EX-99.2 3 tsgi-fsq22019exhibit992.htm EXHIBIT 99.2 Exhibit


Exhibit 99.2



thestarsgroupstackeda02.jpg
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2019
August 12, 2019




TABLE OF CONTENTS
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Unaudited Interim Condensed Consolidated Statements of Earnings (Loss)
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
Unaudited Interim Condensed Consolidated Statements of Financial Position
Unaudited Interim Condensed Consolidated Statements of Changes in Equity
Unaudited Interim Condensed Consolidated Statements of Cash Flows
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Nature of business
2.
Significant accounting policies
3.
Acquisition of subsidiaries
4.
Revenue
5.
Segmental information
6.
Expenses classified by nature
7.
Income taxes
8.
Earnings per share
9.
Long-term debt
10.
Derivatives
11.
Provisions
12.
Share capital
13.
Reserves
14.
Fair value
15.
Adoption of new accounting standards
16.
FOX Bet partnership





UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands of U.S. Dollars (except per share and share amounts)

Note
 
2019
 
2018 †
 
2019
 
2018 †
Revenue

4,5
 
637,618


411,512


1,218,002


804,403

Cost of revenue (excluding depreciation and amortization)

6
 
(173,910
)

(83,637
)

(336,546
)

(163,901
)
Gross profit (excluding depreciation and amortization)

 
 
463,708

 
327,875

 
881,456

 
640,502

General and administrative

6
 
(276,440
)

(262,786
)

(535,797
)

(404,093
)
Sales and marketing

 
 
(79,915
)

(54,899
)

(164,258
)

(104,317
)
Research and development

 
 
(13,398
)

(9,126
)

(25,909
)

(17,161
)
Operating income

 
 
93,955

 
1,064

 
155,492

 
114,931

Gain (loss) on re-measurement of deferred contingent payment
 
5,6
 
3,335

 
(3,697
)
 
12,713

 
(3,697
)
Gain on re-measurement of Embedded Derivative
 
5,6
 
12,200

 
—

 
34,800

 
—

Unrealized foreign exchange gain (loss) on financial instruments associated with financing activities
 
5,6
 
292

 
—

 
(1,340
)
 
—

Other net financing charges
 
5,6
 
(84,072
)

(156,663
)

(161,395
)

(195,014
)
Net financing charges

 
 
(68,245
)
 
(160,360
)
 
(115,222
)
 
(198,711
)
Net earnings from associates
 
 
 
—

 
1,068

 
—

 
1,068

Earnings (loss) before income taxes

 
 
25,710

 
(158,228
)
 
40,270

 
(82,712
)
Income tax (expense) recovery

7
 
(21,081
)

3,404

 
(7,983
)
 
2,249

Net earnings (loss)

 
 
4,629

 
(154,824
)
 
32,287

 
(80,463
)
Net earnings (loss) attributable to

 
 







Shareholders of The Stars Group Inc.

 
 
4,757


(153,645
)

32,670


(78,194
)
Non-controlling interest

 
 
(128
)

(1,179
)

(383
)

(2,269
)
Net earnings (loss)

 
 
4,629

 
(154,824
)
 
32,287

 
(80,463
)
Earnings (loss) per Common Share (U.S. dollars)

 
 







Basic

8
 

$0.02



($1.01
)


$0.12



($0.52
)
Diluted

8
 

$0.02



($1.01
)


$0.12



($0.52
)
Weighted average Common Shares outstanding (thousands)

 
 







Basic

8
 
281,689


152,788


277,557


150,523

Diluted

8
 
282,399


152,788


278,181


150,523

_____________________________
† The Corporation applied IFRS 16 from January 1, 2019. Consistent with the transition method chosen by the Corporation, comparative information has not been restated. See note 15.
See accompanying notes.


2

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands of U.S. Dollars
 
Note
 
2019
 
2018 †
 
2019
 
2018 †
Net earnings (loss)
 
 
 
4,629

 
(154,824
)
 
32,287

 
(80,463
)
Items that are or may be reclassified to net earnings (loss)
 
 
 
 
 
 
 
 
 
 
Debt instruments at FVOCI – changes in fair value *
 
13
 
288

 
435

 
937

 
(354
)
Debt instruments at FVOCI – reclassified to net earnings (loss) *
 
13
 
62

 
35

 
(6
)
 
42

Foreign operations – unrealized foreign currency
  translation differences
 
 
 
(107,387
)
 
76,761

 
(11,364
)
 
31,518

Cash flow hedges – effective portion of changes in fair value **
 
13
 
(63,368
)
 
52,219

 
(44,458
)
 
19,124

Cash flow hedges – reclassified to net earnings (loss) **
 
13
 
36,210

 
(47,707
)
 
(6,347
)
 
(9,491
)
Other comprehensive (loss) income
 
 
 
(134,195
)
 
81,743

 
(61,238
)
 
40,839

Total comprehensive loss
 
 
 
(129,566
)
 
(73,081
)
 
(28,951
)
 
(39,624
)
Total comprehensive loss attributable to:
 
 
 
 
 
 
 
 
 
 
Shareholders of The Stars Group Inc.
 
 
 
(129,197
)
 
(71,902
)
 
(28,565
)
 
(37,355
)
Non-controlling interest
 
 
 
(369
)
 
(1,179
)
 
(386
)
 
(2,269
)
Total comprehensive loss
 
 
 
(129,566
)
 
(73,081
)
 
(28,951
)
 
(39,624
)
_____________________________
† The Corporation applied IFRS 16 from January 1, 2019. Consistent with the transition method chosen by the Corporation, comparative information has not been restated. See note 15.
* For debt instruments measured at fair value through other comprehensive income (“FVOCI”), the amounts are presented net of aggregate income tax of $120,000 and $169,000 for the three and six months ended June 30, 2019, respectively (2018 - net of income tax recovery of $517,000 for both periods).
** For other comprehensive income in relation to cash flow hedges, the amounts are presented net of aggregate income tax of $nil for each of the three and six months ended June 30, 2019 (2018 - net of income tax of $nil for both periods).
See accompanying notes.


3

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


 
 
As at June 30,
 
As at December 31,
In thousands of U.S. Dollars

Note
 
2019
 
2018 †
ASSETS

 
 



Current assets

 
 



Cash and cash equivalents - operational

 
 
339,239


392,853

Cash and cash equivalents - customer deposits

 
 
326,628


328,223

Total cash and cash equivalents

 
 
665,867

 
721,076

Restricted cash advances and collateral

 
 
9,239


10,819

Prepaid expenses and other current assets

 
 
45,296


43,945

Current investments - customer deposits

 
 
105,196


103,153

Accounts receivable

 
 
121,190


136,347

Income tax receivable

 
 
25,074


26,085

Total current assets

 
 
971,862

 
1,041,425

Non-current assets

 
 



Restricted cash advances and collateral

 
 
10,677


10,630

Prepaid expenses and other non-current assets

 
 
31,605


32,760

Non-current accounts receivable

 
 
15,418


14,906

Property and equipment

15
 
139,532


85,169

Income tax receivable

 
 
24,686


15,611

Deferred income taxes

7
 
8,405


1,775

Derivatives

10
 
62,518


54,583

Intangible assets

 
 
4,590,758


4,742,699

Goodwill

 
 
5,256,819


5,265,980

Total non-current assets

 
 
10,140,418

 
10,224,113

Total assets

 
 
11,112,280

 
11,265,538

LIABILITIES

 
 



Current liabilities

 
 



Accounts payable and other liabilities

 
 
439,349


424,007

Customer deposits

 
 
421,084


423,739

Current provisions

11
 
29,556


39,189

Derivatives

10
 
10,051


16,493

Income tax payable

 
 
60,419


72,796

Current portion of lease liability

15
 
18,764


—

Current portion of long-term debt

9
 
35,750


35,750

Total current liabilities

 
 
1,014,973

 
1,011,974

Non-current liabilities

 
 



Lease liability

15
 
44,121


—

Long-term debt

9
 
5,053,165


5,411,208

Long-term provisions

11
 
3,637


4,002

Derivatives

10
 
40,675


6,068

Other long-term liabilities

 
 
—


79,716

Income tax payable

 
 
11,659


18,473

Deferred income taxes

7
 
574,392


580,697

Total non-current liabilities

 
 
5,727,649

 
6,100,164

Total liabilities

 
 
6,742,622

 
7,112,138

EQUITY

 
 



Share capital

12
 
4,355,902


4,116,287

Reserves

13
 
(525,270
)

(469,629
)
Retained earnings

 
 
535,431


502,761

Equity attributable to the Shareholders of The Stars Group Inc.

 
 
4,366,063

 
4,149,419

Non-controlling interest

 
 
3,595


3,981

Total equity

 
 
4,369,658

 
4,153,400

Total liabilities and equity

 
 
11,112,280

 
11,265,538

_____________________________
† The Corporation applied IFRS 16 from January 1, 2019. Consistent with the transition method chosen by the Corporation, comparative information has not been restated. See note 15.
See accompanying notes.
Approved and authorized for issue on behalf of the Board on August 12, 2019.
(Signed) “Divyesh (Dave) Gadhia”, Director
Divyesh (Dave) Gadhia,
Executive Chairman of the Board

(Signed) “David Lazzarato”, Director
David Lazzarato,
Chairman of the Audit Committee of the Board


4

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six months ended June 30, 2019 and 2018:
 
 
Share Capital
 
 
 
 
 
 
 
 
 
 
In thousands of U.S. Dollars, except share numbers
 
Common
Shares
number
 
Preferred
Shares
number
 
Common
Shares
amount
 
Preferred
Shares
amount
 
Reserves
(note 13)
 
Retained
earnings
 
Equity
attributable
to the Shareholders of The Stars Group Inc.
 
