Our insurance coverage may be inadequate to satisfy future claims against us.
While we believe that we have adequately insured our operations and property in a way that we believe is customary in the Indian film entertainment industry in the countries in which we operate and in amounts that we believe to be commercially appropriate, we may become subject to liabilities against which we are not adequately insured or against which we cannot be insured, including losses suffered that are not easily quantifiable and cause severe damage to our reputation. Film bonding, which is a customary practice for U.S. film companies, is rarely used in India. Even if a claim is made under an existing insurance policy, due to exclusions and limitations on coverage, we may not be able to successfully assert our claim for any liability or loss under such insurance policy. In addition, in the future, we may not be able to maintain insurance of the types or in the amounts that we deem necessary or adequate or at premiums that we consider appropriate. The occurrence of an event for which we are not adequately or sufficiently insured including any class action litigation, the successful assertion of one or more large claims against us that exceed available insurance coverage, the successful assertion of claims against our co-producers, or changes in our insurance policies could have a material adverse effect on our business, prospects, financial condition and results of operations.
Our Indian subsidiary, Eros India, from which we derive a substantial portion of our revenues, is publicly listed on the Indian stock exchanges. As such, under Indian law, minority stockholders have certain rights and protections against oppression and mismanagement. Further asshares of Eros India is pledged to secure indebtedness incurred by Eros India. To the extent that Eros India is unable to service such indebtedness, or otherwise defaults on its obligations under such indebtedness, the lenders of such indebtedness may exercise certain remedies over such shares, including foreclosing on such shares and selling such shares. As of June 30, 20172020, we owned approximately 66.22%62.31% of Eros India. Over time, we may lose control over its activities and, consequently, lose our ability to consolidate its revenues.
As a holding company, we rely on funds from our subsidiaries to satisfy our obligations. Dividend payments by our subsidiaries, including Eros India, are subject to certain limitations under local laws.laws and restrictive covenants of their borrowing arrangements. For example, under Indian law, dividends other than in cash are not permitted and cash dividends are only permitted to be paid out of distributable profits. Dubaithe profits of the company for that year or out of the profits for any previous financial year after providing for depreciation. UAE law imposes similar limitations on dividend payments. AnAs per the Finance Act 2020, the DDT of 20.56 percent levied on the Indian company paying dividendscompanies declaring dividend has been abolished with effect from April 1, 2020. Consequently, dividend is also liable to pay dividend distribution tax at an effective ratetaxable in the hands of 20.3% including cessrecipient and surcharge. In addition, the Shareholders Agreementthere shall be withholding of Ayngaran, limits the ability of that entity to pay dividends without shareholders’ approval.taxes on such dividends.
The transfer pricing arrangements in the Relationship Agreement are not binding on the applicable taxing authorities, and may be subject to scrutiny by such taxing authorities. Accordingly, there may be material and adverse tax consequences if the applicable taxing authorities challenge these arrangements, and they may adjust our income and expenses for tax purposes for both present and prior tax years, and assess interest on the adjusted but unpaid taxes.
Our indebtedness could adversely affect our operations, including our ability to perform our obligations, fund working capital and pay dividends.
If any of these consequences occur, our financial condition, results of operations and ability to pay dividends could be adversely affected. This, in turn, could negatively affect the market price of our A ordinary shares, and we may need to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital.
We cannot assure that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. For additional information, please see Note 3 to the audited Consolidated Financial Statements included in this transition report.
There can be no assurance that our business will generate sufficient cash flow from operations, or that we will be able to refinance debt as it comes due or draw under our revolving credit facilities in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, or seek additional capital. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we are unable to generate sufficient cash flow, refinance our debt on favorable terms or sell additional debt or equity securities or our assets, it could have a material adverse effect on our financial condition and on our ability to make payments on our indebtedness.
Our business is subject to risks inherent in international trade, many of which are beyond our control. These risks includes:include:
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-Indianforeign sources, which could have a material adverse effect on our business, prospects, financial condition and results of operations.
We evaluate potential acquisitions of complementary businesses on an ongoing basis and may from time to time pursue acquisition opportunities. We may in the future seek to acquire or invest in other companies or technologies that we believe could complement or expand our services, enhance our technical capabilities, or otherwise offer growth opportunities. Pursuit of future potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities or consummating acquisitions on acceptable terms. In addition, we have limited experience acquiring and integrating other businesses. We may be unsuccessful in integrating our recently acquired businesses or any additional business we may acquire in the future, and we may fail to acquire companies whose market power or technology could be important to the future success of our business. Future acquisitions may result in near termnear-term dilution toof earnings, including potentially dilutive issuances of equity securities or issuances of debt. For instance, in Fiscal 2016, our subsidiary, Eros India acquired 100% of the shares and voting interest in Techzone, to utilize Techzone’s billing integration and distribution across major telecom operations in India, in order to complement our Eros Now services. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:
If we are unable to address the risks associated with acquisitions, or if we encounter expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, we may fail to achieve acquisition synergies and may be required to focus resources on integration of operations rather than on our primary business activities. In addition, future acquisitions could result in potentially dilutive issuances of our A ordinary shares, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.
Prior to November 12, 2013, our ordinary shares had been admitted on the Alternative Investment Market of the London Stock Exchange (“AIM”) since 2006 and our ‘A’ ordinary shares have been traded on the New York Stock Exchange (“NYSE”) since our initial public offering.offering in 2013. The trading price of our ordinary shares on AIM and the NYSE has been highly volatile. For example, the highest price that our ordinary shares traded in the period beginning November 12, 2012 and ending November 12, 2013 was $4.48 per share and the lowest price was $2.96 per share, prior to giving effect to the one-for-three reverse stock split effectuated on November 12, 2013. Since the listing of our A ordinary shares on the NYSE, the highest closing price of the A ordinary shares, in the period beginning November 12, 2013 and ended May 31, 2017,October 23, 2020, was $39.01$37.60 per share and the lowest closing price was $5.59$1.24 per share. The market price of the A ordinary shares on the NYSE may fluctuate as a result of several factors, including the following:
These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes may cause the market price of ordinary shares to decline.
In addition, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have also recently become the subject ofA putative securities class action litigation against us.filed in November 2015 has now been dismissed with prejudice, but on June 21, 2019, the Company was named a defendant in two substantially similar putative class action lawsuits filed in federal court in New Jersey by purported shareholders of the Company. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could adversely impact our business and affect the market price of our A ordinary shares.
We became a U.S. public company in November 2013. As a U.S. public company, we incur significant legal, accounting and other expenses and these expenses will likely increase after we no longer qualify as an “emerging growth company.”expenses. Being a U.S. public company increased our legal and financial compliance costs and make some activities more time-consuming and costly. In addition it has made it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our boardBoard of directorsDirectors or as executive officers.
As a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Securities Exchange Act of 1934,1933, as amended, or the Exchange Act. Although we intend to report quarterly financial resultsperformance updates and report certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence and our quarterly or current reports may contain less information than required under U.S. filings. In addition, we are exempt from the Section 14 proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding sales of ordinary shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to the Securities Exchange Act. As a result, you may not have all the data that you are accustomed to having when making investment decisions. For example, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder with respect to their purchases and sales of our A ordinary shares.
The periodic disclosure required of foreign private issuers is more limited than that required of domestic U.S. issuers and there may therefore be less publicly available information about us than is regularly published by or about U.S. public companies. See “Part I — I—Item 10. Additional Information — Information—H. Documents on Display.”
As a foreign private issuer, we are exempt from complying with certain corporate governance requirements of the NYSE applicable to a U.S. issuer, including the requirement that a majority of our boardBoard of directorsDirectors consist of independent directors. Although we are in compliance with the current NYSE corporate governance requirements imposed on U.S. issuers, with the exception of our Audit Committee currently having two rather than three members, our charter does not require that we meet these requirements.
As the corporate governance standards applicable to us are different than those applicable to domestic U.S. issuers, you may not have the same protections afforded under U.S. law and the NYSE rules as shareholders of companies that do not have such exemptions. It is also possible that the significant ownership interest of the Founders Group could adversely affect investor perception of our corporate governance.
The Indian Income Tax Act, 1961 has been amended to provide that income arising directly or indirectly through the sale of a capital asset, including shares of a company incorporated outside of India, will be subject to tax in India, if such shares derive, directly or indirectly, their value substantially from assets located in India, whether or not the seller of such shares has a residence, place of business, business connection, or any other presence in India, if, on the specified date, the value of such assets (i) represents 50% of the value of all assets owned by the company or entity, or and (ii) exceeds the amount of 100 million rupees.
