchange risk as a result of the Acquisitions (as defined below), primarily when translating the functional currencies of the United Kingdom segment (i.e., GBP) and Australia segment (i.e., AUD) into U.S. dollars for financial reporting purposes. The Corporation intends to provide information on the impact of foreign exchange for these segments either individually or on a consolidated basis when applicable reported comparative period information is available.

Free Cash Flow

The Corporation defines Free Cash Flow as net cash flows from operating activities after adding back customer deposit liability movements, and after capital expenditures and debt servicing cash flows (excluding voluntary prepayments).

The Corporation believes that Free Cash Flow is a useful liquidity measure because it believes that removing movements in customer deposit liabilities provides a meaningful understanding of its underlying cash flows as customer deposits are not available funds that the Corporation can use for financial or operational purposes, and removing capital expenditures and debt servicing costs shows cash potentially available for voluntary debt repayments and other financial or operational purposes including to pursue strategic initiatives.

 

 

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Key Metrics and Other Data

The Corporation currently considers the below noted key metrics in this MD&A for its reporting segments, as applicable. The Corporation does not currently provide consolidated key metrics because management analyzes these metrics primarily on a segment-by-segment basis due to differences in the nature of the applicable segment’s market, customer base and product offerings. Notwithstanding and unless the context otherwise requires, the Corporation believes that readers should consider the applicable metrics together for each segment (but not on a consolidated basis) as customer growth and monetization trends reflected in such metrics are key factors that affect the Corporation’s revenue for the applicable segment. The Corporation is also in the process of integrating its recent acquisitions, as applicable, and implementing its recently changed operating and reporting segments, and once complete, the Corporation may revise or remove currently presented key metrics or report certain additional or other measures in the future.

Quarterly Real-Money Active Uniques (QAUs)

The Corporation defines QAUs for the International and Australia reporting segments as active unique customers (online, mobile and desktop client) who (i) made a deposit or transferred funds into their real-money account with the Corporation at any time, and (ii) generated real-money online rake or placed a real-money online bet or wager on during the applicable quarterly period. The Corporation defines “active unique customer” as a customer who played or used one of its real-money offerings at least once during the period, and excludes duplicate counting, even if that customer is active across multiple lines of operation (Poker, Gaming and/or Betting, as applicable) within the applicable reporting segment. The definition of QAUs excludes customer activity from certain low-stakes, non-raked real-money poker games, but includes real-money activity by customers using funds (cash and cash equivalents) deposited by the Corporation into such customers’ previously funded accounts as promotions to increase their lifetime value.

The Corporation currently defines QAUs for the United Kingdom reporting segment (which currently includes the SBG business operations only) as active unique customers (online and mobile) who have settled a Stake (as defined below) or made a wager on any betting or gaming product within the applicable quarterly period. The Corporation defines active unique customer for the United Kingdom reporting segment as a customer who played at least once on one of its real-money offerings during the period, and excludes duplicate counting, even if that customer is active across more than one line of operation. For the quarter ended September 30, 2018, QAUs for the United Kingdom reporting segment also include the applicable pre-acquisition period of July 1, 2018 through July 9, 2018.

QAUs are a measure of the player liquidity on the Corporation’s real-money poker product offerings and level of usage on all its real-money product offerings, collectively. Trends in QAUs affect revenue and financial results by influencing the volume of activity, the Corporation’s product offerings, and its expenses and capital expenditures.

 

The Corporation has faced and may continue to face challenges in increasing the size of its active customer base within its reporting segments, as applicable, due to, among other things, competition from alternative products and services for all verticals, as well as regulatory changes, payment processing or other restrictions that may impact customer acquisition or the ability of customers to make a deposit or play certain products, high-volume, net-withdrawing customers who detract from the overall poker ecosystem and discourage recreational customers, the use of certain sophisticated technology that may provide an artificial competitive advantage for certain online poker customers over others, and past and potential future weakness in certain global currencies against the U.S. dollar, which decreases the purchasing power of the Corporation’s customer base as the U.S. dollar is the primary currency of gameplay on many of its International segment product offerings. Notwithstanding, the Corporation intends to retain and grow its reporting segments’ customer bases and reactivate dormant users by, as applicable, continuing to improve the poker ecosystem to benefit recreational players, continuing to introduce new and innovative product offerings, features and enhancements for all verticals, improving the user interfaces, platforms and user experience across its lines of operations, investing in customer relationship management (“CRM”) initiatives, improving the effectiveness of its marketing and promotional efforts, and expanding the availability of its offerings geographically, including through potential acquisitions and strategic transactions, among other things. To the extent the growth of the customer base of a reporting segment of the Corporation continues to decline, that segment’s revenue growth will become increasingly dependent on its ability to increase levels of customer engagement and monetization.

 

 

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Quarterly Net Yield (QNY)

 

The Corporation defines QNY as combined revenue for its lines of operation (i.e., Poker, Gaming and/or Betting, as applicable) for each reporting segment, excluding Other revenue, as reported during the applicable quarterly period (or as adjusted to the extent any accounting reallocations are made in later periods) divided by the total QAUs during the same period. For the quarter ended September 30, 2018, QNY for the United Kingdom reporting segment also includes the applicable pre-acquisition period of July 1, 2018 through July 9, 2018. The numerator of QNY is a non-IFRS measure.

 

Trends in QNY are a measure of growth as the Corporation continues to expand its applicable core real-money online product offerings. In addition, the trends in the Corporation’s ability to generate revenue on a per customer basis across its real-money online product offerings are reflected in QNY and are key factors that affect the Corporation’s revenue. The Corporation also provides QNY using Constant Currency Revenue for the International reporting segment.

Many variables can impact a reporting segment’s QNY, including, as applicable, the rake and fees charged in real-money online poker, the applicable margin of online casino games, Stakes and Betting Net Win Margin, the amount of time customers play on its product offerings, offsets to gross revenue for loyalty program rebates, rewards, bonuses, and promotions, VAT and similar taxes in certain jurisdictions, and the amount the applicable reporting segment spends on advertising and other similar expenses. The Corporation currently intends to increase QNY for its reporting segments in future periods by, among other things, and as applicable, (i) continuing to introduce new and innovative product offerings and other initiatives to enhance the customer experience and increase customer engagement, including through CRM initiatives to attract and retain high-value customers, (ii) capitalizing on its existing online poker platforms and offerings, which provides customers with the highest level of player liquidity globally, (iii) cross-selling its online offerings to both existing and new customers, and (iv) continuing to expand and improve its online gaming offerings.

Net Deposits

 

The Corporation defines Net Deposits for the International segment as the aggregate of gross deposits or transfer of funds made by customers into their real-money online accounts less withdrawals or transfer of funds by such customers from such accounts, in each case during the applicable quarterly period. Gross deposits exclude (i) any deposits, transfers or other payments made by such customers into the Corporation’s play-money and social gaming offerings, and (ii) any real-money funds (cash and cash equivalents) deposited by the Corporation into such customers’ previously funded accounts as promotions to increase their lifetime value.

 

Net Deposits are representative of the money the Corporation’s customers hold in their accounts to potentially play with. Net Deposits are correlated to the International segment’s reported revenue, as some, all or none of such deposits may eventually be used and become revenue. Trends in Net Deposits are used by management to gauge expected revenue performance across the International segment’s applicable lines of operations and are considered by management when making decisions with respect to applicable product offering changes, including the recent and continuing changes to the Corporation’s online poker ecosystem to benefit and attract high-value, net-depositing customers (primarily recreational players).

 

Net Deposits are not, and should not be considered, representative of revenue bookings or deferred revenue. Many variables impact the International segment’s Net Deposits, most of which are substantially similar to those noted above impacting the monetization of a product offering as evidenced through QNY. In addition, certain factors have impacted, and may in the future impact, Net Deposits that are not indicative of the performance or underlying health of that segment’s business. For example, as it relates to online poker and following the implementation of certain previously disclosed changes to the poker ecosystem, the movement in customer real-money account balances (i.e., customer deposits on the consolidated statements of financial position) by high-volume, net-withdrawing customers has reduced, and may in the future reduce, Net Deposits as a result of increased withdrawals by such customers, but the Corporation believes that such movements will ultimately create a more attractive environment and experience for recreational players, which in turn may lead to increased Net Deposits. The Corporation believes that the funds in the accounts of the high-volume, net-withdrawing customers are generally not additive to the overall poker ecosystem or to the Corporation’s revenue as such customers generally use only a small portion of them to bet or wager. As the Corporation continues to adjust and improve its product offerings, it expects that such customers may continue to

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withdraw at greater rates and amounts immediately following such adjustments and improvements, which would impact Net Deposits accordingly.

 

Stakes and Betting Net Win Margin

 

The Corporation defines Stakes as betting amounts wagered on the Corporation’s applicable online betting product offerings, and is also an industry term that represents the aggregate amount of funds wagered by customers within the Betting line of operation for the period specified. Betting Net Win Margin is calculated as Betting revenue as a proportion of Stakes. The Corporation uses Stakes and Betting Net Win Margin as measures of the scale of its operations, the engagement of its customers and performance of its operations across its product offerings and geographic regions. Trends in Stakes are a measure of growth in the Corporation’s Betting line of operations as the Corporation continues to expand its applicable core real-money online betting offerings. Trends in Betting Net Win Margin are primarily a measure of the favorability of the outcomes of sporting and other events and the impact of promotional offerings related to the Corporation’s betting offerings.

 

Many variables impact a reporting segment’s Stakes, including, as applicable, that segment’s QAUs, the seasonality of sporting events throughout the year (such as timing of European football (or soccer) including English Premier League, horse races, rugby seasons, tennis, and others) and major tournaments, such as the 2018 FIFA World Cup (“World Cup”) and UEFA European Championships. For example, the World Cup, and other major sporting events provide a unique opportunity to drive both customer acquisition and engagement. Furthermore, the amount of external marketing and CRM promotions including free bets and offers and the Corporation’s pricing strategy can lead to positive or negative “recycling of winnings”. Similarly, betting outcomes can also lead to positive or negative “recycling of winnings”. Recycling of winnings refers to customer winnings earned from prior bets that are subsequently used to place additional bets or play other products. The mix of products and markets is also an important driver of total Stakes.

 

Like Stakes, many variables also impact a reporting segment’s Betting Net Win Margin, including client management and bet limits, sporting results, the mix of Stakes and bet types, and the use of offers, promotions and pricing strategy. For example, the International segment’s Betting Net Win Margin is less exposed to the English Premier League and UK horse racing, and as such, is generally not impacted to the same extent by the operator-unfavorable (or customer-favorable) results seen within the United Kingdom segment as a whole. Betting Net Win Margin can vary significantly from quarter to quarter depending on the variables noted above; however, over the long term, the Corporation believes these margins tend to become more predictable.

Limitations of Non-IFRS Measures, Key Metrics and Other Data

There are a number of limitations related to the use of such non-IFRS measures as opposed to their nearest IFRS equivalent. Some of these limitations are:

While management may have provided other non-IFRS financial measures and key metrics in the past, it continues to review and assess the importance, completeness and accuracy of such measures as it relates to its evaluation of the Corporation’s business, performance and trends affecting the same. This includes customer engagement, gameplay,

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depositing activity and various other customer trends, particularly following the introduction of certain previously announced improvements in the poker ecosystem to benefit and attract recreational customers and reduce incentives for high-volume, net-withdrawing customers, the introduction of certain customer acquisition initiatives, and the Corporation’s expansion in real-money online casino and sportsbook. As such, management may determine that particular measures that it may have presented in the past are no longer helpful or relevant to understanding the Corporation’s current and future business, performance or trends affecting the same, and as a result it may remove or redefine any such measures, or introduce new or alternative measures. For each applicable period, management intends to provide such metrics and measures that it believes may be the most helpful and relevant to an understanding of the Corporation’s business and performance, including on a consolidated and segmental basis and normalized measures of the same, and trends affecting the foregoing.

The numbers for the Corporation’s key metrics and related information are calculated using internal company data based on the activity of customer accounts. While these numbers are based on what the Corporation believes to be reasonable judgments and estimates of its customer base for the applicable period of measurement, there are certain challenges and limitations in measuring the usage of its product offerings across its customer base. Such challenges and limitations may also affect the Corporation’s understanding of certain details of its business. In addition, the Corporation’s key metrics and related estimates, including the definitions and calculations of the same, may differ among reporting segments, from estimates published by third parties or from similarly-titled metrics of its competitors due to differences in operations, product offerings, methodology and access to information. The Corporation continually seeks to improve its estimates of its active customer base and the level of customer activity, and such estimates may change due to improvements or changes in the Corporation’s methodology.

 

For example, the methodologies used to measure the Corporation’s customer metrics may be susceptible to algorithm, calculation or other technical or human errors, including how certain metrics may be defined (and the assumptions and considerations made and included in, or excluded from, such definitions) and how certain data may be, among other things, integrated, analyzed and reported after the Corporation completes an acquisition or strategic transaction. Moreover, the Corporation’s business intelligence tools may experience glitches or fail on a particular data backup or upload, which could lead to certain customer activity not being properly included in the calculation of a particular key metrics. Another challenge with respect to certain key metrics is that customers could create multiple real-money accounts with the Corporation (in nearly all instances such account creation would violate the Corporation’s applicable terms and conditions of use), and customers could take advantage of certain customer acquisition incentives to register and interact with the Corporation’s product offerings without actually depositing or transferring funds into their real-money accounts. Furthermore, customers may have more than one account across the Corporation’s brands that currently do not have common or shared account structure, which could lead to such customers being counted more than once for a particular key metric. Although the Corporation typically addresses and corrects any such failures, duplications and inaccuracies relatively quickly, its metrics are still susceptible to the same and its estimations of such metrics may be lower or higher than the actual numbers.