Non-controlling
interest
 
Total equity
Balance – January 1, 2018
 
147,947,874

 
1,139,249

 
1,199,834

 
684,385

 
(142,127
)
 
605,213

 
2,347,305

 
33

 
2,347,338

Net loss
 
—

 
—

 
—

 
—

 
—

 
(78,194
)
 
(78,194
)
 
(2,269
)
 
(80,463
)
Other comprehensive income
 
—

 
—

 
—

 
—

 
40,839

 
—

 
40,839

 
—

 
40,839

Total comprehensive income (loss)
 
—

 
—

 
—

 
—

 
40,839

 
(78,194
)
 
(37,355
)
 
(2,269
)
 
(39,624
)
Issue of Common Shares in relation to stock options and equity awards
 
1,599,883

 
—

 
33,891

 
—

 
(6,264
)
 
—

 
27,627

 
—

 
27,627

Conversion of Preferred Shares to Common Shares
 
8,013,887

 
(152,698
)
 
114,897

 
(114,897
)
 
—

 
—

 
—

 
—

 
—

Issue of Common Shares in connection with acquired subsidiary
 
3,115,344

 
—

 
96,434

 
—

 
—

 
—

 
96,434

 
—

 
96,434

Issue of Common Shares in connection with equity offering
 
17,000,000

 
—

 
621,775

 
—

 
—

 
—

 
621,775

 
—

 
621,775

Issue of Common Shares in connection with exercised warrants
 
2,422,944

 
—

 
14,688

 
—

 
(14,688
)
 
—

 
—

 
—

 
—

Stock-based compensation
 
—

 
—

 
—

 
—

 
5,648

 
—

 
5,648

 
—

 
5,648

Reversal of deferred tax on stock-based compensation
 
—

 
—

 
—

 
—

 
(359
)
 
—

 
(359
)
 
—

 
(359
)
Equity fees
 
—

 
—

 
(2,393
)
 
—

 
—

 
—

 
(2,393
)
 
—

 
(2,393
)
Reversal of 2014 deferred tax
 
—

 
—

 
(3,748
)
 
—

 
—

 
—

 
(3,748
)
 
—

 
(3,748
)
Acquisition of non-controlling interest in subsidiary
 
—

 
—

 
—

 
—

 
(220,029
)
 
—

 
(220,029
)
 
45,743

 
(174,286
)
Balance – June 30, 2018
 
180,099,932


986,551


2,075,378


569,488


(336,980
)

527,019


2,834,905


43,507


2,878,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance – January 1, 2019 †
 
273,177,244

 
—

 
4,116,287

 
—

 
(469,629
)
 
502,761

 
4,149,419

 
3,981

 
4,153,400

Net earnings (loss)
 
—

 
—

 
—

 
—

 
—

 
32,670

 
32,670

 
(383
)
 
32,287

Other comprehensive loss
 
—

 
—

 
—

 
—

 
(61,235
)
 
—

 
(61,235
)
 
(3
)
 
(61,238
)
Total comprehensive (loss) income
 
—

 
—

 
—

 
—

 
(61,235
)
 
32,670

 
(28,565
)
 
(386
)
 
(28,951
)
Issue of Common Shares in relation to stock options and equity awards (note 12)
 
185,660

 
—

 
3,652

 
—

 
(1,868
)
 
—

 
1,784

 
—

 
1,784

Stock-based compensation
 
—

 
—

 
—

 
—

 
7,462

 
—

 
7,462

 
—

 
7,462

Issue of Common Shares to FOX (note 12)
 
14,352,331

 
—

 
235,963

 
—

 
—

 
—

 
235,963

 
—

 
235,963

Balance – June 30, 2019
 
287,715,235


—


4,355,902


—


(525,270
)

535,431


4,366,063


3,595


4,369,658

_____________________________
† The Corporation applied IFRS 16 from January 1, 2019. Consistent with the transition method chosen by the Corporation, comparative information has not been restated. See note 15.
See accompanying notes.



5


UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


 
 
Six Months Ended June 30,
In thousands of U.S. Dollars

Note
 
2019
 
2018 †
Operating activities

 
 



Net earnings (loss)

 
 
32,287


(80,463
)
Add (deduct):

 
 



Income tax expense (recovery) recognized in net earnings (loss)

 
 
7,983


(2,249
)
Net financing charges

6
 
115,222


198,710

Depreciation and amortization

6
 
218,375


83,843

Stock-based compensation

13
 
7,462


5,948

Unrealized loss on foreign exchange

 
 
656


68,996

Unrealized gain on investments

 
 
(485
)

(164
)
Impairment of property and equipment and intangible assets

6
 
2,652


1,074

Net earnings from associates

 
 
—


(1,068
)
Realized (gain) loss on current investments and promissory note

 
 
(292
)

28

Income taxes paid

 
 
(46,512
)

(15,772
)
Changes in non-cash operating elements of working capital

 
 
(57,433
)

18,525

Customer deposit liability movement

 
 
2,346


13,901

Other

 
 
1,332


4,771

Net cash inflows from operating activities

 
 
283,593

 
296,080

Investing activities

 
 



Acquisition of subsidiaries, net of cash acquired

3
 
—


(310,563
)
Additions to intangible assets

 
 
(18,505
)

(11,842
)
Additions to property and equipment

 
 
(8,178
)

(9,261
)
Additions to deferred development costs

 
 
(39,033
)

(16,190
)
Net (purchase) sale of investments utilizing customer deposits

 
 
(2,043
)

16,044

Settlement of minimum revenue guarantee

 
 
(675
)

(2,713
)
Net investments in associates

 
 
—


1,068

Other

 
 
(356
)

(1,137
)
Net cash outflows from investing activities

 
 
(68,790
)
 
(334,594
)
Financing activities

 
 



Issuance of Common Shares

12
 
235,963


646,000

Transaction costs on issuance of Common Shares

 
 
—


(24,225
)
Issuance of Common Shares in relation to stock options

12
 
1,784


27,627

Issuance of long-term debt

 
 
—


425,041

Repayment of long-term debt

9
 
(367,875
)

(106,493
)
Transaction costs on long-term debt

 
 
—


(23,061
)
Repayment of lease liability principal
 
 
 
(8,064
)
 
—

Interest paid

 
 
(142,285
)

(66,278
)
Acquisition of further interest in subsidiaries

 
 
—


(48,240
)
Proceeds on loan issued to the holders of non-controlling interest
 
 
 
4,894

 
30,918

Net cash (outflows) inflows from financing activities

 
 
(275,583
)
 
861,289

(Decrease) increase in cash and cash equivalents

 
 
(60,780
)
 
822,775

Unrealized foreign exchange difference on cash and cash equivalents

 
 
5,571


(6,090
)
Cash and cash equivalents – beginning of period

 
 
721,076


510,323

Cash and cash equivalents – end of period

 
 
665,867

 
1,327,008

_____________________________
† The Corporation applied IFRS 16 from January 1, 2019. Consistent with the transition method chosen by the Corporation, comparative information has not been restated. See note 15.
See accompanying notes.

6
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATD FINANCIAL STATEMENTS

1.
NATURE OF BUSINESS

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, FOX Bet, 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 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 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 and its subsidiaries and affiliates (collectively, “BetEasy”), in which it acquired an 80% equity interest in between February 2018 and April 2018 (BetEasy acquired what was formally the William Hill Australia business in April 2018) (collectively, the “Australian Acquisitions”). With certain exceptions, The Stars Interactive Group is headquartered in the Isle of Man and Malta and operates globally; SBG is headquartered in and primarily operates in the United Kingdom; and BetEasy is headquartered in and primarily operates in Australia.

As at June 30, 2019, 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 (collectively, “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 (collectively, “Other”). As it relates to these lines of operations, online revenue includes revenue generated through the Corporation’s online, mobile and desktop client platforms and applications, as applicable.

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; 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 primarily within the Betting line of operation and primarily in Australia.

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 unaudited interim condensed consolidated financial statements in U.S. dollars. Unless otherwise indicated, all dollar (“$”) amounts and references to “USD” or “USD $” in these unaudited interim condensed 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 unaudited interim condensed consolidated financial statements of the Corporation for the three and six months ended June 30, 2019. References to “IFRS” and “IASB” are to International Financial Reporting Standards and the International Accounting Standards Board, respectively.

2.
SIGNIFICANT ACCOUNTING POLICIES

Basis of accounting

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34—Interim Financial Reporting as issued by the IASB, and do not include all the information required for full annual consolidated financial statements. Except as described below, the accounting policies and methods of computation applied in these unaudited interim condensed consolidated financial statements and related notes contained therein are consistent with those applied by

7

the Corporation in its audited consolidated financial statements as at and for the year ended December 31, 2018 (the “2018 Financial Statements”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2018 Financial Statements.

On January 1, 2019, the Corporation adopted the provisions in IFRS 16, Leases (“IFRS 16”) and International Financial Reporting Interpretations Committee (“IFRIC”) 23, Uncertainty over Income Tax Treatments (“IFRIC 23”). See note 15. Changes to significant accounting policies in relation to these adoptions are detailed below. The Corporation also expects to reflect these changes in accounting policies in its audited consolidated financial statements as at and for the year ended December 31, 2019.