If the Indian tax authorities determine that our A ordinary shares derive their value substantially from assets located in India you may be subject to Indian income taxes on the income arising, directly or indirectly, through the sale of our A ordinary shares. However, the impact of the above indirect transfer provisions would need to be separately evaluated under the tax treaty scenario of the country of which the shareholder is a tax resident. For additional information, see “Part I—Item 10. Additional Information—E. Taxation.”
Our constitution is set out in our memorandum and articles of association, and we are subject to the Isle of Man Companies Act 2006, as amended, (the “2006 Act”) — see “Part II — I—Item 4. Information on the Company — Company—B. Business Overview—Government Regulations”Regulations—Material Isle of Man Regulations,” below and Isle of Man common law. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Isle of Man law are to an extent governed by the common law of the Isle of Man. The common law of the Isle of Man is derived in part from comparatively limited judicial precedent in the Isle of Man as well as from English common law, which has persuasive, but not binding, authority on a court in the Isle of Man. The rights of our shareholders and the fiduciary responsibilities of our directors under Isle of Man law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.U.S. In particular, the Isle of Man has a less developed body of securities laws than the United States.U.S. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Isle of Man. Furthermore, shareholders of Isle of Man companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.U.S. As a result, shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directorsBoard or controlling shareholders than they would as shareholders of a U.S. company.
We are an Isle of Man company and substantially all of our assets are located outside of the United States.U.S. A substantial part of our current operations are conducted in India. In addition, substantially all of our directors and executive officers are nationals and residents of countries other than the United StatesU.S. and we believe that a substantial portion of the assets of these persons may be located outside the United States.U.S. As a result, it may be difficult for you to effect service of process within the United StatesU.S. upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. Moreover, the courts of India would not automatically enforce judgments of U.S. courts obtained in such actions against us or our directors and officers, or entertain actions brought in India against us or such persons predicated solely upon United StatesU.S. federal securities laws. Further, the U.S. has not been declared by the Government of India to be a reciprocating territory for the purposes of enforcement of foreign judgments, and there are grounds upon which Indian courts may decline to enforce the judgments of United StatesU.S. courts. Some remedies available under the laws of United StatesU.S. jurisdictions, including remedies available under the United StatesU.S. federal securities laws, may not be allowed in Indian courts if contrary to public policy in India. Since judgments of United StatesU.S. courts are not automatically enforceable in India, it may be difficult for you to recover against us or our directors and officers based upon such judgments. There is uncertainty as to whether the courts of the Isle of Man would recognize or enforce judgments of United StatesU.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United StatesU.S. or any state. In addition, there is uncertainty as to whether such Isle of Man courts would be competent to hear original actions brought in the Isle of Man against us or such persons predicated upon the securities laws of the United StatesU.S. or any state.
We currently intend to retain any future earnings and do not expect to pay dividends on our ordinary shares. The amount of our future dividend payments, if any, will depend upon our satisfaction of the solvency test contained in the 2006 Companies Act, our future earnings, financial condition, cash flows, working capital requirements and capital expenditures. The 2006 Companies Act provides that a company satisfies the solvency test if: (i) it is able to pay its debts as they become due in the normal course of the company’s business: and (ii) the value of the company’s assets exceeds the value of its liabilities. There can be no assurance that we will be able to pay dividends. Additionally, we are restricted by the terms of certain of our current debt financing facilities and may be restricted by the terms of any future debt financings in relation to the payment of dividends.
Based upon the past and projected composition of our income and valuation of our assets, we do not believe we will be a PFIC for our taxable year ending December 31, 2017,2020, and we do not expect to become one in the future, although there can be no assurance in this regard. The determination of whether or not we are a PFIC for any taxable year is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United StatesU.S. federal income tax purposes if either:
The calculation of the value of our assets will be based, in part, on the then market value of our A ordinary shares, which is subject to change. We cannot assure you that we were not a PFIC for the 2013, 2014 and 2015previous taxable years or that we will not be a PFIC for this or any future taxable year. Moreover, the determination of our PFIC status is based on an annual determination that cannot be made until the close of a taxable year and involves extensive factual investigation. This investigation includes ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income we earn, which cannot be completed until the close of a taxable year, and, therefore, our U.S. counsel expresses no opinion with respect to our PFIC status.
If we were to be or become classified as a PFIC, a U.S. Holder (as defined in “Part I — Item 10. Additional Information — Information—E. Taxation”) may be subject to burdensome reporting requirements and may incur significantly increased United StatesU.S. income tax on gain recognized on the sale or other disposition of the shares and on the receipt of distributions on the shares to the extent such gain or distribution is treated as an “excess distribution” under the United StatesU.S. federal income tax rules. Further, if we were a PFIC for any year during which a U.S. Holder held our shares, we would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our shares. Each U.S. Holder is urged to consult its tax advisors concerning the United StatesU.S. federal income tax consequences of acquiring, holding and disposing of shares if we are or become classified as a PFIC. See “Part I — I—Item 10. Additional Information — Information—E. Taxation”Taxation.” for a more detailed description of the PFIC rules.
ITEM 4. INFORMATION ON THE COMPANY
We believe we are pioneers in our business. Our success is built on the relationships we have cultivated over the past 40 years with leading talent, production companies,producers, exhibitors and other key participants in the entertainment industry in the U.S. and India and with our industry. By leveraging these relationships, wepartners around the world. We have aggregated multi-format rights to over 3,000 films in the Eros library, including recent and classic titles that span different genres, budgets and languages, and STX has amassed a high-quality library of 48 films that generates substantial revenue.
Theatrical:The theatrical channel largely includes revenues from multiplex chains and single screen theaters. We are a leading player in a growing and under-penetrated cinema marketlargest Indian language movie content library worldwide with threeover 12,000 digital titles, out of top fourwhich approximately 5,000 films are owned in perpetuity. Eros Now also has a deep library of short-form content, including music videos, trailers, original shorts exclusive interviews and seven out of top 15 box office hits in calendar year 2015. Wemarketing shorts. During the twelve months ended March 31, 2020, Eros Now digitally released a total of 45630 films in fiscal12 different Indian languages. Over the same period over 8,000 music audio and video files were released on Eros Now as well as over 500 units of short form and Eros Now Originals & Quickie content. Since inception, Eros has digitally premiered (first ever digital release) over 250 films on the Eros Now platform, and also introduced the concept of theatrical films launching on OTT prior to its satellite premiere, which is a testament to the strength of the Eros Now platform and breadth and depth of its offering. As of June 30, 2020, Eros Now achieved over 205.8 million registered users across Apps, WAPs and the Eros Now website, and 33.8 million paying subscribers. Eros Now has seen a significant surge across metrics wherein engagement has risen 70% - 100% across daily viewers, time spent and repeat visits in a pre- lockdown to during lock down phase.Having established many partnerships and strategic collaborations globally with telecommunications operators, original equipment manufacturers (“OEMs”) and streaming services providers, Eros Now is available globally through multiple distribution channels. These partnerships and strategic collaborations include Eros’ recent agreement with Apple to make Eros Now content available on all Apple devices in multiple countries outside of India, making Eros Now the first Indian OTT provider collaborating with Apple on such a scale.
Our Competitive Strengths
We believe the following competitive strengths position us as a leading company in the global entertainment industry.
Leading co-producer and acquirer of new global film content, with an extensive film library.
As one of the leading participants in the global entertainment industry, we believe our size, scale and market position will continue contributing to our growth in India, the U.S. and internationally. We have established our size and scale by aggregating a film library of over 3,000 films.
Eros demonstrated its market position by releasing, internationally, Hindi language films which were among the top grossing films in India in calendar years 2018, 2016, 2015 and 2014. Eros released 36 of the top 110 highest grossing box office films in India from 2007 to 2018. We believe that we have strong relationships with the Indian creative community and a reputation for quality productions.
The combined company will leverage the strong relationships that STX has with leading global film and television talent and the relationships STX has with top independent film producers to continue creating mid-budget Hollywood productions with global appeal and to acquire projects for distribution in markets around the globe.
We believe that our relationships, our track record of success, and our worldwide distribution platform, will enable us to continue to attract talent and film projects of a quality that we believe is one of the best in our industry, and build what we believe will continue to be a strong film slate in the coming years with some of the leading actors and production houses with whom we have previously delivered our biggest hits. We believe that the combined strength of our new releases and our extensive film library positions us well to build new strategic relationships.
Integrated Global Entertainment Company
We have identified several potential synergies and cost efficiencies that we aim to realize over the next calendar year 2017,as a result of the Merger. These include maximizing production tax credits and financing through our combined production leverage, working to reduce debt interest obligations across the combined company and utilizing our cumulative net operating losses to capture tax efficiencies. We also intend to leverage our newly combined content library to promote revenue growth through increased distribution and licensing of ErosSTX film and television content to global digital platforms, including five high budgetAmazon, Apple, Netflix and Walmart, develop adaptations of Indian films for distribution in the U.S. and China and expand our digital businesses through accelerated Eros Now subscriber and ARPU growth.