 

The Corporation regularly reviews its processes for calculating and defining these metrics, and from time to time it may make adjustments to improve their accuracy that may result in the recalculation or replacement of historical metrics or introduction of new metrics. These changes may also include adjustments to underlying data, such as changes to historical figures as a result of accounting adjustments and revisions to definitions in an effort to provide what management believes may be the most helpful and relevant data. These changes may arise as a result of, among other things, the Corporation implementing new technology, software or accounting methods, engaging third-party advisors or consultants, or acquiring or integrating new assets, businesses or business units. The Corporation also continuously seeks to improve its ability to identify irregularities and inaccuracies (and suspend any customer accounts that violate its terms and conditions of use and limit or eliminate promotional incentives that are susceptible to abuse), and its key metrics or estimates of key metrics may change due to improvements or changes in its methodology. Notwithstanding, the Corporation believes that any such irregularities, inaccuracies or adjustments are immaterial unless otherwise stated.

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OVERVIEW AND OUTLOOK

Business Overview and Background

The Stars Group is a global leader in the online and mobile gaming and interactive entertainment industries, entertaining millions of customers across its online real- and play-money poker, gaming and betting product offerings, which are delivered through mobile, web and desktop applications. The Stars Group offers these products directly or indirectly under several ultimately owned or licensed gaming and related consumer businesses and brands, including, among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, BetEasy, Sky Bet, Sky Vegas, Sky Casino, Sky Bingo, Sky Poker, and Oddschecker, as well as live poker tour and events brands, including the PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK. The Stars Group is one of the world’s most licensed online gaming operators with its subsidiaries collectively holding licenses or approvals in 21 jurisdictions throughout the world, including in Europe, Australia, and the Americas. The Stars Group’s vision is to become the world’s favorite iGaming destination and its mission is to provide its customers with winning moments.

The Stars Group’s primary business and source of revenue is its online gaming and betting businesses. These currently consist of the operations of Stars Interactive Holdings (IOM) Limited and its subsidiaries and affiliates (collectively, “Stars Interactive Group”), which it acquired in August 2014 (the ‘‘Stars Interactive Group Acquisition’’), the operations of Cyan Blue Topco Limited and its subsidiaries and affiliates (collectively, “Sky Betting & Gaming” or “SBG”), which it acquired in July 2018 (the “SBG Acquisition”), and the operations of TSG Australia Pty Ltd (formerly CrownBet Holdings Pty Limited) and its subsidiaries and affiliates, including TSGA Holdco Pty Limited (formerly William Hill Australia Holdings Pty Ltd) and its subsidiaries and affiliates (“TSGA” and where the context requires, collectively, “BetEasy”), which it acquired an 80% equity interest in between February 2018 and April 2018 (BetEasy acquired TSGA in April 2018) (collectively, the “Australian Acquisitions”). The Stars Interactive Group is headquartered in the Isle of Man and Malta and operates globally, with certain exceptions; SBG is headquartered in and primarily operates in the United Kingdom; and BetEasy is headquartered in and primarily operates in Australia.

For additional information about The Stars Group, including a detailed overview of the business, current strategies and a discussion of the competitive landscape affecting The Stars Group, see the disclosure and discussion elsewhere in this MD&A and the 2018 Annual Reports, particularly in the 2018 Annual Information Form. For risks and uncertainties relating to, among other things, The Stars Group, its business, its customers, its regulatory and tax environment and the industries and geographies in which it operates or where its customers are located, see “Risk Factors and Uncertainties” above and in the 2018 Annual Information Form as well as the risks and uncertainties contained elsewhere herein, the 2018 Annual Reports and in other filings that The Stars Group has made and may make in the future with applicable securities authorities. For information about The Stars Group’s outlook, see the 2018 Annual Reports, particularly in the 2018 Annual Information Form, including under the headings “Business of the Corporation—Business Strategy of the Corporation” and “—Markets and Customers”.

Recent Corporate and Other Developments

Below is a general summary of certain recent corporate and other developments from the beginning of the fourth quarter of 2018 through the date hereof. For additional corporate and other developments and highlights, see the 2018 Annual Reports, particularly the 2018 Annual Information Form, and “Further Information” below.

UK CMA Clearance of SBG Acquisition

On October 11, 2018, the UK Competition and Markets Authority cleared the SBG Acquisition following its Phase 1 review under the Enterprise Act 2002, which permitted the Corporation to begin executing on its integration plans.

Eldorado Market Access Agreement

On November 26, 2018, the Corporation announced it entered into an

agreement with Eldorado Resorts, Inc. (Nasdaq: ERI) (“Eldorado”) that grants the Corporation the option to operate online betting and gaming in the states where Eldorado currently or in the future owns or operates casino properties. The agreement currently covers 11 states (Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, Ohio and West Virginia) which, when combined with the Corporation’s existing market access deals in New

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Jersey and Pennsylvania, gives the Corporation potential access to 13 states. The agreement grants the Corporation the option to own, operate and brand real-money online sports betting, poker and casino offerings in each of the applicable states subject to license availability, state law and regulatory approvals. As it relates to sports betting, the Corporation’s options will provide first skin access in states where Eldorado owns or operates more than one casino property and second skin access in all other applicable states.

Under the terms of the agreement, Eldorado will receive a revenue share from the operation of the applicable offerings by the Corporation, and the Corporation issued Eldorado 1,076,658 Common Shares at a contractual price of $23.22 per share for a value of $25 million and the Corporation will issue an additional $5 million of Common Shares upon the Corporation’s exercise of the first option and following the satisfaction of certain conditions. Further, Eldorado would be entitled to additional Common Shares at a price of $23.22 per share beginning in five years. The number of additional shares potentially issuable to Eldorado would be solely based on the success of the Corporation’s online gaming offerings in applicable states as measured by net gaming revenue generated in each applicable state.

Kentucky Litigation

On December 21, 2018, the Kentucky Court of Appeals ruled in The Stars Group’s favor and reversed in its entirety the $870 million judgment issued against it by a trial court judge in December 2015 under a centuries old statute and relating to alleged losses by Kentucky residents who played real-money online poker on PokerStars’ website during a period between 2006 and 2011. The Supreme Court of Kentucky is currently considering whether to hear the Commonwealth’s appeal of the reversal and The Stars Group intends to vigorously dispute any and all liability in the event the Kentucky Supreme Court grants review and hears the appeal. For additional information regarding the Kentucky proceeding, see the 2018 Annual Information Form, particularly under the heading “Legal Proceedings and Regulatory Actions”, and note 28 to the 2018 Annual Financial Statements.

Prepayment of First Lien Term Loans

On February 22, 2019, the Corporation prepaid $100.0 million of its USD First Lien Term Loan (as defined below), including accrued and unpaid interest, using cash on its balance sheet. For additional information, see “Liquidity and Capital Resources” below.

SELECTED FINANCIAL INFORMATION

 

Selected financial information of the Corporation for the three months ended December 31, 2018 and 2017, and for the years ended December 31, 2018, 2017 and 2016 is set forth below.

 

Revenue increased in both the quarter and year ended December 31, 2018 as compared to the applicable prior year periods and as compared to the year ended December 31, 2016 primarily as a result of the SBG Acquisition and Australian Acquisitions (collectively, the “Acquisitions”) as well as growth of the Corporation’s online Poker, Gaming and Betting and product offerings. For additional variance analysis on revenue, see “Consolidated Results of Operations and Cash Flows”, and “Segment Results of Operations” below.

 

The increase in the Corporation’s total assets as at December 31, 2018 compared to December 31, 2017 and 2016 was primarily the result of an increase in goodwill and intangible assets following the Acquisitions. The increase in outstanding long-term liabilities as at December 31, 2018 compared to December 31, 2017 and 2016 was primarily to

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the result of an increase to long-term debt resulting from the SBG Financing. For additional variance analysis on total assets and non-current liabilities, see “Consolidated Results of Operations and Cash Flows” below.

CONSOLIDATED RESULTS OF OPERATIONS AND CASH FLOWS

 

Summary consolidated results of the Corporation’s operations, cash flows and certain other items for the quarters and years ended December 31, 2018 and 2017 are set forth below:

 

¹ Non-IFRS measure. A reconciliation to its nearest IFRS measure is provided under “Reconciliations” below.

The discussion below sets forth a summary of the results, trends and variances of the Corporation on a consolidated basis. For further discussion and detail of the individual segment results, trends and variances, including details of

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separate trends in revenue by individual line of operation for each segment, as applicable, and the Corporate cost center, see the section “Segment Results of Operations”.

Revenue

Revenue for the quarter and year ended December 31, 2018 increased $292.6 million, or 81.2% and $716.9 million, or 54.6%, respectively, compared to the applicable prior year period. The increase for both periods was primarily driven by the Acquisitions, which added $298.1 million and $591.1 million to revenue for the respective periods. With respect to the International segment, revenue increased in all lines of operation for the year but decreased in Poker for the quarter, which was partially offset by increased revenue across Gaming and Betting, in each case primarily driven by those factors set forth under “Segment Results of Operations—International—Revenue”.

With respect to Canada, the jurisdiction where its registered office is located, and based solely on calculations derived from internal records, the Corporation estimates that revenue derived from customers in Canada, which currently relates only to peer-to-peer Poker, represented less than 3% of its total consolidated revenue for the quarter and year ended December 31, 2018 and less than 5% for the applicable prior year periods. These estimations are neither itemized nor otherwise separated from the revenue the Corporation reports under IFRS or otherwise, and as such, they cannot be reconciled to a reported IFRS measure.

Foreign Exchange Impact on Revenue

The U.S. dollar, which is the primary currency of gameplay for the International segment, was stronger during the quarter ended December 31, 2018 and weaker during the year ended December 31, 2018, against certain foreign currencies, particularly the Euro, which is the primary depositing currency of the International segment’s customers. This impact to customer purchasing power and translation of foreign currency gameplay, had a negative impact on revenue across all lines of operations during the quarter and had a positive impact on revenue across all lines of operations during the year. By including Constant Currency Revenue for the International segment in the consolidated results of operations for the quarter and year ended December 31, 2018, revenue would have been $672.9 million and $2.01 billion, respectively, and would have increased by 86.8% and 53.5%, as opposed to 81.2% and 54.6%, respectively, compared to the applicable prior year period. For discussion of Constant Currency Revenue for the International segment, see discussion under “Segment Results of Operations—International—Revenue”.

Gross Profit (Excluding Depreciation and Amortization) and Gross Profit Margin

Gross profit for the quarter and year ended December 31, 2018 increased $196.5 million, or 67.7%, and $505.3 million, or 47.4%, respectively, compared to the applicable prior year period. The increase in both periods was primarily driven by the Acquisitions, which added $201.6 million and $412.5 million to gross profit for the respective periods, and solely related to the full year period, the increase in revenue within the International segment.

Gross profit margin for the quarter ended December 31, 2018 was 74.6%, a decrease of 7.5% compared to the prior year period. Gross profit margin for the year ended December 31, 2018 was 77.4%, a decrease of 4.6% compared to the prior year period. The decrease in both periods was primarily driven by the change in revenue mix among and across geographies and lines of operations. For instance, revenue in locally regulated or taxed geographies, which generally impose higher rates of taxes, gaming duties, levies and fees represented 76% of revenue in the quarter ended December 31, 2018, compared to 54% of revenue in the prior year period. In addition, Betting and Gaming revenue as a result of the Acquisitions, which generally have lower gross profit margins than Poker, represented 64.4% of revenue in the quarter ended December 31, 2018, compared to 31.2% of revenue in the prior year period.

Operating Expenses

General and Administrative

General and administrative expenses for the quarter and year ended December 31, 2018 increased $197.1 million, or 170.6%, and $546.3 million, or 124.8%, respectively, compared to the applicable prior year period. The increase in both periods was primarily the result of (i) additional general and administrative expenses resulting from the Acquisitions, which added $168.3 million and $357.5 million to general and administrative expenses for the respective periods, (ii) increased salary and wages of $11.2 million and $27.3 million within the International segment and Corporate cost center for the respective periods as the result of investment in additional headcount, (iii) increased information technology and software costs within the International segment driven by increased cloud storage space

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and additional leased data center spaces, and (iv) solely in respect of the full year period, acquisition-related costs and deal contingent forwards in relation to the Acquisitions of $115.7 million within the Corporate cost center.

Sales and Marketing

Sales and marketing expenses for the quarter and year ended December 31, 2018 increased $40.2 million, or 72.0%, and $138.6 million, or 89.8%, respectively, compared to the applicable prior year period. The increase in both periods was primarily the result of (i) additional sales and marketing expenses resulting from the Acquisitions, which added $51.3 million and $129.0 million to sales and marketing expenses for the respective periods, and (ii) timing of certain advertising costs and other marketing initiatives during the year related to certain sporting events, including an increase in advertising costs during the second and third quarter related to the World Cup, and the launch of some or all lines of operations in certain new markets, as applicable.

Research and Development

Research and development expenses for the quarter and year ended December 31, 2018 increased $4.3 million, or 64.6%, and $14.8 million, 58.8%, respectively, compared to the applicable prior year period. The increase in both periods was primarily the result of (i) additional research and development expenses resulting from the Acquisitions, which added $6.1 million and $12.1 million to research and development expenses for the respective periods, (ii) increased salary and wages within the International segment as a result of investment in additional headcount and (iii) increased costs in relation to investment in technology including new product development, mainly in PokerStars and PokerStars Casino.

Foreign Exchange Impact on Operating Expenses

The Corporation’s expenses are impacted by currency fluctuations. Almost all of its expenses are incurred in either the Euro, British Pound Sterling, U.S. dollar, Canadian dollar or Australian dollar. There are some natural hedges as a result of customer deposits and revenue made in such currencies; however, the Corporation also enters into certain economic hedges to mitigate the impact of foreign currency fluctuations as it deems necessary. See “Liquidity and Capital Resources—Market Risk—Foreign Currency Exchange Risk” for further information on foreign currency risk.

Net Financing Charges

Net financing charges for the quarter and year ended December 31, 2018 increased $52.1 million, or 134.4%, and $205.6 million, or 129.8% compared to the applicable prior year period. The increase in both periods was primarily the result of (i) increased interest expense primarily related to the First Lien Term Loans and Senior Notes (each as defined below) after the effects of hedging activities, and (ii) solely in respect of the full year period, losses on extinguishment of $147.0 million recorded in respect of the amendment and extension and the subsequent early repayment of debt in connection with the Acquisitions.