New significant accounting policies

IFRS 16, Leases

The Corporation adopted IFRS 16 effective January 1, 2019. See note 15. In preparation for the first-time application of IFRS 16, the Corporation carried out an implementation project, which has shown that the new definition in IFRS 16 will not significantly change the scope of the Corporation’s contracts that meet the definition of a lease.

IFRS 16 introduces significant changes to lessee accounting by removing the distinction between operating and finance lease requirements and adding a requirement to recognize a right-of-use asset and a lease liability at the commencement of all leases except short-term leases and leases of low-value assets for which the election to recognize a lease expense on a straight-line basis has been applied. The requirements for lessor accounting have remained substantially unchanged. The Corporation applied IFRS 16 using the modified retrospective approach, with right-of-use assets being measured at an amount equal to the lease liability, adjusted for any amount of applicable prepaid or accrued lease payments recognized on the statement of financial position as at December 31, 2018. As a result, there was no restatement of the comparative period. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for applicable consideration.

The Corporation applied the following transitional-related elections available upon transition to IFRS 16:

•
Hindsight in the determination of right-of-use assets and lease liabilities on transition;
•
Reliance 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;
•
Exclusion of initial direct costs from the measurement of right-of-use assets on transition; and
•
No recognition of right-of-use assets and lease liabilities for leases expiring within 12 months of adoption of IFRS 16.

The Corporation as a Lessee

The Corporation assesses whether a contract is or contains a lease at the inception of the applicable contract. IFRS 16 changes how the Corporation accounts for leases that it otherwise would have previously classified as operating leases under IAS 17, Leases (“IAS 17”). Under IFRS 16, for all leases except as noted above, the Corporation:

a)
Recognizes a right-of-use asset and a lease liability in the consolidated statement of financial position, initially measured at the present value of future lease payments;
b)
Recognizes depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of profit or loss as part of general and administrative expense and other interest expense within net financing charges, respectively; and
c)
Separates the total amount of cash payments in relation to lease liabilities into a principal portion and interest (each presented within financing activities) in the consolidated statement of cash flows.

Lease incentives are recognized as part of the measurement of right-of-use assets and as part of lease liabilities, except if received prior to lease commencement, while under IAS 17 they resulted in the recognition of a lease incentive liability, and were amortized as a reduction of rental expense on a straight-line basis.

Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36, Impairment of Assets, which replaces the previous requirement to recognize a provision for onerous lease contracts.

For short-term leases (lease term of 12 months or less) and leases of low-value assets, such as personal computers and office furniture, the Corporation has opted to recognize a lease expense on a straight-line basis as permitted by IFRS 16.

The lease liability is initially measured at the present value of the future lease payments, discounted by using the interest rate implicit in the lease. If this rate cannot be readily determined, the Corporation uses its incremental borrowing rate at the lease commencement date.

8

The Corporation subsequently measures the lease liability by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made.

Lease payments included in the measurement of the lease liability include:

•
Fixed lease payments (including in-substance fixed payments), less any lease incentives;
•
Variable lease payments that depend on an index or rate initially measured using the index or rate at the commencement date;
•
Amount expected to be payable by the lessee under residual value guarantees;
•
The exercise price of purchase options if the lessee is reasonably certain to exercise the options; and
•
Payments of penalties for terminating the lease if the lease includes an option to terminate the lease.

The Corporation remeasures the lease liability and makes a corresponding adjustment to the related right-of-use asset whenever:

•
The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;
•
The lease payments change due to changes in an index or rate or change in expected payment under a guaranteed residual value, in which case the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); or
•
A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement of the lease, and any initial costs. They are then subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter of the lease term and the useful life of the underlying asset.

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability or right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers such payments occurs.

As a practical expedient, IFRS 16 permits a lessee to account for any lease and associated non-lease components as a single arrangement instead of separating the non-lease components. The Corporation has applied this practical expedient.

The Corporation as a Lessor

The Corporation does not currently have any material contracts where the Corporation acts as a lessor.

IFRIC 23, Uncertainty over Income Tax Treatments

The Corporation adopted IFRIC 23 effective January 1, 2019. Where uncertain tax treatments exist, the Corporation assesses whether it is probable that a tax authority will accept the uncertain tax treatment applied or proposed to be applied in its income tax filings. The Corporation assesses for each uncertain tax treatment whether it should be considered independently or whether some tax treatments should be considered together based on what the Corporation believes provides a better prediction of the resolution of the uncertainty. The Corporation considers whether it is probable that the relevant authority will accept each uncertain tax treatment, or group of uncertain 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 adoption of the interpretation did not have a material impact on the unaudited interim condensed consolidated financial statements.

IFRS 2, Share-based Payment

For share-based payment transactions that may be settled in cash on the occurrence of a contingent event which is in the control of neither the Corporation nor the counterparty to the payment (“Contingently cash-settled share-based payments”), the Corporation applies the “probable” approach. Under this approach, the share-based payment is classified as either cash-settled or equity-settled in its entirety depending on which outcome is probable at each reporting date. Any change in the probable method of settlement is treated as a change in accounting estimate, with the cumulative expense updated to reflect the appropriate charge for the method of settlement now considered probable.

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

9

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 of the 2018 Financial Statements. The Corporation completed its annual goodwill impairment testing as at December 31, 2018.

The recoverable amount for any cash-generating unit (“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 a CGU or group of CGUs, and could result in an impairment loss. See note 11 of the 2018 Financial Statements.

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

As part of the previously disclosed incremental acquisition of an 18% equity interest in BetEasy, the holders of the non-controlling interest in BetEasy will be entitled to an additional payment of up to AUD $232 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 valuing the deferred contingent payment as at June 30, 2019, the Corporation used a discount rate of 9.5% (December 31, 2018 ‑ 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 22.5% (December 31, 2018 ‑ 25.0%), which was based on historical performance and market indicators. See notes 3 and 14.

Uncertain tax treatments

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 audits and has a number of open tax inquiries. As a result, it has recognized a number of provisions against uncertain tax positions 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 unaudited interim condensed 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 unaudited interim condensed 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 unaudited interim condensed consolidated financial statements and actual results could differ from the Corporation’s estimates.

The following discussion sets forth for the three and six months ended June 30, 2019 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.

Deferred contingent payments

Management 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

10

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 notes 3 and 14.

Useful lives of long-lived assets

Estimates are used for each component of an asset’s useful life and are 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.

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. As previously disclosed, these features were bifurcated from the carrying value of the Senior Notes. Management used estimates, including an implied credit spread of 3.4% as at June 30, 2019 (December 31, 2018 ‑ 4.6%), in determining the fair value of the Embedded Derivative (as defined below). See notes 10 and 14.

Contingent liabilities

The Corporation reviews its legal proceedings following developments in the same 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 alleged 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 favorable or adverse impact on the Corporation’s business, financial condition or results of operations.

Determination of lease term

The Corporation’s lease portfolio includes contracts with extension and termination options. These terms are used to maximize operational flexibility with respect to managing such contracts.

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The Corporation reviews the applicable assessment if a significant event or a significant change in circumstances occurs which affects the assessment and that is within the control of the lessee. If the Corporation exercises an extension option (or elects not to exercise a termination option) that was not included in the lease term, this would result in an increase to the right of use asset and lease liability. As at June 30, 2019, the weighted average remaining life of the Corporation’s leases is 4.66 years.

FOX equity option

On May 8, 2019, the Corporation entered into a commercial agreement with FOX Sports (as defined below). See note 16 for additional details of the agreement. Prior to the tenth anniversary of the commercial agreement, and subject to certain conditions and applicable gaming regulatory approvals, FOX Sports has the right to acquire up to a 50% equity stake in the Corporation’s U.S. business. In accordance with IFRS 2, Share-based payment (“IFRS 2”), based on the judgment of the Corporation's management, this right granted to FOX Sports is considered a contingently cash-settled share-based payment because FOX Sports, subject to receiving regulatory approvals and meeting certain other conditions, has discretion to exercise the right. During the three and six months ended June 30, 2019, the Corporation recorded $3.0 million to sales and marketing expense in relation to the commercial agreement.

Management has made certain judgments in the recognition and measurement of liabilities in relation to this commercial agreement and associated right of FOX Sports to acquire equity, including its estimate as to the probable method of settlement. The right has been valued using a discounted cash flow model and as it represents a contingently cash-settled share-based payment, will be recorded at fair value each reporting period.


11

3.
ACQUISITION OF SUBSIDIARIES

BetEasy

On February 27, 2018, a subsidiary of the Corporation acquired a 62% controlling equity interest in BetEasy for a purchase price of $117.7 million. Accordingly, the Corporation acquired $58.8 million of identifiable net assets, including $102.4 million of intangible assets, of which it recognized a non-controlling interest of $1.0 million in relation to the acquired identifiable net assets. The Corporation also recognized $59.9 million of goodwill in connection with the same.

On April 24, 2018, the same subsidiary of the Corporation acquired an additional 18% interest in BetEasy for a purchase price of $229.2 million. Included in the purchase price was a deferred contingent payment, which is included in other long-term liabilities in the unaudited interim condensed consolidated statements of financial position. See note 14 for details regarding the valuation of the deferred contingent payment. 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 purchase price compared to the carrying value of the 18% non-controlling interest was recognized directly in equity as acquisition reserve.