Since its founding, STX has distributed 42 feature films. STX theatrical releases include films we produce or co-produce in house and rights to films we acquire from third parties. STX films to date have generated approximately $1.5 billion in global box office receipts and have been enjoyed by audiences around the world in over 150 territories. Recent STX films, The Gentlemen and Hustlers have received critical acclaim, including nominations for awards.
We are currently developing and producing multiple TV series related to films that we have produced or are currently producing, including scripted drama TV series related to our feature films. We believe that our integrated approach positions us well to capture opportunities in an evolving media landscape. As consumer behavior changes with new and emerging technologies, we are adapting our content creation methods to best serve them.
Largest Indian-content OTT Service Provider Globally
We are the largest Indian-content SVOD OTT service provider globally. Our OTT platform Eros Now has digital rights to over 12,000 films and 10 medium budgetwe are collaborating with leading talents and strategic partners to create new content and expand Eros Now’s digital library. To maximize the reach of Eros Now, we currently have collaborations and partnerships in India and globally with market-leading telecommunications operators, OEMs and digital distribution entities to make available our digital service Eros Now across global audiences. Our partners include, among others, major telecommunications providers such as Airtel, Reliance Jio, Etisalat, Ooredoo, Vodafone and many more as well as streaming service providers such as Amazon Channels, Apple+ Channels, YouTube, Virgin Media, Roku, Sony TV and a plethora of connected devices. We are the first and only Indian-content OTT service provider to collaborate with Apple on a large scale. Furthermore, we have a unique and strategic relationship with Microsoft to further develop and create video technology. We believe that the scale of our digital library and the number of partnerships and collaborations with market leaders make us well positioned to take advantage of the increasing demand for digital entertainment content in India and other parts of the world.
Established, worldwide, multi-channel distribution network with access to China.
We distribute our films to the Indian population in India, the South Asian diaspora worldwide and to non-Indian consumers who view Indian films that are subtitled or dubbed in local languages. Internationally, our distribution network extends to over 50 countries, such as the U.S., the United Kingdom and throughout the Middle East, where we distribute films to Indian expatriate populations, and to Germany, Poland, Russia, Romania, Indonesia, Malaysia, Taiwan, Japan, South Korea, China and Arabic and Spanish speaking countries, where we release Indian films that are subtitled or dubbed in local languages.
China is increasingly becoming an important market, and we expect to release selected successful films from our slate for wider release into China. We entered the China market in 2018 by releasing Bajrangi Bhaijaan across more than 8,000 screens, which grossed approximately $45 million at the box office in China since release. We also released Andhadhun in China in April 2019 which collected over $43 million in the Chinese box office in less than four weeks. Our partnership with iQiyi, one of China’s leading online video sites, also gives us direct access to Chinese viewers who have an interest in Indian film content. Furthermore, we are in development of our international co-productions and are planning to release projects in early fiscal 2022.
During the twelve months ended March 31, 2020, Eros Now established a digital distribution partnership in China with Wasu Media, a large state-owned culture media group (the “Wasu Group” or “Wasu”). The Wasu Group is one of the largest comprehensive digital content service providers across interactive TV, 3G / 4G mobile TV and Internet TV in China. Wasu’s services cover approximately 100 cities in 29 provinces in China with cable network as well as covering the three major telecom operators and several million Internet users.
Through this global distribution network, we distribute Indian entertainment content over three primary distribution channels — theatrical, television syndication and digital and ancillary platforms. Our primarily internal distribution network allows us greater control, transparency and flexibility over the regions in which we distribute our films, which is indicativewe believe results in the direct exploitation of our scalefilms without the payment of significant commissions to sub-distributors.
Since its inception, STX has partnered with leading Chinese investors and leadingcontent providers across development, production, financing and distribution. We aim to create content primarily for the U.S. market position.
that has strong appeal to audiences in China and other international markets.STX co-developed and co-produced the popular Chinese reality TV show, Number One Surprise which attracted over one billion views on China’s Hunan TV between November 2016 and February 2017. STX also co-produced Jackie Chan’s 2017 action film, The Foreigner, with his company Sparkle Roll Media, which generated over US$145 million in worldwide box office receipts and became an example of a successful U.S.-China co-production. Notably, the film was well-received by both U.S. and Chinese audiences, earning an A- on Cinemascore, a key U.S. audience satisfaction measurement site, and an 8.4 out of 10 on Maoyan, a Chinese audience rating system.
Currently, STX has several film and TV projects in progress with Chinese partners, including a crime-thriller TV series, Overhead, co-produced with Bona Films, and a children's animated TV series, Warriors, co-produced with Alibaba. In film, STX is co-producing with Tencent the action-comedy, New York Will Eat You Alive, an adaptation of the popular Chinese digital comic book and animated TV series Zombie Brother.
Diversified revenue streams and pre-sale strategies mitigate risk and promote stable cash flow generation.
Our revenue model is diversified by three major distribution channels:
| · | theatrical distribution; |
| · | television syndication; and |
| · | digital distribution and ancillary products and services, including Eros Now. |
Eros bundles library titles with new releases to maximize cash flows, and we also utilize a pre-sale strategy to mitigate new production project risks by obtaining contractual commitments to recover a portion of our capitalized film costs through international sales and the licensing of television, music and other distribution rights prior to a film’s completion.
Television Syndication:We de-risk our theatrical revenues whilepre-sales in India are an important factor in enhancing revenue predictability for the Eros business and are part of our diversification strategy to mitigate risks of cash flow generation.
In addition, we further seek to reduce risk to the Eros business by building a diverse film slate, with a mix of films by budget, region and genre that reduces our reliance on “hit films.” This broad-based approach also enables us to bundle old and new Eros titles for our television and digital distribution channels to generate additional revenues long after a film’s theatrical release period is completed. We believe our multi-pronged approach to exploiting content through pre-sales andtheatrical, television syndication which includes satelliteand digital distribution channels, our pre-sale strategies and our portfolio approach to content sourcing and exploitation mitigates our dependence on any one revenue stream and promotes cash flow generation.
The international licensing of STX films also provides revenue predictability by securing minimum guaranteed license fees prior to the U.S. and United Kingdom direct theatrical releases of films by STX. STX is also a significant international distributor of feature films, acquiring films for release solely in international markets. The exclusive pay TV window licensing arrangement between STX and Showtime has also provided consistent and predictable revenue for the long-term monetization of films released by STX. We expect that revenues from licensing of STX content to television broadcasting, cable televisionnetworks and terrestrial television whichstreaming platforms will continue to be an important source of revenue for the STX film library and will constitute an increasingly important opportunity for sale of our films for in-home premieres while U.S. domestic theatrical distribution remains disrupted by the COVID-19 pandemic.
Strong brands with fast-growing international reach
We believe Eros is a leading brand that is a household name in India. Through our partnerships we are facilitated byalso able to reach the large Indian diaspora globally.
Eros Theatrical Distribution Outside India: Outside India, we distribute our long-standing films theatrically through our offices in Dubai, Singapore, the U.S., the United Kingdom, Australia and through sub-distributors in other markets. In our international markets, instead of focusing on wide releases, we select a smaller number of theaters that play films targeted at the expatriate South Asian population or the growing international audiences for Indian films. We generally theatrically release subtitled versions of our films internationally on the release date in India, and dubbed versions of films in countries outside India 12-24 weeks after their initial theatrical release in India, sometimes after a long gap.
Eros brand, reputation and industry relationships. WeInternational Broadcasting Distribution: Outside of India, we license Indian film content (usually a combinationto content aggregator to reach cable and pay TV subscriber and for broadcasting on major channels and platforms around the world. We also license dubbed content to Europe, Arabic and Spanish speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and existingother distribution rights are an important component of our overall pre-sale strategy.
STX International Distribution: STX maintains long-term output and film-by-film distribution agreements with international film distributors typically covering over 150 territories worldwide, including all of the major markets where STX films are distributed outside of the U.S., the United Kingdom and Ireland. STX also conducts an active business acquiring films for international distribution and selling rights for distribution of such films in territories around the world.
We believe that our library) overinternational distribution capabilities and large library of content enable us to generate a statedlarger portion of our revenue through international distribution.
Dynamic management of our film library
We have the ability to combine our new release strategy with our library monetization efforts to maximize our revenues. We believe our extensive film library provides us with unique opportunities for content monetization, such as our dedicated Eros content channel carried by various cable companies outside India and our exclusive pay TV arrangements for distribution of our STX film library.
Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period of time in exchange for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films. The existence of high margin library monetization avenues especially in television and digital platforms reduce reliance on theatrical revenues.
Strong and experienced management team with established relationships with key industry participants.
Our management team has substantial industry knowledge and expertise, with a majority of our executive officers and executive directors having been involved in the film, media and entertainment industries for 20 or more years. Our management team’s experience has served as a key driver of our strength in content sourcing. In particular, several members of our management team have previously led media companies such as Discovery Communications, NBC Universal and Universal Studios and have established personal relationships with leading talent, production companies, exhibitors and other key participants in Hollywood and the Indian film industry, which have been critical to our success. Through their relationships and expertise, our management team has also built our global distribution network, which has allowed us to effectively exploit our content globally.
Our Strategy
Our strategy is driven by the scale and variety of our content and the global exploitation of that content through diversified channels. Specifically, we intend to pursue the following strategies:
Scaling up productions and co-productions to augment our film library and focus on creating original digital content.
We will continue to leverage the longstanding relationships with creative talent, production houses and other key industry participants that we have built since our founding to source a wide variety of content. Our focus will be on investing in future slates comprised of a diverse portfolio mix ranging from high budget global theatrical releases to lower budget movies with targeted audiences. We intend to maintain our focus on films with various budgets and augment our library with quality content for exploitation through our distribution channels and explore new bundling strategies to monetize existing content.
We continue to focus on ramping up our own productions and co-productions through key partnerships. These include our partnership with the acclaimed producer-director, Aanand L Rai (Colour Yellow Production) and our joint venture partnership with screen writer and director V. Vijayendra Prasad. We have also entered into a distribution partnership agreement with Apple to make available Eros Now’s content across Apple devices in multiple countries including India. These strategic partnerships not only help us augment our in-house content production model but also expand our geographical footprint for content monetization.
Our focus is to become a global digital content company. Eros Now has rights to 12,000 films across ten different Indian languages and is rapidly expanding its content base. Eros Now enhances its consumer appeal by focusing on the production of contemporary Originals in under-exploited genres that have broad audience appeal. The launch of our Original digital series, comprising a broad mix of genres from comedy to horror and crime thriller, has enjoyed great success to date, with its original series Side Hero, Smoke, Metro Park, Modi and others winning over twenty awards across different platforms. Since April 2018, Eros Now has premiered several made for digital Original Films like Meri Nimoo, Maunn, That Man in the Picture, Unkahee and our most recent release of Halahal has created a definitive and large scaled audience for Digital Original features. Over the next 12 months, Eros Now is planning to launch an exclusive stable of feature films, made-for-digital originals series and Eros Now Quickie, some including Modi Season 2, Metro Park Season 2, 754 and Flipkart, The Swap, The Illegals, Gun master Geetu, Vicky Detective, Bhumi, 7 Kadam, etc.
Eros Now Quickie is a short-form program format we launched in 2019 with stories that can be told in a total of 80-100 minutes across episodes that are 8-10 minutes in length. The format has shown good traction with Tier 2 audiences, with ‘The Investigation” and “Date Gone Wrong” resonating very well with youth audiences. We plan to further scale this initiative across regional languages and drive wider adoption of premium short-form programming. We believe this format will benefit from the secular growth in the wireless sector, including a growing base of smartphone users and improving bandwidth on 4G and 5G wireless networks.
Eros Now Prime - our soon to be launched premium English-language service - is scheduled to go live in fiscal 2021. We are excited about our plans to further penetrate the English-speaking, higher-ARPU market in India. In March 2020, we also announced an agreement with NBC Universal to license fee, where paymentsthousands of English-language library titles. We are looking for additional license deals from other studios.
The digital music industry in India has been growing exponentially over the past few years, with millions of digital audio streaming users. Film music is often marketed and monetized separately from the underlying film, both before and after a film is released. To further capture this market opportunity, we plan to expand our deep music library, which is an essential component to Eros Now’s offering, and to that end have recently established a partnership with YouTube Music in India to further capitalize on the digital music opportunity.
To promote Eros Now, our OTT digital entertainment service platform, as the preferred choice for online entertainment by consumers across digital platforms.
The adoption of 4G in India is rapidly increasing and now constitutes over 95% of all data consumption over mobile networks. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packages by leading telecom providers will only help boost the quality of digital infrastructure in India.
Eros Now is increasingly focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy across all operating systems and platforms across mobile, tablets, cable or internet, including through deals with OEMs. As of June 30, 2020, Eros Now caters to 33.8 million paying subscribers and has garnered 205.8 million registered users across global digital distribution platforms. While a majority of users are from South Asia, followed by North America and the United Kingdom we get paid subscribers from 150 countries. Out of the 12,000 films that Eros Now has rights to, 5,000 films are owned in perpetuity, across Hindi and regional languages. Eros Now service is integrated with some of India’s major telecommunications providers such as Reliance Jio, Airtel, Vodafone, Idea and BSNL, as well as streaming service providers such as Amazon, Apple, Virgin Media and Roku, and has partnerships with connected devices such as televisions and mobile handsets with companies such as Samsung to distribute in multiple territories. We continue to believe that Eros Now will be a significant player within the OTT online Indian entertainment industry, especially given the rapidly growing internet and mobile penetration within India. We will also continue to expand Eros Now’s reach beyond audiences in India through strategic collaborations such as our partnership with Apple to distribute Eros Now content on all Apple devices in multiple countries outside of India.
Capitalize on positive industry trends driven by roll-out of high speed 4G services in the Indian market.
Driven by the economic expansion within India and the corresponding increase in consumer discretionary spending, FICCI-EY Report 2020 projects that the dynamic Indian media and entertainment industry will grow at a 10.0% compound annual growth rate (“CAGR”), from INR 1.674 trillion in 2018 to INR 2.416 trillion by 2022, and that the Indian digital media industry will grow at a 23% CAGR over the same period. India is one of the largest and most prolific film markets in the world as measured by output and remains underpenetrated compared to other established cinema markets such as the U.S. and the U.K. Ticket prices in India remain at lower levels than other cinema markets globally and have room to increase. In fiscal year 2019 the average ticket price amongst the two leading multiplex cinema chains in India, Inox Leisure Limited and PVR Limited, was $2.70, based on information publicly disclosed by them. This compares to average ticket prices in the US of $9.16 during fiscal year ending March 31, 2019.
The Indian television market, in terms may extend upof viewers, is the second largest in the world after China, reaching an estimated 175 million viewers in 2019. The FICCI-EY Report 2020 projects that the Indian television industry will grow from $9.9 billion in 2018 to $11.8 billion in 2022. The growing size of the television industry has led television satellite networks to provide an increasing number of channels, resulting in competition for quality feature films for home viewing in order to attract increased advertising and subscription revenues.
Broadband and mobile platforms present growing digital avenues for content distribution in India. According to a year;2020 Cisco report, India is forecasted to have approximately 907 million internet users by 2023, a large increase from 398 million internet users in 2018. According to a recent EY FICCI report, by 2025 there are expected to be one billion “screens” in India, of which 250 million screens would be television-sized while 750 million would be smart phones. This is expected to result in a continued growth in demand for content – both long form, episodic and
Digital short form – as well as provide significant opportunities for content creators currently there are approximately 550 million television and ancillary:In additionsmart phone consumers in India, We aim to
take advantage of the opportunities presented by these trends within India to monetize our
library and distribute new films through existing and emerging platforms, including by exploring new content options for expanding our digital strategy such as filming exclusive short form content for consumption through emerging channels such as mobile and internet streaming devices.Disclaimer: The exceptional circumstances brought about by coronavirus have led to the suspension of FICCI Frames. This report and the forewords were written before this development took place. We are not yet in a position to quantify the deep impact which the coronavirus will have on the media ecosystem and we will come back to the investor community when we are in a better position to articulate the impact with updated future forecasts.
Further extend the distribution of our Indian language content outside of India to new audiences.
Eros currently distributes Indian language content to consumers in more than 50 countries, including in markets where there is significant demand for subtitled and dubbed Indian themed entertainment, such as Europe and South East Asia, as well as to markets where there is significant concentration of South Asian expatriates, such as the Middle East, the U.S. and the United Kingdom.
We intend to promote and distribute our films in additional countries, and further expand in countries where we already distribute, when we believe that demand for Indian filmed entertainment exists or the potential for such demand exists. To that end, we have entered into arrangements with local distributors in Taiwan, the Middle East, Japan, South Korea, and China to distribute dubbed or subtitled Eros films through theatrical release, television broadcast or DVD release. The Middle East North Africa market represents a compelling market opportunity given the consumer trends, attractive demographics and televisionEros’ historic presence in the market and numerous distribution networks,partnerships including with Etisalat and Ooredoo. Additionally, we believe that the general population growth in India experienced over recent years may eventually lead to increasing migration of Indians to other regions, resulting in increased demand for our films internationally.