Income Taxes

Income tax expense for the quarter ended December 31, 2018 was $14.5 million and income tax recovery for the year ended December 31, 2018 was $(1.0) million (quarter and year ended December 31, 2017, income tax expense of $26.4 million and $27.2 million, respectively), which resulted in effective tax rates for those periods of (60.9%) and 0.9%, respectively (quarter and year ended December 31, 2017, 35.8% and 9.5%, respectively). The income tax expense and recovery for the quarter and year ended December 31, 2018, respectively, includes $12.9 million and $27.3 million, respectively (quarter and year ended December 31, 2017, $nil) in relation to the income tax recovery on the amortization expense of acquired intangible assets from the Acquisitions.

The Corporation’s income taxes for the current period were impacted by the tax recovery on amortization as noted above and the mix of taxable earnings among and across geographies, with an increase in taxable earnings following the Acquisitions in geographies with higher statutory corporate tax rates. The Corporation expects the mix of taxable earnings to continue to impact income tax expense in future periods as the acquired businesses operate primarily in

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Australia and the United Kingdom, where statutory corporate income tax rates are higher than those in the Isle of Man and Malta, where the Corporation primarily operated from prior to the Acquisitions.

Net (Loss) Earnings

Net loss for the quarter ended December 31, 2018 was $38.2 million, a decrease of 180.9%, compared to net earnings of $47.2 million in the prior year period. Net loss for the year ended December 31, 2018 was $108.9 million, a decrease of 142.0%, compared to net earnings of $259.3 million in the prior year period. The losses in both periods were primarily the result of (i) increased amortization of acquisition intangibles due to the Acquisitions of $55.6 million and $117.4 million, respectively, and (ii) solely in relation to the full year, the above noted losses on extinguishment, acquisition-related costs, deal contingent forwards, and integration costs, each in connection with the Acquisitions and recorded through general and administrative expenses.

Basic and Diluted Net (Loss) Earnings per Share

Basic net loss per share for the quarter ended December 31, 2018 was $(0.14), a decrease of 145.1%, compared to basic net earnings per share of $0.32 for the prior year period, based on weighted average Common Shares outstanding of 272,636,266 and 147,678,824, respectively. Basic net loss per share for the year ended December 31, 2018 was $(0.49), a decrease of 127.9%, compared to basic net earnings per share of $1.77 for the prior year period, based on weighted average Common Shares outstanding of 208,269,905 and 146,818,764, respectively. The decreases in both periods were due to the net losses incurred as noted above and were partially offset by increases in the weighted average Common Shares outstanding, which was primarily the result of the issuance of Common Shares in connection with the Equity Offering (as defined below), the Corporation’s mandatory conversion of its preferred shares and the Acquisitions.

Diluted net loss per share for the quarter ended December 31, 2018 was $(0.14), a decrease of 162.8%, compared to diluted net earnings per share of $0.23 for the prior year period, based on weighted average Common Shares outstanding of 272,636,266 and 206,807,485, respectively. Diluted net loss per share for the year ended December 31, 2018 was $(0.49), a decrease of 138.7%, compared to diluted net earnings per share of $1.27 for the prior year period, based on weighted average Common Shares outstanding of 208,269,905 and 203,707,589, respectively. The decreases in both periods were due to the net losses incurred as noted above. The decreases were further negatively impacted as all potentially dilutive securities of the Corporation (i.e., securities exercisable or convertible into Common Shares or equity-based awards that can be settled into Common Shares), were not included in the weighted average diluted Common Share amount above used to calculate diluted loss per share because the exercise, conversion or settlement of such securities would be anti-dilutive. This compares to the same period in 2017 where dilutive securities were primarily impacted by dilutive impact of its then outstanding preferred shares.

Adjusted EBITDA, Adjusted Net Earnings, and Adjusted Diluted Net Earnings per Share

For additional information regarding Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share, including applicable definitions and explanations of the relative usefulness of such measures, see “Non-IFRS Measures, Key Metrics and Other Data—Non-IFRS Measures” above. For quantitative reconciliations of such measures to their nearest IFRS measures, see “Reconciliations” below.

The primary adjustment from operating income to Adjusted EBITDA for the applicable quarterly and full year periods was depreciation and amortization, which increased by $61.8 million and $135.6 million for the quarter and year ended December 31, 2018, respectively, primarily as a result of the Acquisitions. In addition to depreciation and amortization, total adjustments and reconciling items also collectively increased by $75.8 million and $239.5 million for the quarter and year ended December 31, 2018, respectively, compared to the applicable prior year period primarily driven by (i) acquisition-related costs and deal contingent forwards incurred in connection with the Acquisitions of $3.1 million and $115.6 million, respectively, (ii) integration-related costs also in connection with the Acquisitions of $17.0 million and $45.6 million, respectively, and (iii) costs incurred in respect of the market access agreement with Eldorado of $20.7 million.

As it relates to Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share for the applicable quarterly and full year periods, the primary adjustments from net (loss) earnings and diluted net (loss) earnings per share were the amortization of acquisition intangibles and acquisition- and integration-related costs, together with the losses on debt extinguishment for the applicable periods, all as noted above. Adjusted Diluted Net Earnings per Share for the quarter and the year were also impacted by the increase in Common Shares issued and outstanding primarily as a result of the

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Equity Offering and the Acquisitions, which included the issuance of a total 59,924,398 Common Shares. In addition, all potentially dilutive securities of the Corporation were not included in the weighted average diluted Common Share amount used to calculate the nearest IFRS measure because the exercise, conversion or settlement of such securities would be anti-dilutive, as noted above. However, these dilutive securities, and in particular the then-outstanding convertible preferred shares of the Corporation, were included in the weighted average Common Share amount used in the calculation of Adjusted Diluted Net Earnings per Share.

Cash Flows by Activity

Cash from Operating Activities

Cash from operating activities for the year ended December 31, 2018 increased $65.2 million, or 13.2%, compared to the prior year period. The increase in the year was primarily the result of (i) the above noted increase in revenue and gross profit generated from the underlying operations of the Corporation, including the impacts of the Acquisitions, and (ii) movements in customer deposit liabilities relative to the prior year period. This was partially offset by increased general and administrative expenses and sales and marketing costs, as described above and in particular resulting from acquisition-related costs and integration costs incurred in respect of the Acquisitions.

Cash used in Investing Activities

The Corporation’s cash outflows from investing activities during the year ended December 31, 2018 were primarily the result of (i) $1.87 billion in aggregate cash consideration (net of cash acquired) paid in connection with the SBG Acquisition and the acquisition of a 62% equity interest in BetEasy, and (ii) capital expenditures, primarily consisting of investments in online gaming development, in each case partially offset by the inflow of cash from the sale of certain investments made with customer deposits.

Cash from (used in) Financing Activities

The Corporation’s cash inflows from financing activities during the year ended December 31, 2018 were primarily the result of (i) $5.67 billion incurred in connection with the debt portion of the SBG Financing (as defined below), (ii) $425.0 million of first lien term loans incurred in connection with the Australian Acquisitions, and (iii) $715.5 million related to the issuance of Common Shares in connection with the Equity Offering, including the proceeds from the exercise of the over-allotment option in full and net of transaction costs, and the exercise of employee stock options. These inflows were partially offset by outflows related to (i) interest and principal repayments on the First Lien Term Loans, Revolving Facility (as defined below) and previous first lien term loans, (ii) $3.93 billion related to the repayment of the previous first lien term loans and the second lien term loan, and the repayment of long-term debt of SBG assumed in connection with the SBG Acquisition, and (iii) $48.2 million in cash consideration (net of cash acquired) paid for the acquisition of an incremental 18% interest in BetEasy.

Free Cash Flow

Free Cash Flow for the quarter and year ended December 31, 2018 decreased $2.3 million, or 2.7%, and $116.9 million, or 34.4%, respectively, compared to the applicable prior year period. The decrease in both periods was primarily the result of (i) increased cash interest and non-voluntary principal payments, and (ii) increased capital expenditures as the Corporation continued to invest in future product improvements and market expansion. This was partially offset by increased cash flow from operating activities, excluding the impact of movements in customer deposit liabilities. As noted above, solely in relation to the full year period, cash flow from operating activities was negatively impacted by acquisition-related and integration costs.

For additional information regarding Free Cash Flow, including an applicable definition and explanation of the relative usefulness of this measure, see “Non-IFRS Measures, Key Metrics and Other Data—Non-IFRS Measures” above. For a quantitative reconciliation of this measure to its nearest IFRS measure, see “Reconciliations” below

Total Assets

Total assets as at December 31, 2018 increased by $5.85 billion, or 108.0%, compared to the same as at December 31, 2017. The increase was primarily the result of increases in (i) goodwill and intangible assets relating primarily to the Acquisitions, and (ii) operational cash and customer deposits.

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Total Non-Current Liabilities

Total non-current liabilities as at December 31, 2018 increased $3.59 billion, or 143.1%, compared to the same as at December 31, 2017. This was primarily the result of increases in (i) long-term debt resulting from the SBG Financing, (ii) deferred tax liabilities as a result of deferred taxes recorded on the intangibles acquired through the Acquisitions, and (iii) contingent consideration relating to the Corporation’s acquisition of an incremental 18% interest in BetEasy. See note 5 to the 2018 Annual Financial Statements. This was partially offset by a decrease in the liability for the Swap Agreements (as defined below) resulting from changes in fair value and settlements during the year ended December 31, 2018.

SEGMENT RESULTS OF OPERATIONS

 

During the second and third fiscal quarters of 2018, the Corporation added additional reporting segments, and it currently has three reporting segments, International, United Kingdom and Australia, each with certain major lines of operations, including Poker, Gaming, Betting and Other, as applicable, and a Corporate cost center. See above under “Managements Discussion and Analysis” and note 7 of the 2018 Annual Financial Statements. Prior quarterly and annual segmental results and information presented in this MD&A have been recast to be presented in a manner consistent with the changed reporting segments.

International

As at December 31, 2018, the International reporting segment included the Stars Interactive Group business (i.e., the Corporation’s existing business prior to the Acquisitions), which operates across all lines of operations and in various jurisdictions around the world, including in the United Kingdom, under the brands identified above under “Overview and Outlook”.

 

¹ Non-IFRS measure. A reconciliation to its nearest IFRS measure is provided under “Reconciliations” below.

² Other revenue includes $1.0 million and $2.0 million for the quarter and year ended December 31, 2018, respectively, that the Corporation excluded from its consolidated results as it related to certain non-gaming related transactions with the United Kingdom segment. A corresponding exclusion in the consolidated results is recorded to sales and marketing expense for amounts included in the United Kingdom segment in respect of these transactions.

  

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Revenue

 

 

Poker revenue for the quarter ended December 31, 2018 decreased $23.4 million, or 10.0%, compared to the prior year period. Constant Currency Revenue for the quarter was $224.1 million, which is $13.1 million higher than actual IFRS revenue. Excluding the impact of year-over-year changes in foreign exchange rates, such revenue for the quarter would have decreased by 4.4%. This decrease was primarily the result of (i) reduced deposits in certain markets as a result of local restrictions on some methods of payment processing and on certain methods of downloading The Stars Group’s poker applications, and (ii) increased cross-selling of customers to the Stars Group’s online casino offerings. This was partially offset by the continued positive impact of shared poker liquidity in Southern Europe (i.e., France, Spain, and Portugal).

 

Poker revenue for the year ended December 31, 2018 increased $9.3 million, or 1.1%, compared to the prior year period. Constant Currency Revenue for the year was $880.5 million, which is $6.1 million lower than actual IFRS revenue. Excluding the impact of year-over-year changes in foreign exchange rates, such revenue for the year would have increased by 0.4%. The increase was primarily the result of (i) the Stars Rewards loyalty program and continued focus on high-value, net-depositing customers (primarily recreational players), and (ii) the positive impact of shared poker liquidity in Southern Europe, with France and Spain beginning in the first quarter of 2018 and Portugal joining in the second quarter of 2018. This was partially offset by (i) the cessation of operations in certain markets (notably Australia from September 2017), and (ii) reduced deposits in certain markets as noted above.

 

 

Gaming revenue for the quarter and year ended December 31, 2018 increased $21.3 million, or 23.4%, and $93.6 million, or 28.0%, respectively, compared to the applicable prior year period. Constant Currency Revenue for the quarter and year ended December 31, 2018 was $117.5 million or $5.4 million higher than the actual IFRS revenue and $421.2 million or $7.2 million lower than the actual IFRS revenue, respectively. Excluding the impact of foreign currency fluctuations, the increase in both periods was primarily the result of (i) product and content improvements to its real-money online casino offerings, including the introduction of over 350 new casino games throughout the year, and (ii) the launch of its real-money online casino offerings in certain new markets during the year.

 

 

Betting revenue for the quarter and year ended December 31, 2018 increased $0.1 million, or 0.4%, and $29.9 million, or 60.7% respectively compared to the prior year period. Constant Currency Revenue for the quarter and year ended December 31, 2018 was $22.7 million or $0.9 million higher than the actual IFRS revenue and $77.6 million or $1.5 million lower than the actual IFRS revenue, respectively. Excluding the impact of foreign currency fluctuations, the increase in revenue was primarily due to increased Stakes which in turn was primarily the result of an increase in wagering activity and QAUs, driven in part by the World Cup, product and content improvements, and the launch of its real-money online sports betting offerings in certain new markets during the year. Revenue for the quarter and the year ended December 31, 2018 was also impacted by Betting Net Win Margin with a decrease in Betting Net Win Margin for the quarter and an increase for the year, in each case primarily driven by sporting results.

Gross Profit (Excluding Depreciation and Amortization) and Gross Profit Margin

Gross profit for the quarter and year ended December 31, 2018 decreased $4.2 million, or 1.4%, and increased $94.8 million, or 8.9%, respectively, compared to the applicable prior year period. The change in both periods was primarily the result of the movements in total revenue as noted above.