During the three months ended March 31, 2019, the Corporation finalized the purchase price allocation in relation to this acquisition and did not record any adjustments.

Also in connection with the acquisition of the additional 18% interest in BetEasy, a subsidiary of 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 June 30, 2019, the Corporation determined that the fair value of this non-controlling interest derivative was $nil.

Former William Hill Australia Business

On April 24, 2018, BetEasy acquired 100% of the former William Hill Australia business for a purchase price of $241.2 million. Accordingly, the Corporation acquired $162.5 million of identifiable net assets, including $267.3 million of intangible assets. The Corporation recognized $78.7 million of goodwill in connection with the same.

During the three months ended March 31, 2019, the Corporation recorded an adjustment to increase the acquired financial liabilities by $0.4 million with a corresponding increase to the goodwill recognized. The comparative unaudited interim condensed consolidated statement of financial position has not been restated to reflect this adjustment. During the three months ended June 30, 2019, the Corporation finalized the purchase price allocation in relation to this acquisition and did not record any further adjustments.

SBG

On July 10, 2018, the Corporation completed the SBG Acquisition, acquiring 100% of SBG for a purchase price of $3.24 billion. Accordingly, the Corporation acquired $808.7 million of identifiable net assets, including $3.04 billion of intangible assets. The Corporation recognized $2.43 billion of goodwill in connection with the same.

The Corporation has not completed its assessment or valuation of certain assets acquired and liabilities assumed in connection with this acquisition. Therefore, the information disclosed above and in the 2018 Financial Statements 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. The Corporation did not record any adjustments to the provisional purchase price allocation during the six months ended June 30, 2019.



12

4.
REVENUE

The Corporation recognized the following amounts in the unaudited interim condensed consolidated statements of earnings:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands of U.S. Dollars
 
2019
 
2018
 
2019
 
2018
Poker revenue
 
194,210

 
216,986

 
411,649

 
462,856

Gaming revenue
 
196,891

 
101,941

 
386,102

 
208,651

Betting revenue
 
227,953

 
80,912

 
383,619

 
108,723

Other revenue from customers
 
18,408

 
18,837

 
34,214

 
28,042

Other sources of revenue
 
156

 
(7,164
)
 
2,418

 
(3,869
)
Total revenue
 
637,618

 
411,512

 
1,218,002

 
804,403


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 homogeneous. For further information regarding revenue, including segment revenue by major line of operations and geographic region, see note 5.

5.
SEGMENTAL INFORMATION

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. 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. For the three and six months ended June 30, 2019 and 2018, the Corporation had three reportable segments, as applicable: 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 that are not directly allocable to any of the operating segments or relate to a corporate function (i.e., 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, workforce and 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.

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 tax 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.


13

Segmental information for the three months ended June 30, 2019 and June 30, 2018:
 
 
Three Months Ended June 30, 2019
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Corporate
 
Intercompany eliminations *
 
Consolidated
Revenue
 
321,872


252,876


64,070


—


(1,200
)

637,618

Poker
 
191,496

 
2,714

 
—

 
—

 
—

 
194,210

Gaming
 
104,300

 
92,591

 
—

 
—

 
—

 
196,891

Betting
 
18,284

 
146,443

 
63,226

 
—

 
—

 
227,953

Other
 
7,792

 
11,128

 
844

 
—

 
(1,200
)
 
18,564

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (**)
 
143,223

 
101,053

 
7,192

 
(14,734
)
 
—

 
236,734

 
 
 
 
 
 
 
 
 
 
 
 
 
Net financing charges
 
—

 
—

 
—

 
68,245

 
—

 
68,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
39,377


60,146


9,404


154

 
—

 
109,081

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
23,745

 
7,383

 
5,859

 
2

 
—

 
36,989


 
 
Three Months Ended June 30, 2018 ***
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Corporate
 
Intercompany eliminations
 
Consolidated
Revenue
 
350,235


—


61,277


—


—

 
411,512

Poker
 
216,986

 
—

 
—

 
—

 
—

 
216,986

Gaming
 
101,941

 
—

 
—

 
—

 
—

 
101,941

Betting
 
19,635

 
—

 
61,277

 
—

 
—

 
80,912

Other
 
11,673

 
—

 
—

 
—

 
—

 
11,673

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (**)
 
164,467

 
—

 
13,489

 
(9,685
)
 
—

 
168,271

 
 
 
 
 
 
 
 
 
 
 
 
 
Net financing charges
 
—

 
—

 
—

 
160,360

 
—

 
160,360

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
35,987

 
—

 
8,588

 
10

 
—

 
44,585

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
21,214

 
—

 
3,548

 
88

 
—

 
24,850

_____________________________
* The Corporation excluded from its consolidated revenue $1.2 million of Other revenue included in the United Kingdom segment related to certain non-gaming related transactions with the International segment. A corresponding exclusion is recorded in sales and marketing expense in the International segment.
** Adjusted EBITDA is used internally by the CODM when analyzing underlying segment performance.
*** The Corporation recorded an immaterial reclassification for the three months ended June 30, 2018 of $0.2 million resulting in an increase to Adjusted EBITDA reported for the International segment and a corresponding decrease of the same amount to Adjusted EBITDA for the Corporate cost center.


14

Segmental information for the six months ended June 30, 2019 and June 30, 2018:
 
 
Six Months Ended June 30, 2019
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Corporate
 
Intercompany eliminations *
 
Consolidated
Revenue
 
662,485


431,973


126,244


—


(2,700
)

1,218,002

Poker
 
405,645

 
6,004

 
—

 
—

 
—

 
411,649

Gaming
 
203,208

 
182,894

 
—

 
—

 
—

 
386,102

Betting
 
38,333

 
220,940

 
124,346

 
—

 
—

 
383,619

Other
 
15,299

 
22,135

 
1,898

 
—

 
(2,700
)
 
36,632

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (**)
 
302,563

 
143,272

 
15,822

 
(29,568
)
 
—

 
432,089

 
 
 
 
 
 
 
 
 
 
 
 
 
Net financing charges
 
—

 
—

 
—

 
115,222

 
—

 
115,222

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
77,356


121,817


18,846


356

 
—

 
218,375

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
40,225

 
15,183

 
10,250

 
58

 
—

 
65,716


 
 
Six Months Ended June 30, 2018 ***
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Corporate
 
Intercompany eliminations
 
Consolidated
Revenue
 
732,001


—


72,402


—


—

 
804,403

Poker
 
462,856

 
—

 
—

 
—

 
—

 
462,856

Gaming
 
208,651

 
—

 
—

 
—

 
—

 
208,651

Betting
 
36,321

 
—

 
72,402

 
—

 
—

 
108,723

Other
 
24,173

 
—

 
—

 
—

 
—

 
24,173

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (**)
 
350,874

 
—

 
12,643

 
(20,224
)
 
—

 
343,293

 
 
 
 
 
 
 
 
 
 
 
 
 
Net financing charges
 
—

 
—

 
—

 
198,711

 
—

 
198,711

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
73,956

 
—

 
9,868

 
19

 
—

 
83,843

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
32,489

 
—

 
4,658

 
146

 
—

 
37,293

_____________________________
* The Corporation excluded from its consolidated revenue $2.7 million of Other revenue included in the United Kingdom segment related to certain non-gaming related transactions with the International segment. A corresponding exclusion is recorded in sales and marketing expense in the International segment.
** Adjusted EBITDA is used internally by the CODM when analyzing underlying segment performance.
*** The Corporation recorded an immaterial reclassification for the six months ended June 30, 2018 of $0.1 million resulting in an increase to Adjusted EBITDA reported for the International segment and a corresponding decrease of the same amount to Adjusted EBITDA for the Corporate cost center.


15

A reconciliation of Adjusted EBITDA to Net earnings is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands of U.S. Dollars
 
2019
 
2018
 
2019
 
2018
Consolidated
 
 
 
 
 

 
 
Adjusted EBITDA
 
236,734

 
168,271

 
432,089

 
343,293

Add (deduct) the impact of the following:
 
 
 
 
 

 
 
Acquisition-related costs and deal contingent forwards
 
—

 
(95,627
)
 
—

 
(110,818
)
Stock-based compensation
 
(4,726
)
 
(3,265
)
 
(7,462
)
 
(5,648
)
Gain (loss) from investments
 
326

 
265

 
393

 
(247
)
Impairment of property and equipment and intangible assets
 
(2,498
)
 
(959
)
 
(2,652
)
 
(1,074
)
Other costs
 
(26,800
)
 
(23,036
)
 
(48,501
)
 
(26,732
)
Total adjusting items
 
(33,698
)
 
(122,622
)
 
(58,222
)
 
(144,519
)
Depreciation and amortization
 
(109,081
)
 
(44,585
)
 
(218,375
)
 
(83,843
)
Operating income
 
93,955

 
1,064

 
155,492

 
114,931

Net financing charges
 
(68,245
)
 
(160,360
)
 
(115,222
)
 
(198,711
)
Net earnings from associates
 
—

 
1,068

 
—

 
1,068

Earnings (loss) before income taxes
 
25,710

 
(158,228
)
 
40,270

 
(82,712
)
Income tax (expense) recovery
 
(21,081
)
 
3,404

 
(7,983
)
 
2,249

Net earnings (loss)
 