Expand our regional Indian content offerings.
We continue to be committed to promoting regional content films and growing the regional movie industry. We will utilize our resources, international reputation and distribution network to continue expanding our non-Hindi content offerings to reach the substantial Indian population whose main language is not Hindi. While Hindi films retain a broad appeal across India, the diversity of languages within India allows us to treat regional language markets as distinct markets where particular regional language films have a strong following.
Our regional language films include Marathi, Malayalam, Punjabi, Kannada and Bengali films. Our Malayalam film Pathemari won a national award for Best Malayalam Film. We intend to use our existing distribution network across India to distribute regional language films to specific territories. Where opportunities are available and where we have the rights, we also intend to exploit re-make rights to some of our popular Hindi films into non-Hindi language content targeted towards these regional audiences.
Expand Monetization of Successful IP Across Platforms
We will seek to leverage our relationships with talent and industry leaders to extend the monetization of our IP across multiple platforms, including complementary verticals such as consumer products. Bad Moms is an example of a franchise that we are monetizing across platforms—the successful film led to a sequel (A Bad Moms Christmas) and we have a global network forthird film in development; a related digital and social community was launched on Facebook, Instagram and YouTube. As our content portfolio scales, we believe that we will be able to utilize the digital distributionIP we own across several future franchise productions and platforms to create a virtuous cycle that yields attractive returns.
Opportunistically Expand Our Platform through Acquisitions
We may opportunistically acquire companies, complementary assets and businesses that we believe present opportunities to enhance our capabilities and competitive position, including companies that hold complementary IP. All acquisition decisions will be carefully assessed in the broader framework of our content, which consists of full length films, music, music videos, clips and other video content. Through our digital distribution channel, we mainly monetize music assets and distribute movies and other content primarily in Internet Protocol television (IPTV), Video on Demand (VOD) (including Subscription Video on Demand (SVOD) and Direct-to-Home (DTH)) and online internet channels. This enables us to prolong the lifecycle of our films and film library. We are present in a high-growth digital market with India projected to have over 969 million wireless internet users by 2021, according to the FICCI Report 2017.
disciplined capital allocation strategy.
Content development and acquisitionSlate Profile
Eros
The success of ourEros’ film distribution business lies in our ability to acquire and develop content. We have been building and adding to our film library for the past 40 years and each year, through acquisition and co-production arrangements, we seek to acquire rights to 60 to 70 additional films. We currently own or have license rights over approximately 3,000 films, including recent and classic titles that span different genres, budgets and languages. Each year, we focusEros focuses on co-production, acquisition and distribution of a diverse portfolio of Indian language and themed films that we believeEros believes will have a wide audience appeal. For fiscal 2017, weOf the 30 films Eros released a total of 45 films in India and overseas. These comprised 12during the twelve months ended March 31, 2020, eight were Hindi films, 16one was a Tamil film and 2 21 were regional films. Of the 72 films Eros released in fiscal year 2019, fifteen were Hindi films, seven was Tamil/Telugu language films and 15fifty were regional films. The Company’s strong portfolio of films drove theatrical, television and digital/ancillary revenues worldwide with key titles such asHousefull 3 (Hindi), Sardaar Gabbar Singh (Telugu), Baar Baar Dekho (Hindi), Dishoom (Hindi) and Ki and Ka (Hindi),Rock On 2 (Hindi), Kahaani 2 (Hindi), Chaar Sahibzaade 2 (Punjabi) and Double Feluda (Bengali) contributing a significant share to our revenue for fiscal 2017.
For fiscal year 2017 our aggregate revenues were $253 million which were derived from theatrical, television syndication and digital and ancillary distribution channels. OurEros’ typical annual slate of new releases consists of both Hindi language films and regionalas well as films produced specifically for audiences whose main language films,is not Hindi, primarily Tamil, Telugu and to a lesser extent other regional Indian languages. Ourlanguage. Eros’ most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) which we release globally. Ofthat it releases globally each year. The remainder of the total 45 movies acquiredfilms (mainly Hindi but also Tamil and/or Telugu) included in the year, five are high budget films. We released 10 medium budget films in fiscal 2017 which mainly comprise Hindi, Tamil, Telugu and regional language films. Thiseach annual release slate is built around the high budget films with various budgets to create a slate that will attract varying segments of the audience. The low budget filmremainder of the slate consists of Hindi, Tamil, Telugu and other regional language films.films of a lower budget.
We have maintained our focusEros focuses on highcontent driven films with appropriate budgets in order to generate an attractive rate of return and medium budget Hindi films because these films typically have better production values, more recognizable stars that attract larger theatrical audiences and also drive higher revenues from television syndication in India. We seek to mitigate the risks associated with these high budget filmsfilm budgets through the use of ourits extensive pre-sale strategies. We haveEros has increased ourits focus on high and medium budget Tamil and Telugu films for similar reasons. Eros’ Hindi films are typically high or medium budget films in the popular comedy and romance genres, supplemented by lower budget films, and Eros’ Tamil films are predominantly star-driven action or comedy films, which appeal to audiences distinct from audiences for more romance-focused Hindi films. Eros believes that a Tamil or Telugu film and a Hindi film can be released simultaneously without adversely affecting business for either film, as each caters to a different audience.
We also believe that Eros can capitalize on the demand for regional films and replicate its success with Tamil and Telugu films for other distinct regional language films, including Marathi, Malayalam, Kannada and Punjabi. In addition, the key Indian release dates for films, during school and other holidays, vary by region and therefore our ability to release films on different holidays in various regions, in addition to being able to release films in different regional languages simultaneously, expands the likely periods in which our films can be successfully released. Eros intends to steadily build up its portfolio of films targeting other regional language markets.
STX
STX focuses on co-production, acquisition and distribution of a diverse portfolio of films each year. Most films in our slate meet the following criteria: (i) a production budget between $5 million and $50 million, (ii) one or more stars in signature roles, (iii) a wide release on at least 2,000 screens in United States with a substantially concurrent global release through our global distribution network, or a theatrical/PVOD/streaming strategy when appropriate, and (iv) a financing structure designed to mitigate our equity risk exposure. The significance of each of these criteria is further described below.
1. Stars in signature roles — We collaborate with talent to maximize the value of their brand and reach their audience most effectively by featuring stars in the ‘‘signature’’ roles for which they are most widely known. For example, Gerard Butler in the sci-fi thriller Greenland in the role of action hero saving his family from a planet-killing comet, consistent with his globally recognized reputation for such roles. Two other recent examples are Kevin Hart as a fish-out-of-water in the comedic drama The Upside and Jennifer Lopez as a streetwise force of nature in the female empowerment crime drama Hustlers. We believe that featuring stars in their ‘signature’’ roles is a key differentiator in helping to ensure a film performs well (i.e. maximize box office receipts), while allowing us to optimize our prints and advertising spending. We believe that the primary advantages of casting a star in a signature role are (a) increased predictability of box office performance because the star has been successful in the past in similar roles, and (b) it reduction of prints and advertising spending necessary to attract the target audience because the audience is easily identifiable based on their past interest in this star playing similar roles and is easily convinced that the film will be to their liking.
2. $5 million to $50 million budgets — The major studios have trended away from producing mid-budget films. This market shift and the resulting undersupply were important drivers of the founding of STX, and the decision to produce films in this production budget range. We believe that producing films in the mid-budget range gives us the greatest flexibility to tailor production and prints and advertising budgets to the appropriate levels based on anticipated production value of our films and the performance of comparable films historically. Additionally, we canhave created a data-driven approach to marketing which, combined with our star-driven casting strategy, allows us to spend significantly less to achieve those results, driving higher returns both for us and our talent partners.
3. Wide release (on approximately 2,000 screens in the United States) with a Tamilsubstantially concurrent global release through our global distribution network, or theatrical/PVOD/streaming strategy when appropriate — Our direct distribution of our feature films in the United States, the United Kingdom and HindiIreland enables us to achieve wide releases on 2,000 or more screens, including through leading theater operators such as AMC, Cineworld and Cinemark. Our international distribution partnerships enable our films to reach over 150 territories worldwide; some through long-term output agreements and others on a film-by-film basis. This global distribution capability yields two primary benefits. First, the wide release of each film onleads to maximum audience penetration, providing leading talent opportunities to be globally relevant and maximizing box office receipts (which in turn drives to the same datecorrelating post-theatrical revenue streams). Second, our international output agreements are structured to minimize at-risk capital, as they caterdescribed below. Our output arrangements specify that the films we deliver pursuant to different audiences, whichsuch agreements must be given a wide release in the United States.