Gross profit margin for the quarter and year ended December 31, 2018 was 80.4%, a decrease of 0.2% and 80.5%, a decrease of 0.8%, respectively, compared to the applicable prior year period. The decrease in both periods was primarily driven by an increase in the proportion of Gaming and Betting revenue within the International segment, which generally have lower gross profit margins than Poker and, solely in relation to the full year period, as a result of increased gaming duties, levies and fees of $16.9 million incurred due to expanded operations in existing markets, including as a result of shared liquidity among Spain, France and Portugal.

 

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Operating Expenses

General and Administrative

General and administrative expenses for the quarter and year ended December 31, 2018 increased $48.6 million, or 52.3%, and $91.5 million, or 24.7%, respectively, compared to the applicable prior year period. The increase in both periods was primarily due to (i) the acquisition of option rights relating to the market access agreement with Eldorado, which added $20.7 million of costs, (ii) increased salary and wages of $7.6 million for the quarter and $21.5 million for the year, respectively, as the result of investment in additional headcount, and (iii) increased information technology and software costs.

Sales and Marketing

Sales and marketing expenses for the quarter and year ended December 31, 2018 decreased $10.2 million, or 18.3%, and increased $11.1 million, or 7.2%, respectively, compared to the applicable prior year period. The decrease in the quarter and the increase in the year was primarily due to the timing of advertising costs and other marketing initiatives as described above including an increase in advertising costs during the second and third quarter related to the World Cup.

Research and Development

Research and development expenses for the quarter and year ended December 31, 2018 decreased $1.8 million, or 26.8%, and increased $2.7 million or 10.7%, respectively, compared to the applicable prior year period. The decrease in the quarter was primarily due to the timing of certain costs. The increase for the year was due to increased salary and wages as the result of investment in additional headcount and increased costs in relation to investment in technology, including new product development.

Key Metrics

International Segment QAUs

The segment’s combined QAUs for the quarter ended December 31, 2018 was 2.1 million, a decrease of 3% over the prior year period. The Corporation believes that this was primarily the result of (i) reduced activity in certain markets as a result of local restrictions on some methods of payment processing and on certain methods of downloading The Stars Group’s poker applications and (ii) its continued strategy of focusing on positive return CRM initiatives to attract high-value, net depositing customers (primarily recreational players), which has resulted, and may continue to result, in a decrease in certain lower value customers. Notwithstanding, the Corporation’s QAUs were positively impacted by the growth and expansion of its real-money online casino and betting product offerings within the International segment. Historically, QAUs have generally been higher in the first and fourth fiscal quarters. For a description of the variables and other factors that can impact QAUs, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

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International Segment QNY

 

The segment’s QNY for the quarter ended December 31, 2018 was $163, an increase of 2% over the prior year period, which reflects growth across the Corporation’s betting and gaming offerings within the segment primarily driven by the cross-selling of poker customers to those products. This cross-selling is driven in part by the Corporation’s strategy of focusing on higher value recreational players, with the Stars Rewards loyalty programme encouraging gameplay across all products and lines of operations. The segment QNY calculated using Constant Currency Revenue for the quarter ended December 31, 2018 was $173, an increase of 8% over the prior year period. For a description of the variables and other factors that can impact QNY, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

 

International Segment Net Deposits

The segment’s Net Deposits for the quarter ended December 31, 2018 were $338 million, an increase of 3% over the prior year period. The Corporation believes that this was primarily driven by the implementation of the Stars Rewards loyalty program and initiatives to enhance the customer experience and increase customer engagement, including through CRM initiatives to attract and retain high-value customers, the continued development of the casino and sports betting product offerings, including through additional third-party slots under the PokerStars Casino brand and

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improvement of the user experience and user interface under the BetStars brand. This was partially offset by loss of deposits from markets that were impacted by local restrictions on select methods of payment processing and on certain methods of downloading The Stars Group’s poker applications as noted above and the negative impacts from foreign exchange fluctuations. For a description of the variables and other factors that can impact Net Deposits, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

 

International Segment Stakes and Betting Net Win Margin

 

The segment’s Stakes for the quarter and year ended December 31, 2018 were $261.1 million, an increase of 33.4%, and $966.3 million, an increase of 49.3%, respectively, over the applicable prior year period. The increases in both periods were primarily the result of: (i) an increase in QAUs active on the International segments sportsbetting offerings, driven by an improved product offering with an enhanced user experience as well as the launch of its real-money online sports betting offerings in certain new markets during the year; and (ii) increased customer activity due to the World Cup. Although the World Cup had a greater impact on the second and third fiscal quarters, newly acquired QAUs during, or as a result of, the World Cup contributed to the increase in Stakes for the quarter ended December 31, 2018.

 

The segment’s Betting Net Win Margin for the quarter ended December 31, 2018 was 8.3%, a decrease of 2.8 percentage points over the prior year period. This decrease was primarily the result of the sustained run of operator-favorable sporting results in the prior year period resulting in a Betting Net Win Margin of 11.1% in that period. The segment’s Betting Net Win Margin for the year ended December 31, 2018 was 8.2%, an increase of 0.6 percentage points over the prior year period, which was primarily the result of operator favorable results compared to the prior year period. For a description of the variables and other factors that can impact Stakes and Betting Net Win Margin, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

United Kingdom

As at December 31, 2018, the United Kingdom reporting segment consisted of the SBG business.

 

¹ Non-IFRS measure. A reconciliation to its nearest IFRS measure is provided under “Reconciliations” below.

² Sales and marketing includes $1.0 million and $2.0 million for the quarter and year ended December 31, 2018, respectively, that the Corporation excluded from its consolidated results as it related to certain non-gaming related

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transactions with the International segment. A corresponding exclusion in the consolidated results is recorded to Other revenue for amounts included in the International segment in respect of these transactions.

As previously disclosed, on July 10, 2018, the Corporation completed the SBG Acquisition. SBG operates mobile-led betting, poker and gaming platforms primarily in the United Kingdom. Revenue for the quarter and year ended December 31, 2018 were $225.8 million and $394.1 million, respectively. Gross profit for the same periods was $153.9 million and $275.1 million, respectively, resulting in a gross profit margin of 68.2% and 69.8%, respectively. Revenue and gross profit for the quarter were impacted by a significantly lower Betting Net Win Margin (albeit still above the long-term average of 9%) than the prior year period of 14%. For a description of seasonal trends and other factors impacting this segment’s results, see “Summary of Quarterly Results” below.

Key Metrics

United Kingdom Segment QAUs and QNY

The segment’s combined QAUs for the quarter ended December 31, 2018 was 1.9 million. The Corporation believes that this was primarily the result of increased activity around the World Cup and the start of the European football season in August 2018, which continued into the quarter. For a description of the variables and other factors that can impact QAUs, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

The segment’s QNY for the quarter ended December 31, 2018 was $116, which the Corporation believes was positively impacted by higher Betting Net Win Margin. For a description of the variables and other factors that can impact QNY, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

United Kingdom Segment Stakes and Betting Net Win Margin

The segment’s Stakes for the quarter ended December 31, 2018 were $1.29 billion, with a Betting Net Win Margin of 10.1%. The segment’s Stakes for the year ended December 31, 2018 were $2.51 billion, with a Betting Net Win Margin of 8.6%. Stakes remained strong primarily as a result of trends in customer engagement. Betting Net Win

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Margin for the quarter was above long-term averages of around 9% primarily due to the mix of stakes across different sporting events and bet types throughout the quarter as such sporting events and bet types can have different average Betting Net Win Margins. For the year, the Betting Net Win Margin was slightly below the long-term average of around 9% primarily as a result of the operator-unfavorable sporting results in the third quarter. For a description of the variables and other factors that can impact Stakes and Betting Net Win Margin, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

Australia

As at December 31, 2018, the Australia reporting segment consisted of the BetEasy business.

¹ Non-IFRS measure. A reconciliation to its nearest IFRS measure is provided under “Reconciliations” below.

As previously disclosed, in February and April 2018 the Corporation collectively acquired a majority interest in BetEasy, and in April 2018 BetEasy acquired TSGA. BetEasy operates an online sportsbook in Australia. As at December 31, 2018, the Corporation held an 80% equity interest in BetEasy.

Revenue for the quarter and year ended December 31, 2018 were $72.4 million and $196.9 million, respectively. Gross profit for the same periods was $47.8 million and $137.4 million, respectively, resulting in a gross profit margin of 66.0% and 69.7%, respectively. Revenue and gross profit for both periods were impacted by the Betting Net Win Margin for the quarter and year which was below the long-term averages of 8.5% primarily due to a combination of customer-favorable sporting results and increased promotional spend, including special bonuses to help mitigate the potential loss of customers during the migration of TSGA customers onto the BetEasy technology platform and the rebranding of both entities into BetEasy.

For a description of seasonal trends and other factors impacting this segment’s results, see “Summary of Quarterly Results” below.

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Key Metrics

Australia Segment QAUs and QNY

The segment’s QAUs for the quarter ended December 31, 2018 was 0.3 million. The Corporation believes that this was primarily the result of increased activity following the successful migration of TSGA customers onto the BetEasy platform and associated promotional spend to drive activity and assist the migration. For a description of the variables and other factors that can impact QAUs, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

The segment’s QNY for the quarter ended December 31, 2018 was $243, which the Corporation believes was negatively impacted by lower than the long-term average Betting Net Win Margin. For a description of the variables and other factors that can impact QNY, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

Australia Segment Stakes and Betting Net Win Margin

The segment’s Stakes for the quarter ended December 31, 2018 were $877.3 million, with a Betting Net Win Margin of 8.2%. The segment’s Stakes for the year ended December 31, 2018 were $2.57 billion, with a Betting Net Win Margin of 7.6%. Stakes were strong primarily as a result of positive trends in QAUs driven in part by the customer migration noted above. Betting Net Win Margin for the quarter and year was below long-term averages of around 8.5% primarily due to a combination of customer-favorable sporting results as well as increased promotional spend, including special bonuses to help mitigate the potential loss of customers during the migration of TSGA customers onto the BetEasy technology platform and the rebranding of both entities into BetEasy as described above. For a description of the variables and other factors that can impact Stakes and Betting Net Win Margin, see “Non-IFRS Measures, Key Metrics and Other Data—Key Metrics and Other Data” above.

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Corporate Cost Center

The Corporate cost center includes certain general and administrative expenses, including corporate head office expenses, acquisition-related costs and various corporate governance and regulatory costs, as well as the cost to manage the centralized corporate tax and the debt servicing functions. These Corporate cost center expenses are not allocated to the reporting segments as they do not directly relate to the operations of those segments.

¹ Non-IFRS measure. A reconciliation to its nearest IFRS measure is provided under “Reconciliations” below.

Operating Expenses

Operating expenses for the quarter ended December 31, 2018 decreased $19.6 million, or 85.8%, compared to the prior year period. This was primarily the result of foreign exchange gains recognized in respect of intercompany loans within the applicable reporting segments, which are offset by losses recognized in the applicable segment’s results. Operating expenses for the year ended December 31, 2018 increased $97.8 million, or 141.8%, compared to the prior year period. This was primarily the result of (i) acquisition-related costs of $54.2 million incurred in connection with the Acquisitions, and (ii) realized losses on deal contingent forward contracts of $61.4 million in relation to the Acquisitions.

Net Financing Charges and Income Taxes

Net financing charges and income taxes are only recorded in the Corporate cost center and as a result the variances and trends are as discussed above under “Consolidated Results of Operations and Cash Flows”.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

The Corporation’s principal sources of liquidity are its cash generated from operations, Revolving Facility and certain other currently available funds. Currently available funds consist primarily of cash on deposit with banks and investments, which are comprised primarily of certain highly liquid, short-term investments, including money market funds. The Corporation’s working capital requirements are generally minimal during the year as its current gaming business requires customers to deposit funds prior to playing or participating in its real-money product offerings. The Corporation believes that such deposits are typically converted to revenue efficiently and on a timely basis such that operating expenditures are sufficiently covered. Management also believes that investing is a key element necessary for the continued growth of the Corporation’s customer base and the future development of new and innovative product offerings. Based on the Corporation’s currently available funds, funds available from the Revolving Facility and its ability to access the debt and equity capital markets, if necessary, management believes that the Corporation will have the cash resources necessary to satisfy current obligations and working capital needs, and fund currently planned development and integration activities and other capital expenditures, as well as currently planned acquisitions, for at least the next 12 months. Notwithstanding, the state of capital markets and the Corporation’s ability to access them on favorable terms, if at all; micro and macro-economic downturns; and fluctuations of the Corporation’s operations, among other things, may influence its ability to secure the capital resources required to satisfy current or future obligations and fund future projects, strategic initiatives and support growth. For a description of the factors and risks that could affect the Corporation’s ability to generate sufficient amounts of cash and access the capital markets in the short- and long-terms in order to maintain the Corporation’s capacity to meet its obligations and expected growth or fund development activities, see “Risk Factors and Uncertainties” above and in the 2018 Annual Information Form, including, in particular, under the headings “Risk Factors and Uncertainties—The Stars

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Group’s substantial indebtedness requires and will continue to require that it use a significant portion of its cash flow to make debt service payments, and it may not generate sufficient cash flows to meet its debt service obligations, which could have significant adverse consequences on it and its business” and “Credit Ratings”.

The Corporation believes that its financial condition improved during the period up to the SBG Acquisition on July 10, 2018 by, among other things, decreasing its leverage ratios and producing strong net cash inflows from operating activities. Following the SBG Acquisition and SBG Financing, the Corporation has improved, and intends to continue to improve, its financial condition, including by reducing its long-term debt and decreasing its leverage ratios, through its strong cash flow generation and liquidity, including as a result of continuing to introduce new and innovative product offerings, gaining market share and pursuing expansion into new jurisdictions. For additional information regarding the Corporation’s repayment of debt, see below under “Long-Term Debt”.