4,629

 
(154,824
)
 
32,287

 
(80,463
)

The distribution of the Corporation’s assets by reporting segment is as follows:
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Corporate
 
Total
Total assets as at June 30, 2019
 
5,187,887

 
5,317,062

 
504,819

 
102,512

 
11,112,280

 
 
 
 
 
 
 
 
 
 
 
Total assets as at December 31, 2018
 
5,248,115

 
5,430,110

 
510,805

 
76,508

 
11,265,538


The distribution of some of the Corporation’s non-current assets (goodwill, intangible assets and property and equipment) by geographic region is as follows:
In thousands of U.S. Dollars
 
As at June 30, 2019
 
As at December 31, 2018
Geographic Area
 
 
 
 
Canada
 
79,390

 
66,830

United Kingdom
 
5,090,107

 
5,191,994

Isle of Man
 
4,196,203

 
4,346,599

Australia
 
452,902

 
456,422

Malta
 
122,365

 
7,469

Other licensed or approved jurisdictions
 
46,142

 
24,534

 
 
9,987,109

 
10,093,848


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 three or six months ended June 30, 2019 or 2018, or that the Corporation otherwise deems relevant based on its historical reporting of the same or otherwise:


16

 
 
Three Months Ended June 30, 2019
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Intercompany eliminations *
 
Total
Geographic Area
 
 
 
 
 
 
 
 
 
 
United Kingdom
 
21,765

 
239,330

 
—

 
(1,200
)
 
259,895

Malta
 
138,354

 
—

 
—

 
—

 
138,354

Australia
 
—

 
65

 
64,070

 
—

 
64,135

Isle of Man
 
22,414

 
—

 
—

 
—

 
22,414

Italy
 
39,780

 
155

 
—

 
—

 
39,935

Spain
 
26,269

 
73

 
—

 
—

 
26,342

Other licensed or approved jurisdictions
 
73,290

 
13,253

 
—

 
—

 
86,543

 
 
321,872

 
252,876

 
64,070

 
(1,200
)
 
637,618

 
 
Three Months Ended June 30, 2018
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Intercompany eliminations
 
Total
Geographic Area
 
 
 
 
 
 
 
 
 
 
United Kingdom
 
19,422

 
—

 
—

 
—

 
19,422

Malta
 
114,574

 
—

 
—

 
—

 
114,574

Australia
 
—

 
—

 
61,277

 
—

 
61,277

Isle of Man
 
97,292

 
—

 
—

 
—

 
97,292

Italy
 
37,133

 
—

 
—

 
—

 
37,133

Spain
 
31,301

 
—

 
—

 
—

 
31,301

Other licensed or approved jurisdictions
 
50,513

 
—

 
—

 
—

 
50,513

 
 
350,235

 
—

 
61,277

 
—

 
411,512

_____________________________
* The Corporation excluded from its consolidated revenue $1.2 million of Other revenue derived from operations in the United Kingdom that were included in the United Kingdom segment related to certain non-gaming related transactions with the International segment. A corresponding exclusion is recorded in sales and marketing expense in the International segment.

 
 
Six Months Ended June 30, 2019
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Intercompany eliminations *
 
Total
Geographic Area
 
 
 
 
 
 
 
 
 
 
United Kingdom
 
36,763

 
416,077

 
—

 
(2,700
)
 
450,140

Malta
 
248,791

 
—

 
—

 
—

 
248,791

Australia
 
—

 
158

 
126,244

 
—

 
126,402

Isle of Man
 
95,196

 
—

 
—

 
—

 
95,196

Italy
 
82,886

 
233

 
—

 
—

 
83,119

Spain
 
53,836

 
152

 
—

 
—

 
53,988

Other licensed or approved jurisdictions
 
145,013

 
15,353

 
—

 
—

 
160,366

 
 
662,485

 
431,973

 
126,244

 
(2,700
)
 
1,218,002


17

 
 
Six Months Ended June 30, 2018
In thousands of U.S. Dollars
 
International
 
United Kingdom
 
Australia
 
Intercompany eliminations
 
Total
Geographic Area
 
 
 
 
 
 
 
 
 
 
United Kingdom
 
39,572

 
—

 
—

 
—

 
39,572

Malta
 
246,954

 
—

 
—

 
—

 
246,954

Australia
 
—

 
—

 
72,402

 
—

 
72,402

Isle of Man
 
197,134

 
—

 
—

 
—

 
197,134

Italy
 
78,759

 
—

 
—

 
—

 
78,759

Spain
 
62,929

 
—

 
—

 
—

 
62,929

Other licensed or approved jurisdictions
 
106,653

 
—

 
—

 
—

 
106,653

 
 
732,001

 
—

 
72,402

 
—

 
804,403

_____________________________
* The Corporation excluded from its consolidated revenues $2.7 million of Other revenue derived from operations in the United Kingdom that were included in the United Kingdom segment related to certain non-gaming related transactions with the International segment. A corresponding exclusion is recorded in sales and marketing expense in the International segment.

6.
EXPENSES CLASSIFIED BY NATURE
 
 
Three Months Ended June 30,

Six Months Ended June 30,
In thousands of U.S. Dollars
 
2019

2018

2019

2018
Cost of revenue (excluding depreciation and amortization)
 
 
 
 
 



Direct selling costs
 
34,089

 
13,592

 
66,894


25,511

Gaming duty, levies and fees
 
112,587

 
49,503

 
214,145


97,483

Processor and other operating costs
 
27,234

 
20,542

 
55,507


40,907

 
 
173,910

 
83,637

 
336,546


163,901

General and administrative
 
 
 
 
 



Salaries and wages
 
81,464

 
60,387

 
161,598


109,167

Legal and professional fees
 
33,684

 
25,327

 
53,304


41,832

Impairment of property and equipment and intangible assets
 
2,498

 
959

 
2,652


1,074

(Gain) loss on disposal of investments and other assets
 
(292
)
 
321

 
(292
)

(196
)
Acquisition-related costs
 
—

 
35,790

 
—


43,453

Foreign exchange loss
 
975

 
62,965

 
1,855


68,972

IT and software costs
 
27,946

 
12,397

 
55,266


19,807

Other operational costs
 
21,084

 
20,055

 
43,039


36,141

Depreciation and amortization
 
109,081

 
44,585

 
218,375


83,843

 
 
276,440

 
262,786

 
535,797


404,093

Net financing charges
 
 
 
 
 



Interest on long-term debt
 
64,686

 
23,424

 
131,305


49,329

Other interest expense
 
714

 
771

 
2,294

 
1,168

(Gain) loss on re-measurement of deferred contingent payment *
 
(3,335
)
 
3,697

 
(12,713
)

3,697

Gain on re-measurement of Embedded Derivative **
 
(12,200
)
 
—

 
(34,800
)

—

Unrealized foreign exchange (gain) loss on financial instruments associated with financing activities
 
(292
)
 
—

 
1,340

 
—

Ineffectiveness on cash flow hedges
 
5,708

 
—

 
7,564


—

Loss on debt extinguishment
 
—

 
124,976

 
—

 
124,976

Accretion expense
 
14,088

 
8,574

 
22,357


21,080

Interest income
 
(1,124
)
 
(1,082
)
 
(2,125
)

(1,539
)
 
 
68,245

 
160,360

 
115,222


198,711

_____________________________
* See note 3 and 14 for details regarding the recognition and measurement of the deferred contingent payment.
** See notes 10 and 14 for details regarding the recognition and measurement of the Embedded Derivative.

18

7.
INCOME TAXES
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). The Corporation’s 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:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands of U.S. Dollars
 
2019
 
2018
 
2019
 
2018
Net earnings (loss) before income taxes
 
25,710

 
(158,228
)
 
40,270

 
(82,712
)
Canadian statutory tax rate
 
26.5
%
 
26.5
%
 
26.5
%
 
26.5
%
Income taxes at Canadian statutory tax rate
 
6,813


(41,930
)

10,672


(21,919
)
Non-taxable income
 
2,174

 
(2,464
)
 
(3,545
)
 
(2,627
)
Non-deductible expenses
 
7,807

 
3,985

 
9,352

 
4,978

Differences in effective income tax rates in foreign jurisdictions
 
1,400

 
(11,407
)
 
(16,406
)
 
(47,287
)
Deferred tax assets not recognized
 
(1,142
)
 
51,966

 
7,659

 
67,504

Provision true up
 
4,029

 
(3,554
)
 
251

 
(2,898
)
Income tax expense (recovery)
 
21,081

 
(3,404
)
 
7,983

 
(2,249
)

The Corporation’s effective income tax rate for the three and six months ended June 30, 2019, was 82.0% (June 30, 2018 – 2.2%) and 19.8% (June 30, 2018 – 2.7%), respectively. The income tax expense for the three and six months ended June 30, 2019 includes $10.3 million (June 30, 2018 – $1.4 million) and $23.2 million (June 30, 2018 – $1.8 million), respectively, 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 three and six months ended June 30, 2019 were impacted by the tax recovery on amortization of intangible assets, 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, and the recognition of deferred tax, as a result of the transfer of customer intangible rights from the Isle of Man to Malta in connection with an internal corporate restructuring, and Australian business continuity tax law change allowing recognition of certain acquired assets. The Corporation expects that income taxes will continue to be effected by the recovery on amortization of intangible assets and geographic diversity of its taxable earnings.
Significant components of the Corporation’s deferred income tax asset balance at June 30, 2019 and December 31, 2018 are as follows:
In thousands of U.S. Dollars
 