4. Financing structure designed to mitigate our equity risk exposure — We adopt risk-mitigated financing structures through a combination of tax incentives and international license agreements to minimize production costs. International license agreements allow us to effectively schedule releasesanticipate that each film will recover no less than the minimum guaranteed license fees under such agreements for each of our produced films. Tax incentives, where available, mitigate the overall net production cost required to complete such films. These and other strategies are aspects of our risk-mitigated approach, which ensures that our exposure is protected on the downside, while retaining a significant interest in the revenue that the films generate. The Company has also employed slate and opportunistic film-by-film co-financing to mitigate downside risk.
Our Business
STX Content Development
The process of making a film portfolio and bringing it to consumers can generally be summarized in five key steps:
Typically, as illustrated above, STX initiates the process of producing a film with the development of the initial concept. Once development has reached the point where STX needs to initiate financial commitments to meet a desired release timeline, the project enters the decision phase known as “greenlighting.” A film that meets the appropriate criteria will be advanced into production so that STX can commence filming scenes, editing and post production work. During and following completion of production, STX’s marketing team prepares marketing materials and begins to build audience awareness through advertising and other forms of publicity leading up to a theatrical release. The greatest spending on marketing is made around the time of release and initial distribution.
While development for a project can vary in length, six months to 18 months is the typical time frame for one of STX’s films to go from development through production, marketing and distribution. Certain types of films, such as animated features may require a longer development and production cycle.
After release, the film begins to earn revenue for its lifetime which STX initially estimates as a ten year period. The key revenue-generating categories from distribution include theatrical receipts and international license fees, post-theatrical home entertainment, and TV and streaming license fees.
Development
The initial stage of film development begins with the concept of a film. In the development of STX’s creative ideas and film projects, our approach is to begin with and design films around the commercial strengths of leading acting, writing, directing or producing talent.
During development, STX seeks to take advantage of tax incentive programs many states and foreign countries have adopted to attract film production as a greater combined sharemeans of economic development. The majority of costs incurred during this stage are typically for script development, including the hiring of writers, and concept development, including illustrations and some limited video production. Average costs during this phase are small compared to the film’s total budget and are capitalized upon commencement of production and included in the amortization of the film’s costs upon the release of the film. For films that do not advance from development to production, the costs are written off.
STX believes its multiplatform development approach is highly attractive to talent and differentiates it from many other entertainment companies. Once a talent is part of our ecosystem, they have the opportunity to work on multiple projects that allow them to extend their brands and connect with their audiences across film, TV and digital formats. For example, STX developed UglyDolls as a feature film, while concurrently creating a toy line, TV show and digital series. Notably, UglyDolls producer Robert Rodriguez was simultaneously working with STX on the film while creating a new virtual reality series called The Limit starring Michelle Rodriguez.
Greenlighting and Risk Assessment
Once the development process has reached its conclusion, a film will only be greenlit by STX senior management if it meets the appropriate criteria to go into “physical production,” the phase that includes filming scenes, editing and post production work. Formal approval is based on a review of (1) financial analysis of projected performance scenarios, including allocable overhead, (2) comparable film analysis, including projected box office receipts and required marketing spend, (3) preliminary marketing and distribution plans.
STX’s approach to acquiring films to produce and distribute is similar to its approach to in-house developed films in that it seeks to limit its financial exposure while adding films to STX’s release schedule and film library. The decision whether to acquire a film and the associated economic arrangements involves senior management and is based on thosea review of the same considerations used for its in-house developed films. In some cases, the decision to acquire rights in a film will be made after the commencement of production.
STX’s budget preparation process is based on standard industry methodologies learned by its senior management team while developing, budgeting, producing, marketing and distributing hundreds of films at major studios prior to joining our team.
Once STX determines an appropriate budget range for a feature film, its physical production department prepares a page-by page breakdown of the script reflecting potential filming locations and facilities. The final detailed budget will reflect locations selected based on factors including availability of tax incentives, filming crews and filming studios.
An initial budget is then prepared based on estimates of upfront costs to be incurred in the course of physical production of the film (expenses related to principal photography and any expected reshoots to capture the performances of actors and other images), post-production (editing, visual effects, sound and music required for completion of the produced film), and the cash compensation and participation arrangements to be entered into with rights holders, producers and creative talent, including the director, writers and actors. Production costs contemplated by the script breakdown are further broken down by department to reflect detailed budgets based on the number of days of work and technical requirements for such department. The initial budget is reviewed by STX’s senior management in connection with the greenlighting review of the film, with approval granted only when STX senior management has determined that the budget is reasonably achievable and consistent with the budget range approved for the project.
A final budget is further refined during pre-production to include final negotiated contractual arrangements (including talent compensation negotiated by STX’s business affairs department) and department-by-department shooting and post-production budgets, all of which are reviewed by STX and the film’s director prior to commencing production. The final budget is also reviewed by the third-party provider of completion guarantee bonding, which provides assurance that the film will be produced according to the budget and schedule contemplated by the final script.
The production, completion and distribution of films can be subject to a number of uncertainties, including delays and increased expenditures due to disruptions or events both beyond and within STX’s control, such as enhancements it believes will improve the marketability of the project. STX employs multiple mitigation tools against budget overruns including (i) contingencies in budgets to allow for incremental financing capacity if ever needed, (ii) standard market insurance products for productions and (iii) completion bonds, which are an insurance product whereby a completion guarantor will step in to complete or choose to abandon production (and accordingly repay amounts spent to date) in the case of a material budget overrun. To date, STX has not experienced any material budget overruns.
Notwithstanding the budget management process, there are several factors that cause variability in STX’s film performance. The key driver of variability is the performance of the film at the box office. During the greenlighting process, STX’s financial analysis considers variability in performance to assess the impact to its films under low, base and high scenarios. The scenarios are driven by a selection of comparable films that are similar to the STX film in terms of genre, release dates.date and talent. STX’s greenlighting procedure is to assess whether the base case scenario can return a minimum of 20% on STX capital at risk and is reasonably close to the average and/or median of the comparable film range. The low and high cases typically represent probable but not expected results based on STX’s review of comparable films.
Below is an illustrative model of the revenue that a film will generate over its lifetime (which we refers to as the film’s “ultimate”) that demonstrates a similar template for how STX creates its greenlighting models. The key drivers of the model are (1) the film’s production cost, which determines within a range the amount of international pre-licensing funding and tax incentive funding and (2) the U.S. box office performance level which is correlated to all of the other revenue streams.
WithProduction
Physical production begins after a film is greenlit. Physical production is when a film’s production cost is incurred and can be divided into the three major phases of pre-production, production and post-production. All phases require highly detailed scheduling and coordination. Costs during physical production include compensation for primary actors, directors, producers and key creative talent, which are typically fixed ahead of filming. During this time, STX also incurs costs for supporting talent and all of the other labor and vendors who contribute to the production process, including transportation, wardrobe and costumes, props and physical items, cameras and rental equipment, camera and sound operators, visual effects and graphics experts and software, insurance, finance and accounting, post production and editing, location and office expenses, lighting and electrical equipment and operators.
Pre-Production
Before filming and shooting commences, STX engages in pre-production activities such as location scouting, casting, shoot scheduling and the set-up of the various contractors that will be working on the project. In addition, all permits, financial, legal and administrative functions are established to help filming go smoothly and so all contracted services can be paid in a timely fashion. During this phase, the writing team may also continue to alter the script and actors receive any required special training or coaching. Lastly, STX finalizes the financing of the film and trigger our commitments with financing and distribution partners.
Production
Depending on the complexity of the filming and creative elements, production may take up to a few months. STX productions are typically filmed at a combination of physical locations and sound stages or back-lot sets. As described above, the choice of filming locations is often dictated by where STX can achieve optimal tax credits or incentives to reduce the cash costs of production. For example, Bad Moms and A Bad Moms Christmas portray a Chicago suburb but were largely filmed in Louisiana and Georgia, respectively, to take advantage of local tax incentives available for guaranteeing a certain number of filming days and local employees.
Production shoots are typically scheduled for a number of full days determined based on the film’s budget and creative needs. The actors are called into sessions based on call times when they arrive on set for makeup, wardrobe and other pre-filming preparations as needed. The directors and talent prepare lighting, rigging, sets, costumes, props and stunt coordination to deliver a multitude of alternative shots and scenarios to be selected for inclusion in the final cut of the film. During production, STX films many hours of content that are selectively edited into the final product, typically 80 to 150 minutes in length.
Post-Production
After filming is complete, the director and editors select the scenes to assemble the finished product, including editing the film and sound, creating and recording music and adding special effects. During this phase, STX also begins developing scenes to include in trailers.