For additional information regarding the Corporation’s liquidity and capital resources, see the descriptions of the Corporation’s debt as set forth below under “Revolving Facility” and “Long-Term Debt” and the notes to the 2018 Annual Financial Statements, as well as the 2018 Annual Information Form. See also “Risk Factors and Uncertainties” above and in the 2018 Annual Information Form, particularly under the heading “Risk Factors and Uncertainties—Risks Related to the Business”.

Market Risk

The Corporation is exposed to market risks, including changes to foreign currency exchange rates and interest rates. For additional information regarding these and other risks, including risks related to Brexit, and its impact on the below, and other risk categories, see note 29 in the 2018 Annual Financial Statements and the 2018 Annual Information Form, including under the heading “Risk Factors and Uncertainties”.

Foreign Currency Exchange Risk

The Corporation is exposed to foreign currency risk, which includes risks related to its revenue and operating expenses denominated in currencies other than the U.S. dollar. In general, the Corporation is a net receiver of currencies other than the U.S. dollar, primarily the Euro, GBP and AUD, which are the primary depositing currencies of the Corporation’s customers. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, which is the primary currency of game play on certain of the Corporation’s product offerings within the International segment, have in the past reduced, and may in the future reduce, the purchasing power of the Corporation’s customers, thereby potentially negatively affecting the Corporation’s revenue and other operating results.

The Corporation has also experienced and will continue to experience fluctuations in its net earnings as a result of translation gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Management monitors movements in foreign exchange rates and uses derivative financial instruments for risk management purposes and anticipates that such instruments will mitigate some of its foreign currency risk. As such, any change in cash flows associated with derivative instruments is expected to be offset by changes in cash flows related to the hedged position. However, it is difficult to predict the effect hedging activities could have on the Corporation’s results of operations and there can be no assurance that any foreign currency exchange risks will be so mitigated or that such instruments will not result in a loss. The Corporation recorded foreign currency losses of $9.5 million and foreign currency losses of $0.5 million in the quarters ended December 31, 2018 and 2017, respectively, and foreign currency losses of $68.4 million and foreign currency losses of $2.8 million in the years ended December 31, 2018 and 2017, respectively. For additional information on derivatives, see also notes 2 and 19 in the 2018 Annual Financial Statements. The Corporation may in the future enter into additional derivatives or other financial instruments in an attempt to further hedge its foreign currency exchange risk.

Interest Rate Risk

The Corporation’s exposure to changes in interest rates relates primarily to interest paid on its long-term indebtedness, as well as the interest earned on and market value of its cash, money market funds and debt instruments held at fair value through other comprehensive income. The Corporation is also exposed to fair value interest rate risk on its fixed rate Senior Notes. The Corporation attempts to mitigate cashflow interest rate risk on the First Lien Term Loans through the Swap Agreements but remains exposed to cash flow interest rate risk on the unhedged elements of the First Lien Term Loans, which have variable interest rates.

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As at December 31, 2018, the USD First Lien Term Loan and EUR First Lien Term Loan (as defined below) have LIBOR and EURIBOR floors, respectively, of 0% and as such, the interest rate cannot decrease below 3.50% or 3.75%, respectively. Management monitors movements in the interest rates by frequently reviewing the EURIBOR and LIBOR.

The Corporation’s cash consists primarily of cash on deposit with banks and its investments consist primarily of certain highly liquid, short-term instruments. The Stars Group’s investment policy and strategy is focused on preservation of capital and supporting its liquidity requirements, not on generating trading profits. Changes in interest rates affect the interest earned on the Corporation’s cash and investments and the market value of those investments. However, any realized gains or losses resulting from such interest rate changes would occur only if it sold the investments prior to maturity.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Corporation has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.

Liquidity Risk

The Corporation is also exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Corporation manages liquidity risk by continuously monitoring its forecasted and actual cash flows, and matching maturity profiles of financial assets and liabilities. The Corporation’s objective is to maintain a balance between continuity of funding and flexibility through borrowing facilities available through the Corporation’s lenders. The Corporation’s policy is to seek to ensure adequate funding is available from operations, established lending facilities and other sources, including the debt and equity capital markets, as required. Notwithstanding, the Corporation’s ability to secure the capital resources required to satisfy its current or future obligations could be impacted by, among other things, the state of capital markets, micro and macro-economic downturns, and fluctuations of the Corporation’s operations.

Contractual Obligations

The following is a summary of the Corporation’s contractual obligations as at December 31, 2018:

* Includes principal and interest

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Long-Term Debt

The following is a summary of long-term debt outstanding as at December 31, 2018 and December 31, 2017 (all capitalized terms used in the table below relating to such long-term debt are defined below):

 

The increase in outstanding long-term debt from December 31, 2017 to December 31, 2018 was primarily the result of the proceeds from the incurrence of the First Lien Term Loans and issuance of the Senior Notes, partially offset by scheduled quarterly debt principal repayments and the repayment of the entire balance of the Corporation’s prior first and second lien term loans. In connection with the SBG Acquisition on July 10, 2018, the Corporation raised $4.567 billion in First Lien Term Loans, $1.00 billion in Senior Notes and obtained a new Revolving Facility of $700.0 million of which it had drawn $100.0 million as of completion of the acquisition (but had fully repaid on October 24, 2018), each of which are described below. Additionally, the Corporation completed the underwritten public offering of Common Shares at a price of $38.00 per Common Share, which closed on June 26, 2018, for a total net proceeds (before expenses and excluding the overallotment) of $621.8 million (the “Equity Offering” and collectively with the foregoing, the “SBG Financing”). See note 24 in the 2018 Annual Financial Statements for additional information relating to the Equity Offering. For additional information regarding the Corporation’s outstanding long-term debt, see the 2018 Annual Financial Statements.

The contractual principal repayments over the next five years of the Corporation’s long-term debt outstanding as at December 31, 2018, amount to the following:

 

First Lien Credit Facility

On July 10, 2018, the Corporation completed the debt portion of the SBG Financing, which replaced its previous first lien credit facility with: (i) a first lien revolving facility (the “Revolving Facility”); (ii) a USD first lien term loan (the “USD First Lien Term Loan”); and (iii) a new EUR first lien term loan (the “EUR First Lien Term Loan” and, together with the USD First Lien Term Loan, the “First Lien Term Loans”). Also on July 10, 2018, in connection with the SBG Financing, the Corporation, lenders and Deutsche Bank AG New York Branch, as agent, and certain other parties entered into a new credit agreement (the “Credit Agreement”) for the Revolving Facility and First Lien Term Loans to, among other things, reflect the new first lien credit facility and continue to add certain operational and financial flexibility, particularly as it relates to the Corporation on a combined basis following the SBG Acquisition.

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The Credit Agreement contains customary restrictive covenants and also provides for customary mandatory prepayments, including a customary excess cash flow sweep. See note 17 in the 2018 Annual Financial Statements for further information in respect of the restrictive covenants. As at December 31, 2018, the Corporation was in compliance with all covenants related to the First Lien Term Loans.

Revolving Facility

Maturing on July 10, 2023, the Revolving Facility is for $700 million and has a margin of 3.25% above the applicable LIBOR rate. The margin for the Revolving Facility is subject to leverage-based step-downs. The commitment fee on the Revolving Facility varies based on first lien leverage and ranges from 0.250% to 0.375%. Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of a default and compliance with certain representations and warranties. To the extent the Corporation’s aggregate drawings on and certain letters of credit against the Revolving Facility exceed 35% of the Revolving Facility, the Corporation must comply on a quarterly basis with a maximum net first lien senior secured leverage ratio of 6.75 to 1.00.

The Revolving Facility can be used for working capital needs and for general corporate purposes. As at December 31, 2018, the Corporation has no funds drawn under the Revolving Facility, but had $74.2 million of letters of credit issued but undrawn thereunder relating to, among other things, the Kentucky bond collateral (as described in the 2018 Annual Financial Statements). Availability under the Revolving Facility as at the date hereof is $625.8 million. As at December 31, 2018, the Corporation was in compliance with all covenants related to the Revolving Facility.

First Lien Term Loans

The First Lien Term Loans consist of a $3.575 billion USD First Lien Term Loan priced at LIBOR plus 3.50% and a €850 million EUR First Lien Term Loan priced at EURIBOR plus 3.75%, each with a maturity date of July 10, 2025 and a floor of 0%. Starting on the last business day of the first fiscal quarter ending after July 10, 2018, the USD First Lien Term Loan requires scheduled quarterly payments in amounts equal to 0.25% of the aggregate principal amount of the USD First Lien Term Loan, with the balance due at maturity. There is no amortization on the EUR First Lien Term Loan.

7.00% Senior Notes

On July 10, 2018, two of the Corporation’s subsidiaries, Stars Group Holdings B.V. and Stars Group (US) Co-Borrower, LLC (the “Issuers”), issued the 7.00% Senior Notes due 2026 (the “Senior Notes”) at par in an aggregate principle amount of $1.00 billion. The Senior Notes mature on July 15, 2026. Interest on the Senior Notes is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2019. The Senior Notes are guaranteed by each of the Issuers’ restricted subsidiaries that guarantees the Revolving Facility. The Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future senior indebtedness.

The indenture governing the Senior Notes (the “Indenture”) provides the holders of the Senior Notes with customary rights, including the right to require Stars Group Holdings B.V. to offer to repurchase the Senior Notes in certain limited circumstances and it also provides the Issuers with the right to redeem some or all of the Senior Notes at defined redemption prices based on when the redemption occurs. The Senior Notes include, among other terms and conditions, certain customary limitations on the Issuers’ ability to take certain actions or engage in certain activities. See note 17 in the 2018 Annual Financial Statements for further information in respect of the terms and conditions of the Indenture and Senior Notes. As at the date hereof, the aggregate principal amount of outstanding Senior Notes is $1.00 billion.

Hedging Activities

Subsequent to the SBG Financing, and as part of managing the Corporation’s exposure to foreign exchange risk and interest rate risk, the Corporation entered into cross-currency interest rate swap agreements and interest rate swap agreements (collectively, the “Swap Agreements”), each as discussed below. Prior to entering into the Swap Agreements, the Corporation unwound and settled all of its and SBG’s prior swap agreements.

During the year ended December 31, 2018, a subsidiary of the Corporation entered into USD-EUR cross-currency interest rate swap agreements with a notional amount of €1.99 billion ($2.33 billion), which fix the USD to EUR exchange rate at 1.167 and fix the Euro interest payments at an average interest rate of 3.6%, as well as EUR-GBP

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cross-currency interest rate swap agreements with a notional amount of £1.00 billion (€1.12 billion), which fix the EUR to GBP exchange rate at 0.889 and fix the GBP interest payments at an average interest rate of 5.4%. The cross-currency interest rate swaps have a profile that amortizes in line with the USD First Lien Term Loan and each are set to mature in July 2023. The Corporation also entered into an amortizing USD interest rate swap agreement with a notional amount of $700 million, which is set to mature in July 2023, and swaps USD three-month LIBOR to a fixed interest rate of 2.82%.

The USD-EUR cross-currency interest rate swap agreements and the USD interest rate swap are designated as cash flow hedges. The effective portion of the Corporation’s cash flow hedges is recognized in the consolidated statements of comprehensive (loss) income until reclassified into the consolidated statements of (loss) earnings in the same period the hedged transaction affects earnings.

The EUR-GBP cross-currency interest rate swap agreements are designated as a net investment hedge of the Corporation’s GBP functional currency subsidiaries. Accordingly, the portion of the translation impact arising from the translation of the GBP-denominated liabilities that was determined to be an effective hedge during the period was recognized in the consolidated statements of comprehensive (loss) income, counterbalancing a portion of the translation impact arising from translation of the Corporation’s net investment in its GBP foreign operations.

Upon completion of the SBG Financing, the Corporation also designated a portion of the carrying amount of the USD First Lien Term Loan and the carrying amount of the Senior Notes as a net investment hedge in the Corporation’s USD functional currency subsidiaries. Accordingly, the portion of the translation impact arising from the translation of the USD-denominated liabilities that was determined to be an effective hedge during the period was recognized in the consolidated statements of comprehensive (loss) income, counterbalancing a portion of the translation impact arising from translation of the Corporation’s net investment in its USD foreign operations.

The Corporation evaluates the effectiveness of its cash flow hedges and net investment hedges for each reporting period. In the years ended December 31, 2018 and 2017, the Corporation recorded $(14.9) million and $nil of ineffectiveness, respectively, in respect of its cash flow hedges, and no ineffectiveness was recorded in respect of its net investment hedges.

See note 19 in the 2018 Annual Financial Statements for further information in respect of the Corporation’s hedging activities.

RECONCILIATIONS

To supplement its 2018 Annual Financial Statements presented in accordance with IFRS, the Corporation considers certain financial measures that are not prepared in accordance with IFRS, including those set forth below. See “Non-IFRS Measures, Key Metrics and Other Data” above. The tables below present reconciliations of Adjusted EBITDA, Adjusted Net Earnings, Adjusted Net Earnings per Diluted Share, and Free Cash Flow, each as presented in this MD&A. The Corporation does not provide a reconciliation for the numerator of QNY as the revenue components thereof (i.e., Poker, Gaming and Betting, as applicable) and Other revenue are set forth in “Segment Results of Operations” above.

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Adjusted EBITDA

 

 

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Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share

The table below presents certain items comprising “Other costs (income)” in the Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share reconciliation tables above:

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Free Cash Flow

 

United Kingdom Segment QNY

 

The table below presents proforma revenue for the United Kingdom segment for the quarter ended September 30, 2018, which includes revenue earned by SBG prior to the SBG Acquisition from July 1, 2018 through July 9, 2018, for use in the calculation of the numerator of QNY for the United Kingdom segment for the applicable period:

 

 

¹ Stock-based compensation expense is excluded from Adjusted EBITDA primarily due to its discretionary nature.

² Interest accretion, re-measurement of contingent consideration and the Embedded Derivative, ineffectiveness on cash flow hedges, and amortization of intangible assets resulting from purchase price allocations following acquisitions are excluded from Adjusted Net Earnings as these are accounting adjustments that are not representative of underlying cash operating activities or expenses of the Corporation.