Property &
Equipment
 
Intangibles
 
Tax Losses
 
Other
 
Total *
At January 1, 2018
 
148

 
—

 
174

 
4,484

 
4,806

Credited (charged) to net earnings
 
41

 
—

 
1,051

 
(1,008
)
 
84

Credited to other comprehensive income
 
—

 
—

 
—

 
53

 
53

Charged directly to equity - share-based payment transactions
 
—

 
—

 
—

 
(359
)
 
(359
)
Acquisition of subsidiary
 
1,016

 
—

 
—

 
9,921

 
10,937

Foreign exchange on translation
 
(61
)
 
—

 
(34
)
 
(1,177
)
 
(1,272
)
At December 31, 2018
 
1,144

 
—

 
1,191

 
11,914

 
14,249

Opening adjustment
 
35

 
—

 
(5
)
 
167

 
197

At January 1, 2019
 
1,179

 
—

 
1,186

 
12,081

 
14,446

(Charged) credited to net earnings
 
(99
)
 
5,405

 
3,641

 
5,225

 
14,172

Charged to other comprehensive income
 
—

 
—

 
—

 
(169
)
 
(169
)
Reallocated to deferred tax liability
 
—

 
64

 
—

 
(30
)
 
34

Foreign exchange on translation
 
(1
)
 
(18
)
 
38

 
143

 
162

At June 30, 2019
 
1,079

 
5,451

 
4,865

 
17,250

 
28,645


19

Significant components of the Corporation’s deferred income tax liability balance at June 30, 2019 and December 31, 2018 are as follows:
In thousands of U.S. Dollars
 
Property &
Equipment
 
Intangibles
 
Other
 
Total *
At January 1, 2018
 
(45
)
 
(16,130
)
 
—

 
(16,175
)
(Charged) credited to net earnings
 
(82
)
 
15,525

 
(513
)
 
14,930

Acquisition of subsidiary
 
—

 
(620,796
)
 
(465
)
 
(621,261
)
Foreign exchange on translation
 
6

 
29,278

 
51

 
29,335

At December 31, 2018
 
(121
)
 
(592,123
)
 
(927
)
 
(593,171
)
Opening adjustment
 
(9
)
 
(131
)
 
(57
)
 
(197
)
At January 1, 2019
 
(130
)
 
(592,254
)
 
(984
)
 
(593,368
)
Charged to net earnings
 
(107
)
 
(2,795
)
 
(24
)
 
(2,926
)
Reallocated to deferred tax asset
 
—

 
(64
)
 
29

 
(35
)
Foreign exchange on translation
 
1

 
1,699

 
(3
)
 
1,697

At June 30, 2019
 
(236
)
 
(593,414
)
 
(982
)
 
(594,632
)
_____________________________
* 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.

8.
EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per Common Share for the following periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator
 


 
 
 
 
 
 
Numerator for basic and diluted earnings (loss) per Common Share – net earnings (loss) attributable to Shareholders of The Stars Group Inc.
 
$
4,757,000

 
$
(153,645,000
)
 
$
32,670,000

 
$
(78,194,000
)
Denominator
 

 
 
 
 
 
 
Denominator for basic earnings (loss) per Common Share – weighted average number of Common Shares
 
281,689,369

 
152,788,098

 
277,557,011

 
150,523,119

Effect of dilutive securities
 

 
 
 
 
 
 
Stock options
 
311,170

 
2,032,234

 
268,784

 
1,625,516

Performance share units
 
315,938

 
302,142

 
292,045

 
284,631

Deferred share units
 
6,710

 
128,810

 
2,906

 
123,092

Restricted share units
 
76,026

 
113,809

 
60,591

 
109,654

Warrants
 
—

 
2,000,094

 
—

 
1,891,087

Convertible Preferred Shares
 
—

 
58,014,988

 
—

 
57,891,979

Effect of dilutive securities
 
709,844

 
62,592,077

 
624,326

 
61,925,959

Dilutive potential for diluted earnings (loss) per Common Share
 
282,399,213


152,788,098


278,181,337


150,523,119

Basic earnings (loss) per Common Share
 
$
0.02

 
$
(1.01
)
 
$
0.12

 
$
(0.52
)
Diluted earnings (loss) per Common Share
 
$
0.02

 
$
(1.01
)
 
$
0.12

 
$
(0.52
)



20

9.
LONG-TERM DEBT

The following is a summary of long-term debt outstanding at June 30, 2019, and at December 31, 2018 (all capitalized terms used in the tables below relating to such long-term debt are defined below in this note):
In thousands of U.S. Dollars (except as noted)
 
Contractual interest rate
 
June 30,
2019
Principal
outstanding
balance in
currency
of borrowing
 
June 30,
2019
Carrying
amount in USD
 
December 31,
2018
Principal
outstanding
balance in
currency of
borrowing
 
December 31,
2018
Carrying
amount in USD
USD First Lien Term Loan
 
6.30%
 
3,189,250

 
3,122,282

 
3,557,125

 
3,479,823

EUR First Lien Term Loan
 
3.75%
 
850,000

 
945,946

 
850,000

 
951,980

Senior Notes
 
7.00%
 
1,000,000

 
980,709

 
1,000,000

 
980,008

Loan payable to non-controlling interest
 
0.00%
 
56,936

 
39,978

 
49,936

 
35,147

Total long-term debt
 
 
 
 
 
5,088,915

 
 
 
5,446,958

Current portion
 
 
 
 
 
35,750

 
 
 
35,750

Non-current portion
 
 
 
 
 
5,053,165

 
 
 
5,411,208


The Corporation’s change in the long-term debt balance from December 31, 2018 to June 30, 2019 was as follows:
In thousands of U.S. Dollars
 
Balance – January 1, 2019
 
New debt
 
Principal payments
 
Interest accretion *
 
Translation
 
Balance – June 30, 2019
USD First Lien Term Loan
 
3,479,823

 
—

 
(367,875
)
 
10,334

 
—

 
3,122,282

EUR First Lien Term Loan
 
951,980

 
—

 
—

 
1,418

 
(7,452
)
 
945,946

Senior Notes
 
980,008

 
—

 
—

 
701

 
—

 
980,709

Loan payable to non-controlling interest
 
35,147

 
4,894

 
—

 
—

 
(63
)
 
39,978

Total
 
5,446,958

 
4,894

 
(367,875
)
 
12,453

 
(7,515
)
 
5,088,915

* 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 unaudited interim condensed consolidated statements of earnings.

As at June 30, 2019, the contractual principal repayments of the Corporation’s outstanding long-term debt over the next five years amount to the following:
In thousands of U.S. Dollars
 
<1 Year
 
1-2 Years
 
2-3 Years
 
3-4 Years
 
4-5 Years
 
>5 Years
USD First Lien Term Loan
 
35,750


35,750


35,750


35,750


35,750


3,010,500

EUR First Lien Term Loan
 
—


—


—


—


—


966,170

Senior Notes
 
—


—


—


—


—


1,000,000

Loan payable to non-controlling interest
 
—


39,978


—


—


—


—

Total
 
35,750


75,728


35,750


35,750


35,750


4,976,670


Revolving Facility and First Lien Term Loans

On July 10, 2018, the Corporation obtained a first lien revolving facility of $700 million (the “Revolving Facility”), USD first lien term loans of $3.58 billion (the “USD First Lien Term Loan”), and EUR first lien term loans of €850 million (the “EUR First Lien Term Loan” and, together with the USD First Lien Term Loan, the “First Lien Term Loans”). The Revolving Facility matures on July 10, 2023 and the First Lien Term Loans mature on July 10, 2025. On February 22, 2019, the Corporation made a voluntary prepayment of $100.0 million of its USD First Lien Term Loan, including accrued and unpaid interest, using available cash on hand. On May 14, 2019, the Corporation prepaid an additional $250.0 million using proceeds from the issuance of Common Shares to FOX and available cash on hand. As at June 30, 2019 and December 31, 2018 there were no amounts outstanding under the Revolving Facility. The Corporation had $73.9 million of letters of credit issued but undrawn as of June 30, 2019. Availability under the Revolving Facility as at June 30, 2019 was $626.1 million.


21

Senior Notes

On July 10, 2018, two of the Corporation’s subsidiaries, Stars Group Holdings B.V. and Stars Group (US) Co-Borrower, LLC, issued 7.00% Senior Notes (the “Senior Notes”) at par in an aggregate principal amount of $1.00 billion. The Senior Notes mature on July 15, 2026.

10.
DERIVATIVES

The Corporation is exposed to interest rate and currency risk and uses derivative financial instruments for risk management and mitigation purposes. 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. The Corporation’s approach and objectives for hedge accounting remain consistent with the prior year.