Marketing
STX begins marketing a film to audiences within the U.S. and the United Kingdom and Ireland before it releases a film in order to generate interest. STX seeks to use print and advertising budgets in a manner that is most likely to reach its core target audience, including through the use of digital media, brand partnerships, in-cinema promotions and unique fan experiences, as well as more traditional marketing media such as film and TV trailers, TV appearances, print advertising and exhibition programs. STX’s goal is to maximize the effectiveness of print and advertising spending by taking an analytical approach, which STX believes enables STX to focus our marketing activities and tailor them to be more effective and efficient.
Eros Content Development
Eros currently acquires films using two principal methods — by acquiring rights for films produced by others, generally through a license agreement, and by co-producing films with a production house, typically referred to as a banner, which is usually owned by a top Indian actor, director or writer, on a project-by-project basis. Eros regularly co-produces and acquires film content from some of the leading banners in India, and continues to focus on creating intellectual property in-house alongramping up its own productions and co-productions through key partnerships. These partnerships include its partnership with delivering wholesome entertainment to audiences, we have entered into key co-production partnerships with producers and directors. Colour Yellow Production, a subsidiary of Eros India with AnandAanand L Rai (Colour Yellow Productions), which has announced film releasesreleased a range of films across budgets, genres and languages,languages; and co-production partnership with screen writer and director V. Vijayendra Prasad.
Moreover, Eros is continuing to focus on expanding the reach of its content by further penetrating the China market, which Eros believes is a significant market for Indian films, and releasing more dubbed and subtitled content to new markets beyond China. To that end, in April 2019 Eros released Andhadhun, a dark comedy crime thriller, in China in collaboration with Tang Media Partners, a leading Chinese film distributor. In addition, these strategic partnerships not only help Eros augment its in-house content production capacity but also includes Anand L Rai’s directorial venture. This co-production model along with our in-house production franchise ‘Trinity’ gives us better visibility on actual costexpands its geographical canvas for content monetization.
Regardless of production ensuring capped budgets andthe acquisition method, over the calendar years 2015 to 2020, Eros has typically obtained exclusive global distribution rights in all media for a minimum period of 10 to 20 years from the Indian initial theatrical release date, although the term can vary for certain films for which Eros may only obtain international or only Indian distribution rights. Occasionally, soundtrack or other rights are excluded from the rights acquired. For co-produced films, Eros typically has exclusive distribution rights typically for at least 20 years.years, co-owns the copyright in such film in perpetuity and, after the exclusive distribution right period, shares control over the further exploitation of the film.
Eros believes producers bring proposed films to Eros not only because of established relationships, but also because they want to leverage its proven distribution and marketing capabilities. Eros’ in-house creative team also directly develops film ideas and contracts with writers and directors for development purposes. When Eros originates a film concept internally, it then approaches appropriate banners for co-production. Eros’ in-house creative team also participates in the selection of Eros’ slate with other members of its management in our analysis focused on the likelihood of the financial success of each project. The Eros management team is extensively involved in the selection of its high budget films in particular.
In-House Production Arm — Trinity Pictures
We set up Trinity Pictures in fiscal year 2015 as what we believeRegardless of whether a film will be acquired or co-produced, Eros determines the likely value of the rights to be acquired for each film based on a variety of factors, including the stars cast, director, composer, script, estimated budget, genre, track record of the production house, our relationship with the talent and historical results from comparable films. Eros follows a disciplined green lighting process involving extensive evaluation of films involving track records, revenue potential and costs before green lighting by a committee led by senior management and business leaders. Eros also has risk sharing contracts with talent and key stakeholders to ensure risk diversification. The primary focus is on sourcing a diversified portfolio of films expected to generate commercial success. Eros generally co-produces its high budget films and acquires rights to more medium and low budget films. Eros’ model of primarily acquiring or co-producing films rather than investing in significant in-house production capability allows it to work on more than one production with key talent simultaneously. Since the producer or co-producer takes the lead on the time intensive process of India’s first dedicated franchise studioproduction, Eros is able to scale our film slate more effectively. The following table summarizes the typical terms included in Eros’ acquisition and co-production contracts.
| Acquisition | Co-production |
| Film Cost | Negotiated “market value” | Actual cost of production or capped budget and 10–15% production fee |
| Rights | 10 years–20 years | Exclusive distribution rights for at least 20 years after which Eros shares control over the further exploitation of the film, and co-owned copyright in perpetuity, subject to applicable copyright laws |
| Payment Terms | 10–30% upon signature
Balance upon delivery or in instalments between signing and delivery | In accordance with film budget and production schedule |
| Recoupment Waterfall | “Gross” revenues
Less 10–20% Eros distribution fee (% of cost or gross revenues)
Less print, advertising costs (actuals)
Less cost of the film
Net revenues generally shared equally | Generally same as Acquisition except sometimes Eros also charges interest and/or a production or financing fee for the cost of capital and overhead recharges |
Where Eros acquires film rights, it pays a negotiated fee based on its assessment of the expected value of the completed film. Although the timing of Eros’ payment of the negotiated fee for an acquired film to its producer varies, typically Eros pays the producer between 10% and 30% of a film’s negotiated acquisition cost upon signing the acquisition agreement, and the remainder upon delivery of the completed film or in installments paid between signing and delivery. In addition to the negotiated fee, the producer usually receives a share of the film’s revenue stream after Eros recoups a distribution fee on all revenues, the entire negotiated fee and distribution costs, including prints and ads. After Eros signs an acquisition agreement, it does not exercise any control over the production process, although Eros does retain complete control over the distribution rights it acquires.
For films that creates valuableEros co-produces, in exchange for its commitment to finance typically 100% of the agreed-upon production budget for the film and agreed budget adjustments, Eros typically shares ownership of the intellectual property around powerful characterrights in perpetuity and plot-driven franchisessecures exclusive global distribution rights for all media for at least 20 years. After Eros recoups its expenses, Eros and monetizes these properties acrossthe co-producers share in the proceeds of the exploitation of the intellectual property rights. Pending determination of the actual production cost of the film, Eros also agrees to a pre-determined production fee to compensate the co-producer for his services, which typically ranges from 10%-15% of the total budget. Eros typically also provides a share of net revenues to its co-producers. Net revenues generally means gross revenues less Eros’ distribution fee, distribution cost and the entire amount Eros has paid as committed financing for production of the film. Eros’ distribution fee varies for each of the co-produced films, merchandising, gaming amongst others. Trinity’s first franchise “Sniff-I Spy”but is currentlygenerally either a continuing 10% to 20% fee on all revenues, or a capped amount that is calculated as a percentage of the committed financing amount for production of the film. In some cases, net revenues also deduct an overhead charge and an amount representing an interest charge on some or all of the committed financing amount. Typically, once Eros agrees with the co-producer on the script, cast and main crew including the director, the budget and expected cash flow through a detailed shooting schedule, the co-producer takes the lead in production and is setexecution. Eros normally has our executive producer on the film to oversee the project.
Eros reduces financing risk for releaseboth acquired and co-produced films by capping its obligation to pay or advance funds at an agreed-upon amount or budgeted amount. Eros also frequently reduces financial risk on a film to which Eros has committed funds by pre-selling rights in fiscal year 2018. Two editions ofSniff comicsthat film.
Pre-sales give Eros advance information about likely cash flows from that particular film product, and accelerate cash flow realizable from that product. Eros’ most common pre-sale transactions are the following:
| · | pre-selling theatrical rights for certain geographic areas, such as theaters outside the main theater circuits in India or certain non-Indian territories, for which Eros generally gets nonrefundable minimum guarantees plus a share of revenues above a specified threshold; |
| · | pre-selling television rights in India, generally by bundling releases in a package that is licensed to satellite television operators for a specified run; and |
| · | pre-selling certain music rights, including for movie soundtracks and ringtones. |
From time to time Eros also acquires specific rights to films that have already been released alongtheatrically. Eros typically does not acquire global all-media rights to such films, but instead licenses limited rights to distribution channels, like digital, television, audio and home entertainment only, or rights within a certain geographic area. As additional rights to these films become available, Eros frequently seeks to license them as well, and its package of distribution rights in a particular film may therefore vary over time. Eros works with iconic Chacha Choudhary comics. These comicsproducers not only to acquire or co-produce new films, but also to license from them other rights they hold that would supplement rights Eros holds or has previously held related to older films in its library. In certain cases, Eros may not hold full sequel or re-make rights or may share these rights with our co-producers.
STX Financing Structures
Film Project Financing
The principal sources of funding for financing STX’s produced films are available in five languages.Sniff mobile gamesinternational upfront license fees, tax incentives, co-financing and video games will also hitequity.