³ Restructuring expenses relate to certain restructuring programs implemented following prior acquisitions, and certain of the Corporation’s strategic cost savings initiatives (i.e., referred to by the Corporation as “operational excellence” or “operational efficiency” programs), all of which management does not consider to be part of core, ongoing operating activities or expenses. “Termination of employment agreements” presented in prior periods is now included in restructuring expenses.

⁴ AMF and other investigation professional fees relate to those matters described in the 2018 Annual Information Form under the heading “Legal Proceedings and Regulatory Actions”.

⁵ The Corporation excludes certain lobbying and legal expenses in jurisdictions where it is actively seeking licensure or similar approval because management believes that the Corporation’s incremental cost of these lobbying and legal expenses in such jurisdictions is generally higher than its peers given liabilities and related issues primarily stemming from periods prior to the acquisition of the Stars Interactive Group or from matters not directly involving the Corporation or its current business.

⁶ Professional fees in connection with non-core activities are excluded from Adjusted EBITDA as these expenses are not representative of the underlying operations including professional fees related to litigation matters, and incremental accounting and audit fees incurred in connection with the integration of the Acquisitions, including as it relates to internal controls.

⁷ The Corporation also excludes direct costs incurred in respect of market access agreements that are not eligible to be capitalized. See above and note 24 in the 2018 Annual Financial Statements for additional information regarding the market access arrangement with Eldorado.

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SUMMARY OF QUARTERLY RESULTS

 

The following financial data for each of the eight most recently completed quarters has been prepared in accordance with IFRS. The presentation currency for each period presented below was and remains the U.S. dollar.

 

The year-over-year consolidated revenue increases in each quarter of 2018 as compared to the applicable prior year periods were primarily attributable to Gaming and Betting revenue in what is now the International segment resulting from the continued rollout of casino and sports betting product offerings and the expansion of the geographical reach of such product offerings into eligible markets, in addition to the positive impact on poker revenue from the introduction of the Stars Rewards program. Quarterly consolidated revenue in 2018 was also positively impacted by the Acquisitions.

For a discussion of results, trends and variances, including the impact of foreign currency fluctuations, over the quarter and year ended December 31, 2018 and 2017, see “Consolidated Results of Operations and Cash Flows”, “Segment Results of Operations” and “Liquidity and Capital Resources” contained in this MD&A.

The Corporation’s consolidated and segmental results of operations can fluctuate due to seasonal trends and other factors. The Corporation believes that the climate and weather in geographies where its customers reside tend to impact, among other things, revenue from operations, key metrics and customer activity, and as such, historically those have been generally higher in the first and fourth quarters than in the second and third quarters. The Betting operations (and thus the financial performance) of the Corporation are also subject to the seasonal variations dictated by various sports calendars. A significant portion of the Corporation’s Betting revenue is and will continue to be generated from bets placed on European football, which has an off-season in the summer that can cause a corresponding temporary decrease in its Betting revenue, and betting on horse racing, the Australian Football League and the National Rugby League comprises a large portion of Betting revenue in the Australia segment. The Corporation’s revenue may also be affected by the scheduling of major sporting events that do not occur annually, such as the World Cup and the UEFA European Championships. In addition, certain individuals or teams advancing or failing to advance and their scores and other results within specific tournaments, games or events may have adverse consequences on the Corporation’s financial performance. Also, the cancellation of sporting events and races could negatively impact Stakes and revenue.

With respect to online Betting, revenue generally fluctuates in line with Betting Net Win Margin. However, the impact on revenue may be mitigated by the impact of Betting Net Win Margin on Stakes, which can fluctuate inversely with such margins. As a result, prolonged periods of high Betting Net Win Margin can negatively impact customer experience, enjoyment and engagement levels, thus resulting in lower customer betting and/or gaming activity levels. Conversely, while periods of low Betting Net Win Margin tend to negatively impact revenue, this may be partially mitigated by increased customer wagering volume (generally referred to as recycling of winnings) due to the positive impact of customer-favorable results on customer experience, enjoyment and engagement. Further, changes to the Corporation’s use of various offsets to revenue including free bets, bonuses and promotions, and/or loyalty program rewards impact reported revenue, which could also cause fluctuations. As such, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full fiscal year. There can be no assurance that the seasonal trends and other factors that have impacted the Corporation’s historical results will repeat in future periods as the Corporation cannot influence or forecast many of these factors. For other factors that may cause its results to fluctuate, including market risks, such as foreign exchange risks, see “Overview and Outlook” above, “Risk Factors and Uncertainties” above, and the 2018 Annual Information Form, including under the headings

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“Risk Factors and Uncertainties” and “Business of the Corporation—Seasonality and Other Factors Impacting the Business” therein.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a description of the Corporation’s significant accounting policies, critical accounting estimates and judgments, and related information, see notes 2 and 3 to the 2018 Annual Financial Statements. Other than as set forth below, there have been no changes to the Corporation’s significant accounting policies or critical accounting estimates or judgments during the quarter and year ended December 31, 2018.

Key Sources of Estimation Uncertainty

Determining the carrying amounts of some assets and liabilities requires estimation of the effects of uncertain future events on those assets and liabilities at the end of the reporting period. The following discussion sets forth key sources of estimation uncertainty at the end of the reporting period, that management believes have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Goodwill impairment

At least annually, the Corporation tests whether goodwill is subject to any impairment in accordance with the applicable accounting policy set forth in note 2 to the 2018 Annual Financial Statements.

The Corporation applied judgment in the allocation of goodwill to the identified cash-generating units (“CGUs”). Prior to the SBG Acquisition, the Corporation identified potential synergy benefits that management estimated would be realized in both the International and United Kingdom CGUs and accordingly attributed a portion of the goodwill recognized from the SBG Acquisition to the International CGU for impairment testing purposes. The annual recurring synergy benefit applicable to each CGU was calculated and the net present value of this recurring benefit to each CGU was used to allocate the appropriate proportion of goodwill accordingly.

The recoverable amount for any CGU or group of CGUs is determined based on the higher of fair value less costs to sell and value in use. Both valuation approaches require management to use judgments and estimates. Goodwill impairment exists when the carrying value of a CGU or group of CGUs exceeds its recoverable amount. Estimates used in determining the recoverable amount include but are not limited to expected cash flows, growth rates, capital expenditures and discount rates. A change in future earnings or any other assumptions may have a material impact on the fair value of the CGU or group of CGUs, and could result in an impairment loss. See note 11 to the 2018 Annual Financial Statements.

Valuation of deferred contingent payment on acquisition of non-controlling interest

As part of the incremental acquisition of an 18% equity interest in BetEasy, BetEasy’s management team will be entitled to an additional payment of up to AUD 239 million in 2020, subject to certain performance conditions primarily related to its EBITDA, and payable in cash and/or additional Common Shares at The Stars Group’s discretion. The Corporation considered this additional payment to be a contingent consideration and accounted for it as part of the purchase price related to the acquisition of the 18% equity interest in BetEasy. The deferred contingent payment is subsequently recorded at fair value at each balance sheet date, with re-measurements recorded within net financing charges in the consolidated statements of (loss) earnings. In valuing the deferred contingent payment as at December 31, 2018, the Corporation used a discount rate of 10.5%, considering the term of the deferred contingent payment period and credit risk. The Corporation applied a volatility of historical EBITDA for comparable companies of 25%, which was based on historical performance and market indicators. See notes 5 and 26 of the 2018 Annual Financial Statements.

Uncertain tax positions

Determining the Corporation’s income tax and its provisions for income taxes involves a significant degree of estimation and judgment, particularly in respect of open tax returns relating to prior years where the liabilities remain to be agreed with the local tax authorities. The Corporation is also subject to tax authority audits and has a number of open tax enquiries. As a result, it has recognized a number of provisions against uncertain tax positions that are recognized based on management’s best estimate of the outcome after taking into consideration all available evidence, and where appropriate, after taking external advice. The tax provisions recorded in the Corporation’s consolidated financial statements in respect of prior years relate to intercompany trading and financing arrangements entered into in the normal course of business and tax audits that are currently in progress with fiscal authorities. Due to the uncertainty associated with such tax items it is possible that at a future date, on resolution of the open tax matters, the

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final outcome may vary significantly and there is the potential for a material adjustment to the carrying amounts of the liability recorded as a result of this estimation uncertainty.

Critical Accounting Estimates and Judgments

The preparation of the Corporation’s 2018 Annual Financial Statements requires management to make estimates and assumptions concerning the future. It also requires management to exercise its judgment in applying the Corporation’s accounting policies. Estimates and judgments are continually evaluated and are based on historical experience, general economic conditions and trends and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Estimates and their underlying assumptions are reviewed on a regular basis and the effects of any changes are recognized immediately. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the consolidated financial statements and actual results could differ from the Corporation’s estimates.

The following discussion sets forth management’s most significant estimates and assumptions in determining the value of assets and liabilities and the most significant judgments in applying accounting policies.

Determination of purchase price allocations and deferred contingent payments

Management makes certain judgments and estimates in the recognition and measurement of assets and liabilities, including separately identifiable intangibles acquired as part of a business combination. Further, management also makes judgments and estimates in determining the value of deferred contingent payments that should be recorded as part of the consideration on the date of acquisition and changes in deferred contingent payments payable in subsequent reporting periods. The deferred contingent payment relating to the incremental acquisition of an 18% equity interest in BetEasy is discussed in notes 2 and 26 to the 2018 Annual Financial Statements.

Business combinations may result in the recognition of certain intangible assets, recognized at fair value, including but not limited to, software technology, customer relationships, below market significant contracts, and brands. Judgment is applied in the identification of “identifiable” intangible assets which requires that an asset must be separable or must arise from contractual or other legal rights to distinguish it from goodwill. Specifically, customer relationships recognized in respect of the SBG Acquisition and the Australian Acquisitions are primarily in respect of non-contractual relationships from which the acquired companies have a practice and history of establishing contracts (i.e., customers that have previously engaged in online gaming transactions and are expected to engage in future online gaming transactions).

Key estimates made by management in connection with the measurement of acquired intangible assets relating to the SBG Acquisition and the Australian Acquisitions, included:

Acquisition of BetEasy – control assessment

The Corporation acquired a 62% equity interest in BetEasy on February 27, 2018, and a further 18% equity interest on April 24, 2018. As is typical, the shareholders agreement entered into with the minority shareholders of BetEasy in connection with these transactions includes a number of rights and protections for the minority shareholders in certain circumstances that are directly harmful to the minority, including as it relates to significant changes to business scope, material acquisitions or financing. In the Corporation’s judgment, such minority shareholder rights are protective rights and the Corporation has control in accordance with IFRS 3, Business Combinations.

Useful lives of long-lived assets

Estimates are used for each component of an asset’s useful life and is based on an analysis of all pertinent factors including, but not limited to, the expected use of the asset and, in the case of intangible assets, where applicable, contractual provisions that enable the renewal or extension of the asset’s legal or contractual life without substantial

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cost, as well as renewal history or the expected period of future benefit of the intangible asset. Incorrect estimates of useful lives could result in an increase or decrease in the annual amortization expense and future impairment charges.

As noted above, the Corporation acquired significant intangible assets in connection with the SBG Acquisition and the Australian Acquisition. Management used estimates in determining the useful lives for these acquired intangible assets using information regarding, among other things, details of the contractual terms, historical customer activity and attrition, forecasted cash flow information, and market conditions and trends.

Debt extinguishment

The Corporation applied judgment in determining whether transactions related to its long-term debt during the period should be classified as an extinguishment or modification of such debt. The Corporation considers long-term debt that is pre-payable with no significant termination costs as being extinguished when contractual amendments are made. As discussed in note 17, on April 6, 2018, the Corporation amended its long-term debt in connection with the Australian Acquisitions and recorded the amendment as an extinguishment for accounting purposes as the debt was repayable at par, and no termination costs were incurred. On July 10, 2018, the Corporation’s previous first lien term loans were repaid in full and the transaction was recorded as an extinguishment for accounting purposes. No termination costs were incurred upon repayment.

Recognition and valuation of embedded derivatives

The Senior Notes include certain embedded features allowing the Corporation to redeem the Senior Notes or allowing the holders to require a redemption of the Senior Notes. Management applied its judgment in determining whether the features represent embedded derivatives required to be bifurcated from the carrying value of the Senior Notes, including in relation to the assessment of whether the features are closely related to the host contract (i.e., the Indenture governing the Senior Notes). Certain features were bifurcated from the carrying value of the Senior Notes. Management used estimates, including an implied credit spread of 3.8% as at December 31, 2018, in determining the fair value of the embedded derivatives. See notes 17, 19 and 26 to the 2018 Annual Financial Statements.

Functional currency

The Corporation’s worldwide operations expose the Corporation to transactions denominated in a number of different currencies, which are required to be translated into one currency for consolidated financial statement reporting purposes. The Corporation’s foreign currency translation policy is designed to reflect the economic exposure of the Corporation’s operations to various currencies. The functional currencies of the Corporation’s subsidiaries are assessed on a regular basis as the operations of the Corporation evolve or as result of business combinations or expansions. The functional currency of an operation or subsidiary is the currency of the primary economic environment to which it is exposed.

Following the SBG Acquisition and the Australian Acquisitions, management applied judgment in determining the functional currencies of the acquired subsidiaries and considered the impact of the acquisitions on the primary economic environment of the acquiring subsidiaries. To determine the functional currencies, management considered the currency that influences sales prices of the goods and services provided by the operations and the currency that influences the costs incurred by the operations. Where as a result of these primary factors, the functional currency was not obvious, management examined secondary factors such as the currency in which funds from financing are obtained, the currency in which cash receipts are retained and the levels of interactions with the parent company.