The following table summarizes the fair value of derivatives as at June 30, 2019 and December 31, 2018:
 
 
As at June 30, 2019
 
As at December 31, 2018
In thousands of U.S. Dollars
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives held for hedging
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated in cash flow hedges
 
 
 
 
 
 
 
 
Cross currency interest rate swaps
 
16,118

 
14,042

 
41,117

 
1,096

Interest rate swap
 
—

 
19,037

 
—

 
4,972

Total derivatives designated in cash flow hedges
 
16,118

 
33,079

 
41,117

 
6,068

 
 
 
 
 
 
 
 
 
Derivatives designated in net investment hedges
 
 
 
 
 
 
 
 
Cross currency interest rate swaps
 
—

 
7,596

 
1,866

 
—

Total derivatives designated in net investment hedge
 
—

 
7,596

 
1,866

 
—

 
 
 
 
 
 
 
 
 
Total derivatives held for hedging
 
16,118

 
40,675

 
42,983

 
6,068

 
 
 
 
 
 
 
 
 
Derivatives held for risk management and other purposes not designated in hedges
 
 
 
 
 
 
 
 
Forward contracts
 
—

 
—

 
—

 
208

Unsettled bets
 
—

 
10,051

 
—

 
16,285

Embedded Derivative
 
46,400

 
—

 
11,600

 
—

Total derivatives held for risk management and other purposes not designated in hedges
 
46,400

 
10,051

 
11,600

 
16,493




22

11.     PROVISIONS
The carrying amounts of provisions as at June 30, 2019 and December 31, 2018 and the movements in the provisions during the six months ended June 30, 2019 were as follows:
In thousands of U.S. Dollars
 
Player bonuses
and jackpots
 
Deferred payment provision *
 
Restructuring provision
 
Other
 
Total
Balance at December 31, 2018
 
18,584

 
6,300

 
9,713

 
8,594

 
43,191

Recognized
 
27,107

 
—

 
—

 
—

 
27,107

Adjustment to provision recognized
 
—

 
—

 
(610
)
 
1,300

 
690

Payments
 
(26,428
)
 
—

 
(8,874
)
 
(2,561
)
 
(37,863
)
Accretion of discount
 
—

 
—

 
—

 
73

 
73

Foreign exchange translation (gains) losses
 
(161
)
 
—

 
(6
)
 
162

 
(5
)
Balance at June 30, 2019
 
19,102

 
6,300

 
223

 
7,568

 
33,193

 
 
 
 
 
 
 
 
 
 
 
Current portion at December 31, 2018
 
18,584

 
6,300

 
9,713

 
4,592

 
39,189

Non-current portion at December 31, 2018
 
—

 
—

 
—

 
4,002

 
4,002

Current portion at June 30, 2019
 
19,102

 
6,300

 
223

 
3,931

 
29,556

Non-current portion at June 30, 2019
 
—

 
—

 
—

 
3,637

 
3,637

_____________________________
* The provision of $6.3 million as at June 30, 2019 is contingent on future events.

12.
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 June 30, 2019, 287,715,235 Common Shares were issued, outstanding and fully paid (December 31, 2018 – 273,177,244).

On May 8, 2019, Fox Corporation (Nasdaq: FOXA, FOX) (“FOX”) acquired 14,352,331 newly issued Common Shares, representing 4.99% of the Corporation’s then-issued and outstanding Common Shares, at a price of $16.4408 per share, for aggregate proceeds of $236.0 million. The Common Shares issued to FOX are subject to certain transfer restrictions for two years, subject to customary exceptions.

During the six months ended June 30, 2019, the Corporation issued 129,325 Common Shares for cash consideration of $1.8 million as a result of the exercise of stock options. The exercised stock options were initially valued at $0.5 million. The Corporation also issued 56,335 Common Shares in connection with the settlement of other equity-based awards, initially valued at $1.4 million. Upon exercise or settlement, as applicable, the values originally allocated to the stock options and equity-based awards in the Equity reserve were reallocated to the Common Shares so issued.


23

13.
RESERVES

The following table highlights the classes of reserves included in the Corporation’s equity as at June 30, 2019 and December 31, 2018 and the movements in the related reserves balances for the six months ended June 30, 2019 and the year ended December 31, 2018:
In thousands of U.S. Dollars
 
Acquisition reserve
 
Warrants
 
Equity
 
Treasury
 
Cumulative
translation
 
Financial assets at FVOCI
 
Cash flow hedging
 
Other
 
Total
Balance – January 1, 2018
 
—

 
14,688

 
36,865

 
(29,542
)
 
(120,694
)
 
168

 
(33,983
)
 
(9,629
)
 
(142,127
)
Cumulative translation adjustments
 
—

 
—

 
—

 
—

 
(93,350
)
 
—

 
—

 
—

 
(93,350
)
Stock-based compensation
 
—

 
—

 
12,806

 
—

 
—

 
—

 
—

 
—

 
12,806

Exercise of stock options and settlement of equity awards
 
—

 
—

 
(6,982
)
 
—

 
—

 
—

 
—

 
—

 
(6,982
)
Re-allocation from warrants reserve to share capital for exercised warrants
 
—

 
(14,688
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(14,688
)
Reclassified to net earnings
 
—

 
—

 
—

 
—

 
—

 
(311
)
 
(45,271
)
 
—

 
(45,582
)
Unrealized (losses) gains
 
—

 
—

 
—

 
—

 
—

 
(339
)
 
41,201

 
—

 
40,862

Deferred tax on re-measurements
 
—

 
—

 
—

 
—

 
—

 
53

 
—

 
—

 
53

Reversal of deferred tax on stock-based compensation
 
—

 
—

 
(359
)
 
—

 
—

 
—

 
—

 
—

 
(359
)
Impairment of debt instruments at FVOCI
 
—

 
—

 
—

 
—

 
—

 
(84
)
 
—

 
—

 
(84
)
Further acquisition of subsidiary
 
(220,023
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(155
)
 
(220,178
)
Balance – December 31, 2018
 
(220,023
)
 
—

 
42,330

 
(29,542
)
 
(214,044
)
 
(513
)
 
(38,053
)
 
(9,784
)
 
(469,629
)
Cumulative translation adjustments
 
—

 
—

 
—

 
—

 
(11,361
)
 
—

 
—

 
—

 
(11,361
)
Stock-based compensation
 
—

 
—

 
7,462

 
—

 
—

 
—

 
—

 
—

 
7,462

Exercise of stock options and settlement of equity awards
 
—

 
—

 
(1,868
)
 
—

 
—

 
—

 
—

 
—

 
(1,868
)
Reclassified to net earnings (loss)
 
—

 
—

 
—

 
—

 
—

 
(15
)
 
(6,347
)
 
—

 
(6,362
)
Unrealized gains (losses)
 
—

 
—

 
—

 
—

 
—

 
1,106

 
(44,458
)
 
—

 
(43,352
)
Deferred tax on re-measurements
 
—

 
—

 
—

 
—

 
—

 
(169
)
 
—

 
—

 
(169
)
Impairment of debt instruments at FVOCI
 
—

 
—

 
—

 
—

 
—

 
9

 
—

 
—

 
9

Balance – June 30, 2019
 
(220,023
)
 
—

 
47,924

 
(29,542
)
 
(225,405
)
 
418

 
(88,858
)
 
(9,784
)
 
(525,270
)

During the six months ended June 30, 2019 the Corporation issued:

• 12,500 stock options with an aggregate grant date fair value of $0.1 million.
• 675,260 restricted share units with an aggregate grant date fair value of $12.1 million.
• 82,842 deferred share units with an aggregate grant date fair value of $1.5 million.
• 1,420,100 performance share units with an aggregate grant date fair value of $27.1 million.

14.
FAIR VALUE

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 their low credit risk.

Certain of the Corporation’s financial assets and liabilities are measured at fair value, including at fair value through profit or loss (“FVTPL”) or FVOCI at the end of each reporting period. The following table provides information about how the fair values of these financial assets and liabilities were determined as at each of June 30, 2019 and December 31, 2018:

24

 
 
As at June 30, 2019
In thousands of U.S. Dollars
 
Fair value &
carrying value
 
Level 1
 
Level 2
 
Level 3
Bonds – FVOCI
 
105,196

 
105,196

 
—

 
—

Equity in unquoted companies - FVTPL
 
7,298

 
—

 
—

 
7,298

Derivatives
 
62,518

 
—

 
16,118

 
46,400

Total financial assets
 
175,012

 
105,196

 
16,118

 
53,698

 
 
 
 
 
 
 
 
 
Derivatives
 
50,726

 
—

 
40,675

 
10,051

Deferred contingent payment - FVTPL
 
64,706

 
—

 
—

 
64,706

Other provisions - FVTPL
 
2,300

 
—

 
—

 
2,300

Total financial liabilities
 
117,732

 
—

 
40,675

 
77,057


 
 
As at December 31, 2018
In thousands of U.S. Dollars
 
Fair value &
carrying value
 
Level 1
 
Level 2
 
Level 3
Bonds - FVOCI
 
103,153

 
103,153

 
—

 
—

Equity in unquoted companies - FVTPL
 
6,773

 
—

 
—

 
6,773

Derivatives
 
54,583

 
—

 
42,983

 
11,600

Total financial assets
 
164,509

 
103,153

 
42,983

 
18,373

 
 
 
 
 
 
 
 
 
Derivatives
 
22,561

 
—

 
6,276

 
16,285

Deferred contingent payment - FVTPL
 
77,628

 
—

 
—

 
77,628

Other provisions - FVTPL
 
2,740

 
—

 
—

 
2,740

Total financial liabilities
 
102,929

 
—

 
6,276

 
96,653


The fair values of other financial assets and liabilities measured at amortized cost, other than those for which the Corporation has determined that their carrying values approximate their fair values on the unaudited interim condensed consolidated statements of financial position as at each of June 30, 2019, and December 31, 2018 are as follows:
 
 
As at June 30, 2019
In thousands of U.S. Dollars
 
Fair value
 
Level 1
 
Level 2
 
Level 3
First Lien Term Loans
 
4,167,262

 
—

 
4,167,262

 
—

Senior Notes
 
1,059,320

 
—

 
1,059,320

 
—

Total financial liabilities
 
5,226,582

 
—

 
5,226,582

 
—


 
 
As at December 31, 2018
In thousands of U.S. Dollars
 
Fair value
 
Level 1
 
Level 2
 
Level 3
First Lien Term Loans
 
4,414,525

 
—

 
4,414,525

 
—

Senior Notes
 
969,370

 
—

 
969,370

 
—

Total financial liabilities
 
5,383,895

 
—

 
5,383,895

 
—


As part of its periodic review of fair values, the Corporation recognizes transfers, if any, between levels of the fair value hierarchy at the end of the reporting period during which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three or six months ended June 30, 2019 or the year ended December 31, 2018.