Contingent liabilities

The Corporation reviews outstanding legal cases following developments in legal proceedings at each balance sheet date, considering, among other things: the nature of the litigation, claim or assessment; the legal processes and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought; the progress of the case (including progress after the date of the consolidated financial statements but before those statements are issued); the opinions or views of legal counsel and other advisors; experience of similar cases; and any decision of the Corporation’s management as to how it will respond to the litigation, claim or assessment. The Corporation assesses the probability of an outflow of resources to settle the obligation as well as if the outflow can be reliably measured. If these conditions are not met, no provision will be recorded and the relevant facts will be disclosed as a contingent liability. To the extent that the Corporation’s assessments at any time do not reflect subsequent developments or the eventual outcome of any claim, its future consolidated financial statements may be materially affected, with a favourable or adverse impact on the Corporation’s business, financial condition or results of operations. See note 28 to the 2018 Annual Financial Statements.

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RECENT ACCOUNTING PRONOUNCEMENTS

New Significant Accounting Policies Adopted

Revenue Recognition

The Corporation applied IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) from January 1, 2018. As permitted, the Corporation applied IFRS 15 using the modified retrospective approach, whereby the cumulative impact of adoption is recognized in opening retained earnings. Comparative information for 2017 has not been restated. See note 4 in the 2018 Annual Financial Statements. The adoption of IFRS 15 did not have a material impact on the timing and amount of revenue recognized by the Corporation and the Corporation did not apply the available optional practical expedients.

Revenue from contracts with customers is recognized when control of the Corporation’s services is transferred to the customer at an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those services. The Corporation has concluded that it is the principal in its revenue arrangements because it controls the services before transferring them to the customer.

The Corporation evaluates all contractual arrangements it enters into and evaluates the nature of the promised goods or services, and rights and obligations under the arrangement, in determining the nature of its performance obligations. Where such performance obligations are capable of being distinct and are distinct in the context of the contract, the consideration the Corporation expects to be entitled under the arrangement is allocated to each performance obligation based on its relative estimated stand-alone selling prices. Performance obligations that the Corporation concludes are not distinct are combined together into a single combined performance obligation. Revenue is recognized at an amount equal to the transaction price allocated to the specific performance obligation when it is satisfied, either at a point in time or over time as applicable based on the pattern of transfer of control.

The Corporation’s principal arrangements include the following sources of revenue:

Revenue from customers within the scope of IFRS 15

Poker revenue

Poker revenue represents primarily the commission charged at the conclusion of each poker hand in cash games (i.e., rake) and entry fees for participation in poker tournaments, and is net of certain promotional expenses, which are treated as a reduction to the transaction price. In poker tournaments, entry fee revenue is recognized when the tournament has concluded.

Gaming revenue

Gaming revenue primarily represents the difference between the amounts of bets placed by customers less amounts won (i.e., net house win) and is presented net of certain promotional expenses which are treated as a reduction to the transaction price. Gaming transactions are instantaneously settled and revenue is recognized at a point in time.

Poker and Gaming each consist of a single revenue performance obligation, notwithstanding the impact of customer loyalty programs as noted below. Revenue is recognized at a point in time upon completion of the performance obligation as noted above. Poker and Gaming are each presented as revenue gross of applicable gaming duties, which are presented within cost of revenue.

Conversion margins

Revenue from conversion margins is the revenue earned on the processing of real-money deposits and cash outs in specified currencies. Revenue from customer cross currency deposits and withdrawals is recognized when the transaction is complete at a point in time. Revenue is recognized with reference to the underlying arrangement and agreement with the players and represents a single performance obligation and is recorded within the applicable line of operations.

Other revenue from customers

Play-money gaming revenue

Customers can participate in online poker tournaments and social casino games using play-money, or virtual currency. Customers can purchase additional play-money chips online to participate in the poker tournaments and social casino games. The revenue is recognized at a point in time when the customer has purchased such chips as control has been

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transferred to the customer and no further performance obligations exist. Once a customer has purchased such chips they are non-refundable and non-cancellable.

Other

The Corporation sponsors certain live poker tours and events, uses its industry expertise to provide consultancy and support services to the casinos that operate the events, and has marketing arrangements for branded poker rooms at various locations around the world. The Corporation also provides customers with access to odds comparisons, tips and other information to assist with betting, and provides other media and advertising services, and limited content development services with revenue generated by way of affiliate commissions, revenue share arrangements and advertising income as applicable. Revenue is recognized upon satisfying the applicable performance obligations, generally at a point in time.

Revenue from customers out of the scope of IFRS 15

Betting revenue

The Corporation’s income generated from Betting product offerings does not fall within the scope of IFRS 15. Income generated from these online transactions is disclosed as revenue although these transactions are accounted as derivative instruments in accordance with IFRS 9 (as defined below) where the income meets the definition of gains or losses, as applicable.

Betting revenue primarily represents the difference between the amounts of bets placed by customers less amounts won (i.e., net house win). Open betting positions are carried at fair value, and gains and losses arising on these positions are recognized in revenue.

Betting is presented as revenue gross of applicable gaming duties, which are presented within cost of revenue.

Customer loyalty programs

The Corporation operates loyalty programs for its customers within each of its reporting segments that reward customers based on a number of factors, including volume of play, player impact on the overall ecosystem, whether the player is a net withdrawing or net depositing player, and product and game selection. For customer loyalty programs operated by the Corporation, applicable revenue received for which loyalty rights earned by its customers are recorded as a contract liability based on the rewards’ allocated amount and are subsequently recognized as revenue in a future period when the rewards are redeemed. Customer loyalty rewards are included in accounts payable and other liabilities on the consolidated statements of financial position.

The estimated selling price of loyalty rewards is determined using an equivalent cash cost approach, which uses historical data of award redemption patterns considering the alternative goods or services for which the rewards can be redeemed. The estimated selling price of rewards is adjusted for an estimate of rewards that will not be redeemed based on historical redemption patterns. Historically, non-redeemed loyalty rewards have not been significant.

Other sources of revenue

Income from player funds

A portion of customer deposits is held as current investments. Income generated from current investments and dormant accounts does not fall within the scope of IFRS 15. Income generated from investments is disclosed as revenue despite being accounted for in accordance with IFRS 9 where it meets the definition of gains or losses, as applicable.

Income (loss) from dormant accounts

When a customer deposit account becomes dormant in accordance with the Corporation’s terms and conditions, the deposit is removed from customer liabilities and recorded within accounts payable and other liabilities. Income is generated from dormant accounts that are not expected to be re-activated based on historical information and re-activation rates. Losses are recorded on dormant accounts that are re-activated. Income (loss) generated from dormant accounts is disclosed as revenue despite being accounted for in accordance with IFRS 9 where it meets the definition of gains or losses, as applicable.

Financial Instruments

The Corporation applied IFRS 9, Financial Instruments (“IFRS 9”) retrospectively from January 1, 2018. In accordance with the practical expedients permitted under the standard, comparative information for 2017 has not been restated. As permitted by IFRS 9, the Corporation elected to continue to apply the hedge accounting requirements of

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IAS 39, Financial Instruments rather than the new requirements of IFRS 9 and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7, Financial Instruments: Disclosures.

For further information regarding the impact of the adoption of IFRS 9, see note 4 in the 2018 Annual Financial Statements.

Financial Assets

Recognition and measurement

At initial recognition, the Corporation measures a financial asset at its fair value plus, in the case of a financial asset not measured at FVTPL (as defined below), transaction costs that are directly attributable to the acquisition of the financial asset. From January 1, 2018, the Corporation classifies financial assets into one of the following measurement categories:

Those to be measured subsequently at fair value through profit or loss (“FVTPL”);

Those to be measured subsequently through other comprehensive income (“FVOCI”); or

Those to be measured at amortized cost.

The classification depends on the Corporation’s business model for managing the financial assets and the contractual terms of the cash flows. Except in very limited circumstances, the classification may not be changed subsequent to initial recognition. The Corporation only reclassifies debt instruments when its business model for managing those assets changes.

Debt instruments

Subsequent measurement of debt instruments depends on the Corporation’s business model for managing the asset and the cash flow characteristics of that asset. There are three measurement categories into which the Corporation classifies its debt instruments:

Amortized cost: debt instruments are measured at amortized cost if they are held within a business model with the objective of collecting the contractual cash flows and those cash flows solely represent payments of principal and interest. A gain or loss on a debt instrument that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the debt instrument is derecognized or impaired. Interest income from these debt instruments is recognized using the effective interest rate method. Cash, restricted cash and accounts receivable are classified as amortized cost.

FVOCI: debt instruments are measured at FVOCI if they are held within a business model with the objective of either collecting the contractual cash flows or of selling the debt instrument, and those cash flows solely represent payments of principal and interest. Movements in the carrying amount are recorded in other comprehensive income, with impairment gains or losses, interest income and foreign exchange gains or losses recognized in profit or loss. When the debt instrument is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss. Bonds recorded within current investments are classified as FVOCI.

FVTPL: debt instruments that are not solely payments of principal and interest are classified and measured at FVTPL, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at FVOCI, as described above, debt instruments may be designated at FVTPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. A gain or loss on a debt instrument that is subsequently measured at FVTPL and is not part of a hedging relationship is recognized in profit or loss and presented in the consolidated statements of (loss) earnings. Funds recorded within current investments are classified as FVTPL.

Equity instruments

The Corporation subsequently measures all equity instruments at fair value, except for equity instruments for which equity method accounting is applied. The classification of equity instruments depends on whether the Corporation has made an irrevocable election at the time of initial recognition to account for the equity instruments at FVOCI. There are two measurement categories into which the Corporation classifies its equity instruments:

FVOCI: equity instruments are classified as FVOCI on an instrument-by-instrument basis when the conditions are met based on the nature of the instrument. Where the Corporation’s management makes an irrevocable election to present fair value gains and losses on equity instruments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss upon the derecognition of those instruments. Dividends

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from such instruments continue to be recognized in profit or loss when the Corporation’s right to receive payment is established. The Corporation does not currently hold any equity instruments classified as FVOCI.

FVTPL: equity instruments are classified as FVTPL if they are held for trading (they are acquired for the purpose of selling or repurchasing in the near term) or equity investments which the Corporation had not irrevocably elected to classify at FVOCI. Changes in the fair value of financial assets at FVTPL are recognized in the consolidated statement of earnings. Equity in unquoted companies is classified as FVTPL.

Impairment of financial assets

At the end of each reporting period, the Corporation assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The impairment provision recorded in respect of debt instruments carried at amortized cost and FVOCI is determined at 12-months expected credit losses on the basis that the Corporation considers these instruments as low risk.

The Corporation applies the simplified approach permitted by IFRS 9 for trade receivables and other financial assets held at amortized cost, which requires expected lifetime losses to be recognized from initial recognition of the receivables.

The forward-looking element in determining impairment for financial assets is derived from comparison of current and projected macroeconomic indicators covering primary markets in which the Corporation operates.

Financial Liabilities

Recognition and measurement

Financial liabilities are classified, at initial recognition, as either financial liabilities at FVTPL or other financial liabilities.

FVTPL: Financial liabilities are classified as FVTPL if they are held for trading or are designated as FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise or the financial liability is managed and its performance is evaluated on a fair value basis. Any gains or losses arising on re-measurement are recognized in the consolidated statements of (loss) earnings. Derivative instruments as well as the deferred contingent payment and certain other level 3 liabilities (see note 26) are classified as FVTPL.

Other financial liabilities: Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method calculates the amortized cost of a financial liability and allocates interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability (or a shorter period where appropriate) to the net carrying amount on initial recognition. Long-term debt is classified within other financial liabilities and is measured at amortized cost.

Debt modifications

The Corporation may pursue amendments to its credit agreements based on, among other things, prevailing market conditions. Such amendments, when completed, are considered by the Corporation to be debt modifications. For debt repayable at par with nominal break costs, the Corporation elected to account for such debt modifications as equivalent to repayment at no cost of the original financial instrument and an origination of a new debt at market conditions. Resetting the debt to market conditions with the same lender has the same economic substance as extinguishing the original financial instrument and originating new debt with a third-party lender at market conditions. The transaction is accounted for as an extinguishment of the original debt instrument, which is derecognized and replaced by the amended debt instrument, with any unamortized costs or fees incurred on the original debt instrument recognized as part of the gain or loss on extinguishment.

For all other debt, the accounting treatment of debt modifications depends upon whether the modified terms are substantially different than the previous terms. The terms of an amended debt agreement are considered substantially different when either: (i) the discounted present value of the cash flows under the new terms, discounted using the original effective interest rate, are at least ten percent different from the discounted present value of the remaining cash flows of the original debt or (ii) management determines that other changes to the terms of the amended agreement, such as a change in the environment in which a floating interest rate is determined, are substantially different. If the modification is considered to be substantially different, the transaction is accounted for as an extinguishment of the original debt instrument, which is derecognized and replaced by the amended debt instrument, with any unamortized costs or fees incurred on the original debt instrument recognized as part of the gain or loss on

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extinguishment. If the modification is not considered to be substantially different, an adjustment to the carrying amount of the original debt instrument is recorded, which is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate with the difference recognized in net financing changes on the consolidated statements of (loss) earnings.

Transaction costs

Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities (other than financial assets and financial liabilities that are classified as FVTPL) are added to or deducted from, as applicable, the fair value of the financial instrument on initial recognition. These costs are expensed to financial expenses on the consolidated statements of (loss) earnings over the term of the related interest bearing financial asset or financial liability using the effective interest method. When a debt facility is retired by the Corporation, any remaining balance of related debt transaction costs is expensed to financial expenses in the period that the debt facility is retired. Transaction costs related to financial instruments at FVTPL are expensed when incurred.

Derivatives

The Corporation uses derivative instruments for risk management purposes and does not use derivative instruments for speculative trading purposes (except for derivatives with respect to the Corporation’s Betting line of operations, which are transactions within the scope of IFRS 9 but reported as revenue as discussed above). All derivatives are recorded at fair value in the statements of financial position. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not designated as hedging instruments, the re-measurement of those derivatives each period is recognized in the consolidated statements of (loss) earnings.

Derivatives may be embedded in other financial liabilities and non-financial instruments (i.e., the host instrument). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined instrument (i.e., the embedded derivative plus the host instrument) is not held-for-trading or designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in the consolidated statements of (loss) earnings.

A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately under IFRS 9. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at FVTPL.

IFRS 16, Leases

In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”) replacing IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lease accounting model for lessees that requires on-balance sheet recognition and measurement. Lessees are required to recognize right-of-use assets representing the right to use the underlying assets and a lease liability representing the obligation to make lease payments. At the commencement date of a lease, a lessee will measure the present value of in substance fixed future lease payments as right-of-use assets and lease liabilities. Lessees will be required to recognize the interest expense related to recognizing the lease liability and the depreciation expense on the right-of-use asset. IFRS 16 substantially carries forward the lessor accounting requirements from IAS 17.

IFRS 16 became effective for the Corporation on January 1, 2019 for reporting periods after that date. The Corporation intends to adopt the standard by applying the requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at January 1, 2019 using a modified retrospective approach with no restatement of the comparative period.

The Corporation will make use of the practical expedient available on transition to IFRS 16, that does not require it to reassess whether a past contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and related interpretations will continue to apply to the Corporation’s leases entered into or modified before January 1, 2019. The Corporation will also elect to use the exemptions provided by the standard on lease contracts with durations of 12 months or less as of the date of initial application and for leases of underlying assets with low value. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36, Impairment of Assets. This will replace the previous requirement to recognize a provision for onerous lease contracts. However, as a transition practical expedient, the Corporation has elected to rely on the assessment of whether leases are onerous by applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review.

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In preparation for the first-time adoption of IFRS 16, the Corporation has also carried out an implementation project which has led management to conclude that that the new definition in IFRS 16 will not change significantly the scope of contracts that meet the definition of a lease for the Corporation.

On initial application of IFRS 16, for all leases for which the Corporation is a lessee, the Corporation expects to recognize a right-of-use asset in the range of $54.0 million to $58.0 million and a corresponding lease liability in the range of $57.0 million to $61.0 million in the consolidated statements of financial position, initially measured at the present value of the future lease payments.

Subsequent to initial application of IFRS 16, there will be a decrease in rent expense and an increase in depreciation and net finance charges. For short-term leases and leases of low-value assets, the Corporation will opt to recognize a lease expense on a straight-line basis as permitted by IFRS 16. For the year ending December 31, 2019, the Corporation currently expects an decrease to net (loss) earnings in the form of a reduction to operating rental expenses of between $14.0 million and $16.0 million and an increase in depreciation expenses of between $12.5 million to $14.5 million, each as reported in general and administrative expenses on the consolidated statements of (loss) earnings as well as an increase to interest accretion expense of between $1.5 million to $2.5 million reported in net financing charges on the consolidated statements of (loss) earnings.

At the date of finalizing the 2018 Annual Financial Statements, management are completing their reviews across certain non-material contracts. Some of these contracts may be identified as leases under IFRS 16 and if so, the right of use asset and lease liability may increase accordingly. As the Corporation has no finance leases, there will be no impact as a result of the adoption of IFRS 16 with respect to the same.

International Financial Reporting Interpretations Committee 23, Uncertainty over Income Tax Treatments (“IFRIC 23”)

In June 2017, the IASB published IFRIC 23, effective for annual periods beginning on or after January 1, 2019. The interpretation requires an entity to assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings and to exercise judgment in determining whether each tax treatment should be considered independently or whether some tax treatments should be considered together. The decision should be based on which approach provides better predictions of the resolution of the uncertainty. An entity also has to consider whether it is probable that the relevant authority will accept each tax treatment, or group of tax treatments, assuming that the taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so.

 

The Corporation intends to adopt the interpretation by applying the requirements retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at January 1, 2019 using a modified retrospective approach with no restatement of the comparative period. The Corporation believes that the adoption of the interpretation will not have a material impact to the consolidated financial statements of the Corporation.

OFF BALANCE SHEET ARRANGEMENTS AND RELATED PARTY TRANSACTIONS

Off Balance Sheet Arrangements

As at December 31, 2018, the Corporation had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Corporation’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Related Party Transactions

The Corporation’s key management have authority and responsibility for overseeing, planning, directing and controlling its activities and consist of the members of the Board, the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Corporate Development Officer, Executive Vice-President and Chief Legal Officer, Chief Technology Officer, and certain other senior members of management. Total compensation expense for such key management was $17.9 million in 2018, as compared to $9.0 million in 2017. The increase in compensation expense for such key management was primarily the result of the addition of members of key management and other senior members of management during the second half of 2017, as well as increased stock-based compensation following the implementation of a long-term incentive plan. For additional information, see note 30 of the 2018 Annual Financial Statements and The Corporation’s most recent management information circular for its annual meeting of shareholders.

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OUTSTANDING SHARE DATA

 

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LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

For information regarding the Corporation’s material legal proceedings and regulatory actions, and material changes or updates thereto, see the 2018 Annual Information Form, particularly under the heading “Legal Proceedings and Regulatory Actions” and note 28 to the 2018 Annual Financial Statements.

 

DISCLOSURE CONTROLS AND PROCEDURES AND

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The applicable rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators require The Stars Group’s certifying officers, the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), to establish and maintain disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in such rules. In compliance with these rules, the Corporation has filed applicable certifications signed by the CEO and the CFO that, among other things, report on the design of each of DC&P and ICFR.

Disclosure Controls and Procedures

The CEO and CFO have designed DC&P, or have caused them to be designed under their supervision, to provide reasonable assurance that:

The CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s DC&P at the financial year end December 31, 2018. Based on that evaluation, the CEO and CFO concluded that, because of material weaknesses in the Corporation’s ICFR discussed below, the Corporation’s DC&P were not effective as of December 31, 2018. Notwithstanding these material weaknesses, the Corporation’s management, including the CEO and CFO, have concluded that the 2018 Annual Financial Statements present fairly, in all material respects, the Corporation’s financial position, results of operations and cash flows for the periods presented in conformity with IFRS.

Management’s Annual Report on Internal Control Over Financial Reporting

The CEO and CFO have designed ICFR, or have caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Corporation’s accounting and reporting standards.

For the quarter and year ended December 31, 2018, the Corporation excluded from its assessment the internal control over financial reporting at BetEasy (including TSGA) and SBG, which were acquired on February 27, 2018 and July 10, 2018, respectively. In respect of BetEasy (including TSGA), its financial statements constitute (1.0)% and 4.5% of net and total assets, respectively, 11.1% and 9.7% of revenue, respectively and (45.8)% and 18.1% of net loss respectively, of the consolidated financial statement amounts as of and for the quarter and year ended December 31, 2018. In respect of SBG, its financial statements constitute 113.5% and 48.2% of net and total assets, respectively, 34.6% and 19.4% of revenue, respectively and 272.4% and 111.9% of net loss respectively, of the consolidated financial statement amounts as of and for the quarter and year ended December 31, 2018.

The CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s ICFR at the financial year end December 31, 2018, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the CEO and CFO concluded that the Corporation’s ICFR was not effective as of December 31, 2018, due to the fact that there were material weaknesses in the same. A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Corporation’s annual or interim financial statements or report will not be prevented or detected

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on a timely basis. Management identified the following internal control deficiencies that constitute material weaknesses in the Corporation’s ICFR as of December 31, 2018:

Translation of Intercompany Loans

During the fourth quarter of 2018, management identified a deficiency related to the foreign currency translation of intercompany loans, which were not being translated each reporting period, which resulted in foreign exchange losses not being properly reflected in the Corporation’s financial statements. Management has concluded that as of December 31, 2018, there was a material weakness in the controls over the foreign currency translation of intercompany loans.

Certain remedial measures were undertaken in the fourth quarter of 2018 that resulted in an effective control design over the Corporation’s translation of intercompany loans, however management was unable to conclude that these controls were operationally effective in the assessment for the year ended December 31, 2018 due to the continued testing of such controls that is currently underway. Management made an adjustment during the fourth quarter of $5.8 million to foreign exchange loss through the consolidated statements of (loss) earnings and a corresponding adjustment to unrealized foreign currency translation in respect of the translation of intercompany loans. There were no restatements or other adjusting entries required in the 2018 Annual Financial Statements or otherwise as a result of this material weakness.

Embedded Derivatives

During the fourth quarter of 2018, management identified a deficiency related to the timely assessment of inputs and assumptions used in the valuation of embedded derivatives as at September 30, 2018, where a full assessment was not prepared in support of such valuation until after such date. This could have resulted in an incorrect valuation with a corresponding impact to (loss) earnings. Management has concluded that as of December 31, 2018, there was a material weakness in the controls over the valuation of embedded derivatives.

Certain remedial measures were undertaken in the fourth quarter of 2018 that resulted in an effective control design over the Corporation’s timely assessment of inputs and assumptions used in valuation of embedded derivatives, however management was unable to conclude that these controls were operationally effective in the assessment for the year ended December 31, 2018 due to the continued testing of such controls that is currently underway. There were no restatements or other adjusting entries required in the 2018 Annual Financial Statements or otherwise as a result of this material weakness.

The effectiveness of the Corporation’s ICFR has been audited by its independent external auditor, Deloitte, LLP, London, United Kingdom (“Deloitte”), the registered public accounting firm that also audited the 2018 Annual Financial Statements. Deloitte’s attestation report on the Corporation’s ICFR as of December 31, 2018 is included in the 2018 Annual Financial Statements.

Changes to Internal Control Over Financial Reporting

As discussed above and below, in the fourth quarter of 2018, the Corporation took steps to remediate material weaknesses relating to foreign currency translation of intercompany loans and the valuation of embedded derivatives.

In addition, in the Corporation’s management’s discussion and analysis for each of the second and third quarters of 2018, the Corporation disclosed a material weakness that management identified as of the quarter ended June 30, 2018. This weakness related to the design of controls over the Corporation’s accounting for debt and related disclosures, and was primarily a result of deficiencies in control design over a complex model that was previously developed to support the underlying accounting for debt. To remediate this material weakness, the Corporation redesigned its complex model used for validating, updating, maintaining and monitoring its accounting for debt and related balances. The Corporation also enhanced the control design regarding management’s review of the model to improve the effectiveness of the review. Furthermore, during the quarter ended September 30, 2018, the Corporation hired staff with significant experience in the financial reporting of debt and related balances. During the fourth quarter of 2018, the Corporation successfully completed the testing necessary for management to conclude that this material weakness has been remediated.

Other than as described above, there has been no change in the Corporation’s ICFR that occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Corporation’s ICFR.

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Remediation Efforts to Address Identified Material Weakness

The following steps are among the measures that have been implemented or that the Corporation intends to implement after the date of this management’s discussion and analysis to address its material weaknesses as of December 31, 2018:

Translation of Intercompany Loans

The Corporation implemented and strengthened controls over the revaluation of intercompany loans, including conducting a monthly revaluation, a monthly review of such revaluations and adding a control to detect whether the revaluation is performed correctly. Management currently expects that the successful implementation of these measures will allow it to conclude that the Corporation’s ICFR relating to the translation of intercompany loans are effective when assessing their effectiveness as at the end of the first quarter of 2019.

Embedded Derivatives

The Corporation strengthened existing control processes over the assessment of inputs and assumptions used in valuation of embedded derivatives. Management currently expects that the successful implementation of these measures will allow it to conclude that the Corporation’s ICFR relating to the valuation of embedded derivatives are effective when assessing their effectiveness as at the end of the first quarter of 2019.

Management believes the foregoing efforts will effectively remediate the material weaknesses.

Limitations on Effectiveness of DC&P and ICFR

In designing and evaluating DC&P and ICFR, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of DC&P and ICFR must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. See also “Risk Factors and Uncertainties—Risks Related to the Business—If The Stars Group’s internal controls are ineffective, its operating results and market confidence in its reported financial information could be adversely affected” in the 2018 Annual Information Form.

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FURTHER INFORMATION

Additional information relating to The Stars Group and its business, including the 2018 Annual Reports and other filings that The Stars Group has made and may make in the future with applicable securities authorities, may be found on or through SEDAR at www.sedar.com, EDGAR at www.sec.gov or The Stars Group’s website at www.starsgroup.com. Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of The Stars Group securities and securities authorized for issuance under equity compensation plans, is also contained in the Corporation’s most recent management information circular for the most recent annual meeting of shareholders of the Corporation.

In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on its website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable securities laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings, and public conference calls and webcasts. This list may be updated from time to time.

Toronto, Ontario
March 6, 2019

 

 

(Signed) “Brian Kyle”

_____________________

Brian Kyle
Chief Financial Officer

 

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Exhibit 99.4

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Rafael (Rafi) Ashkenazi, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.5

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Brian Kyle, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.6

 

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of The Stars Group Inc. (the “Registrant”) on Form 40-F for the year ended December 31, 2018, as filed with the Commission on the date hereof (the “Report”), Rafael (Rafi) Ashkenazi, as Chief Executive Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Registrant for purposes of §18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. This certification is not, and shall not be deemed, incorporated by reference in the Report or any other filing of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act.

 

Exhibit 99.7

 

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of The Stars Group Inc. (the “Registrant”) on Form 40-F for the year ended December 31, 2018, as filed with the Commission on the date hereof (the “Report”), Brian Kyle, as Chief Financial Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Registrant for purposes of §18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. This certification is not, and shall not be deemed, incorporated by reference in the Report or any other filing of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act.

 

 

Exhibit 99.8

Deloitte LLP

Hill House

1 Little New Street

London

EC4A 3TR

 

Phone: +44 (0)20 7936 3000

Fax: +44 (0)20 7583 0112

www.deloitte.co.uk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in Registration Statements No. 333-207925 and No. 333-219986 on Form S-8 and Registration Statement No. 333-221875 on Form F-10 and to the use of our reports dated March 6, 2019 relating to the consolidated financial statements of The Stars Group Inc. and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an explanatory matter paragraph relating to the Company’s change in method of accounting for financial instruments due to adoption of IFRS 9, Financial Instruments) and the effectiveness of the Company’s internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of two material weaknesses), appearing in this Annual Report on Form 40-F of The Stars Group Inc. for the year ended December 31, 2018.

/s/ Deloitte LLP

 

London, United Kingdom

 

March 6, 2019

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London, EC4A 3HQ, United Kingdom.

 

Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

 

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