Valuation of Level 2 financial instruments

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.



25

Derivative Financial Instruments

The Corporation uses derivative financial instruments to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of 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, such as 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 applicable 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. As of June 30, 2019 and December 31, 2018, 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 its derivatives 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 June 30, 2019, the valuation techniques and key inputs used by the Corporation for each Level 3 asset or liability were as follows:

–
Equity in private companies (Level 3 Assets): The Corporation valued its equity investment in private companies with reference to earnings measures from similar businesses in the same or similar industry and adjusts for any significant changes in the earnings multiple and the valuation. A reasonable change in assumptions would not have a material impact on fair value. Changes in the fair value of equity in private companies are recorded in loss (gain) on investments within general and administrative expenses on the consolidated statements of earnings.

–
Deferred contingent payment (Level 3 Liability) in connection with the acquisition of the additional 18% equity interest in BetEasy (see note 3): The Corporation used a risk-neutral derivative-based simulation of the underlying EBITDA forecast to determine the fair value of the deferred contingent payment, and at June 30, 2019, used a discount rate of 9.5% and an EBITDA forecast with an estimated volatility of 22.5% of the historic EBITDA of comparable companies. A five-percentage point increase or decrease in the estimated volatility would have a $0.1 million or $(0.5) million impact on fair value, respectively. Changes in the fair value of the deferred contingent payment are recorded in net financing changes on the consolidated statements of earnings.

–
Embedded derivative redemption option (Level 3 Asset) in connection with the Senior Notes issuance (the “Embedded Derivative”): The Corporation used an interest rate option pricing valuation model to determine the fair value of the Embedded Derivative using an implied credit spread of 3.4% at June 30, 2019. A 10-basis point increase or decrease in the implied credit spread would have a $(3.0) million or $3.0 million impact on fair value, respectively. Changes in the fair value of the Embedded Derivative are recorded in net financing changes on the consolidated statements of earnings.

–
Unsettled bets (Level 3 Liability): The principal assumptions used in the valuation of unsettled bets is the anticipated outcomes for the events related to the unsettled bets (gross win margin). A reasonable change in the gross win margin would not have a material impact on fair value. Changes in the fair value of the unsettled bets are recorded in revenue on the consolidated statements of earnings.

–
Included within other level 3 liabilities:
–
EBITDA support agreement (Level 3 Liability): As previously disclosed, in connection with the initial public offering Innova Gaming Group Inc. (TSX: IGG) (“Innova”), the Corporation entered into an EBITDA support agreement with Innova. The Corporation used a net present value approach for the EBITDA support agreement. Changes in the fair value of the EBITDA support agreement are recorded in net financing changes on the consolidated statements of earnings.

26

The following tables show a reconciliation from opening balances to the closing balances for Level 3 fair values:
In thousands of U.S Dollars
 
Level 3 Equity investments
 
Level 3 Embedded Derivative
Balance – December 31, 2018
 
6,772

 
11,600

Re-measurement of fair value
 
530

 
34,800

Translation
 
(4
)
 
—

Balance – June 30, 2019
 
7,298

 
46,400


In thousands of U.S Dollars
 
Level 3 Deferred contingent payment
 
Level 3
Unsettled Bets
 
Other
Balance – December 31, 2018
 
77,628

 
16,285

 
2,740

Settlements
 
—

 
(6,536
)
 
(675
)
Re-measurement of fair value
 
(12,713
)
 
(52
)
 
73

Translation
 
(209
)
 
354

 
162

Balance – June 30, 2019
 
64,706

 
10,051

 
2,300



15.
ADOPTION OF NEW ACCOUNTING STANDARDS

IFRS 16, Leases

As referenced in note 2 above, the Corporation adopted IFRS 16 on January 1, 2019. The impact of the Corporation’s transition to IFRS 16 is summarized below.

The table below illustrates the reconciliation of lease commitments not recorded on the unaudited interim condensed consolidated statement of financial position prior to the adoption of IFRS 16 to the lease liabilities recognized in connection with the transition to IFRS 16:
In thousands of U.S. Dollars
 
As at January 1, 2019
Off-balance-sheet contractual commitments
 
242,170

Less: non-lease contractual commitments
 
(150,055
)
Off-balance-sheet commitments for lease obligations
 
92,115

Current leases with a lease term of 12 months or less (short-term leases)
 
(24,618
)
Variable lease payments that do not depend on an index or rate
 
(3,325
)
Other
 
1,992

Undiscounted lease liabilities as at January 1, 2019
 
66,164

Effect of discounting
 
(6,679
)
Present value of lease liabilities as at January 1, 2019
 
59,485


The table below illustrates the impact of the adoption of IFRS 16 to the unaudited interim condensed consolidated statement of financial position as at January 1, 2019:
In thousands of U.S. Dollars
 
Original January 1, 2019
(IAS 17)

Adjustment on adoption of IFRS 16
 
January 1, 2019
(IFRS 16)
Right-of-use assets (included in Property and equipment)
 
—


57,288

 
57,288

Prepaid expenses and other non-current assets
 
32,760


(776
)
 
31,984

Net impact on total assets
 


56,512

 


 



 

Lease liabilities
 
—


59,485

 
59,485

Other long-term liabilities
 
79,716


(2,973
)
 
76,743

Net impact on total liabilities
 


56,512

 


 



 

Retained earnings
 


—

 



27

The table below illustrates the right-of-use assets as at June 30, 2019, included as part of property and equipment in the unaudited interim condensed consolidated statement of financial position by asset class:
In thousands of U.S. Dollars
 
Land and Buildings
 
Computer Equipment
 
Total
Net carrying amount
 

 

 

January 1, 2019
 
44,576

 
12,712

 
57,288

June 30, 2019
 
46,051

 
12,550

 
58,601


The table below illustrates the contractual maturity of recognized lease liabilities in the unaudited interim condensed consolidated statement of financial position:
In thousands of U.S. Dollars
 
January 1, 2019
 
June 30, 2019
Lease liabilities
 

 

Current portion of lease liabilities
 
14,985

 
18,764

Long-term portion of lease liabilities
 
44,500

 
44,121


 
59,485

 
62,885


 

 

Maturity analysis (undiscounted)
 

 

Not later than 1 year
 
14,985

 
18,764

Later than 1 year and not later than 5 years
 
41,214

 
42,503

Later than 5 years
 
9,965

 
7,259


 
66,164

 
68,526


The weighted average discount rate applied to the Corporation’s leases as at June 30, 2019 was 3.62%.

The table below illustrates the impact of the adoption of IFRS 16 to the unaudited interim condensed consolidated statement of earnings (loss) for the three and six months ended June 30, 2019:
In thousands of U.S. Dollars
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Impact on earnings for the period
 

 

Increase in depreciation and amortization expenses
 
(4,140
)
 
(8,311
)
Increase in finance costs
 
(523
)
 
(1,123
)
Decrease in other expenses
 
4,900

 
9,404

Increase (decrease) in earnings for the period
 
237

 
(30
)

 

 

Impact on earnings per share
 

 

Increase (decrease) in earnings per share
 

 

Basic
 
$
—

 
$
—

Diluted
 
$
—

 
$
—


During the three and six months ended June 30, 2019, the Corporation recorded lease rental expense of $0.6 million and $2.2 million, respectively, within general and administrative expenses related to short term and low value leases.

IFRIC 23, Uncertainty over Income Tax Treatments

As referenced in note 2, the Corporation adopted IFRIC 23 on January 1, 2019. The adoption of the interpretation did not have a material impact on the unaudited interim condensed consolidated financial statements.



28

16.
FOX BET PARTNERSHIP

On May 8, 2019, the Corporation and FOX Sports, a unit of FOX, announced plans to launch FOX Bet, the first-of-its kind national media and sports wagering partnership in the United States and entered into a commercial agreement of up to 25 years. Under the commercial agreement, FOX Sports granted to the Corporation an exclusive license for the use of certain FOX Sports trademarks for a range of immersive games and online sports wagering, and certain exclusive advertising and editorial integration rights on certain FOX Sports broadcast media and digital assets. As part of the transaction, FOX Sports will receive certain brand license, integration and affiliate fees. In addition, during the term of the commercial agreement, the Corporation has agreed to a minimum annual advertising commitment on certain FOX media assets. Prior to the tenth anniversary of the commercial agreement, and subject to certain conditions and applicable gaming regulatory approvals, FOX Sports has the right to acquire up to a 50% equity stake in the Corporation’s U.S. business.

29




    











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