International License Fees
STX believe that the markets followinglicense fees it receives under its output agreements described above appropriately mitigate its financial risk for its produced films. Subject to the movie’s release. Merchandizingspecific terms under each output and animation series are also being prepared.
Trinity Pictures,distribution agreement, the company’s visionary ventureaggregate minimum guarantees committed by international film distributors collectively contribute a significant portion of the total production budget of each film. Because the amount of revenue that STX expects to receive from the minimum guarantee arrangement is contractually set, STX is able to borrow against the minimum guarantee to finance the production and in-house franchise label has more than twenty franchises across newprints and diverse genres. Outadvertising costs of its films. STX’s schedule for repayment of these twenty franchises, fiveborrowings corresponds to its receipt of the minimum guarantee payments from its international film distributors, a portion of which STX expects to receive before production begins and the balance paid typically at delivery of the completed film.
Tax Incentives
When practicable, STX produces its films in territories that offer tax incentives in order to offset production costs. Going forward, STX expects that tax incentive will represent between 15% and 25% of the total STX production costs. These incentives are lined upuncertain in some jurisdictions where there is a risk of changes to the tax incentive programs. See “Part I—Item 3. Key Information—D. Risk Factors—Delays, cost overruns, cancellation or abandonment of the completion or release of films may have a material adverse effect on our business.”
Given that these tax incentives take a variety of different forms across different tax jurisdictions, the manner and timing of payment also varies. In jurisdictions where the incentive is in the next coupleform of a rebate, STX generally collects the tax rebate from the granting jurisdiction. In jurisdictions where the incentive takes the form of a tax credit, STX generally does not have sufficient tax liabilities in such jurisdiction to permit it to utilize such tax credit itself, so STX generally sells the tax credit to a third-party at a discount. While STX retains a claim on the tax credit, it is able to borrow against the expected payment under the Senior Credit Facility to finance production and prints and advertising costs of its films. These borrowings are subject to the risk that the tax incentive may ultimately be less than expected when the relevant jurisdiction completes its audit of the production and post-production costs. See “Risk Factors—We face substantial capital requirements and financial risks.”
Co-financing arrangements
After borrowing against minimum guarantees from STX’s international distribution arrangements and tax incentives to finance production, the remaining required production costs for films STX produces are financed through equity investments by STX and its partners. STX opportunistically explores co-financing arrangements with third-party investors on a film-by-film basis and has historically supplemented these arrangements through co-financing, co-production and distribution agreements with Huayi Brothers and Tang Film Financing Fund I (US), Inc. STX’s slate co-financing arrangements historically contributed from 7.5% to 25% of the total equity required on each film project, from each co-financing partner. During the two fiscal years ended September 30, 2019 and the six months ended March 31, 2020, our slate co-financing arrangements represented the majority of our co-financing commitments.
Loans
We have entered into the Senior Credit Facility, which enables us to efficiently finance our business and manage cash flow timing. This credit facility allows STX to borrow against future cash flows. Loans are repaid from the collection of revenue from films and TV series, net of amounts due to third parties (including participations and residuals) and distribution expenses. All films are pooled together to enhance the security of the collateral. The Senior Credit Facility is a key tool for STX to manage cash flow associated with production outlays.
| · | Production funding. The Senior Credit Facility is structured using a borrowing base, which is a common concept in the entertainment industry. A borrowing base is collateral that provides for advances against future amounts payable to STX related to license fees and minimum guarantees from our distribution partners, tax incentives and co-financing, among other elements. Additionally, ultimates from previously released films can be borrowed against to fund production and for other corporate purposes. |
| · | Marketing funding. The Senior Credit Facility also provides financing for the majority of the marketing costs, which are repaid after a film’s theatrical release based on the receipts generated from the film (without double-counting for ultimate value that may have been leveraged to finance production costs). If theatrical receipts are insufficient to repay the borrowings, subsequent window receipts (e.g., home entertainment) are applied to prints and advertising facility borrowings until repaid. |
TV and Other
TV
STX’s TV business consists of the development, production and licensing of TV programming, and STX principally generates revenue from the licensing of programming to various TV platforms. STX develops and produces or co-produces scripted and unscripted TV programming. STX actively seeks opportunities to develop TV content that is complementary to content on its other platforms.
| · | Scripted. STX applies a disciplined model to its scripted TV business: (1) STX targets a per-episode production budget between $2.5 million and $4.5 million; (2) STX looks to attach a star in a signature role and partner with leading writers and producers before moving forward with production; (3) STX focuses on dramas and comedies with global appeal; and (4) STX seeks to leverage successful relationships to create other similarly branded content. For projects for which STX retains certain intellectual property or distribution rights, STX aims to cover 50% to 60% of its production budgets via its first-run network partner. In some cases, STX does not retain any such rights, and the first-run network pays the entire production budget plus a negotiated margin. |
| · | Unscripted. Unscripted programs include docu-series and reality shows and may also leverage successful film projects. Unscripted programming is typically created with the goal of retaining rights to the show’s format, and a successful format can be re-licensed for duplication by local producers in international territories. Production budgets vary but STX targets a per-episode production budget between $300,000 and $1 million. Typically, the first-run network pays the production budget plus a negotiated margin, and STX may retain rights to release the “format” or underlying concept of the program in other markets. |
In cases where STX acts in a production services capacity, its earns fees for acting as an executive producer and a share of net profits. In cases where STX retains rights to the IP, its licenses programming to networks, both domestically and internationally across various TV platforms, including free TV, pay TV and digital platforms. This programming can be sold in successive windows, which may occur on an exclusive or non-exclusive basis.
Distribution
STX
STX generates film revenues globally based from box office receipts, licensing agreements, post-theatrical arrangements for TV and streaming. The first source of revenue from its films is typically the share of the U.S. box office receipts for each film it distributes domestically within the U.S. After a film completes its window in domestic cinemas, it is licensed to a variety of distributors in downstream distribution windows, as described below.
Where STX controls international distribution rights, it also generates revenue from the international distribution of its films, including through output agreements and film-by-film agreements with global distributors. In the United Kingdom and Ireland, STX maintains control over the distribution process and thus is able to enjoy the same benefits of direct distribution that it has in the U.S. STX typically use output arrangements to guarantee coverage for a large portion of the expenses of its films.
For most films, the ultimate is generated within the first year of its release, with the remaining received over a number of years —through the post-theatrical windows. STX estimate ultimates for our films for the first ten years after a spy-superhero film,Sniff directed by Amole Gupte, — a live action tri-lingual (Hindi, Telugu and Tamil) elephant filmfilm’s release (including the year of release), which is referred to be directed by multiple award-winning Tamil director, Prabhu Solomon, ace director Krish’s buddy cop film which will be shot in Hindi and Tamil simultaneously, featuring popular lead actors from both South India and the Hindi film industry, an action thriller to be directed by Vipul Amrutlal Shah to be shot next year and two Indo-China co-productions, a first for any Indian studio — Kabir Khan’s travel drama and Siddharth Anand’s cross-cultural romantic comedy currently titledLove In Beijing.
Award winning content / franchise
We are strategically positioned as a leader in our industry as the “first cycle ultimate.” As STX’s library of films grows over time, they anticipate that the revenues generated from earlier released STX films will serve as an additional source of cash flow to STX. The following chart outlines the key film distribution windows and distribution partnerships that allow STX to capitalize on consumer interaction with STX content through each film’s lifecycle.
Film Distribution
| Rights Window | | Consumer Action | | STX Business Partners | | STX Business Model |
| 1. Theatrical U.S., United Kingdom and Ireland | | Purchases movie ticket | | Cinemas, such as AMC, Regal and Cinemark | | Cinemas show STX film, collect ticket sales and remit a portion of gross receipts to STX. STX distributes directly in the U.S., United Kingdom and Ireland |
| | | | | | |
2. Home Entertainment
a. Digital media | | Purchases or rents STX film through download or VOD system | | Digital retail operators, such as iTunes and Amazon, and cable operators | | Digital retail operators collect revenue and record unit volumes and remit to STX the receipts of sales volumes less their revenue share amount |
| | | | | | |
| b. Packaged media | | Purchases DVD or Blu-ray disc | | Third-party retailers serviced by Universal Home Entertainment and Sony | | Unit sales and receipts collected by servicing agents who remit to STX the money received after recouping their costs and a distribution fee |
| | | | | | |
3. TV
a. Pay TV | | Subscribes to a pay TV network via internet protocol TV service or direct-to-consumer app | | Pay TV networks, such as Showtime | | Pay TV network pays us a license fee based on STX film’s U.S. box office receipts |
| | | | | | |
| b. Streaming | | Subscribes to streaming platform | | Streaming platforms, such as Netflix | | Streaming platform pays us a license fee |
| | | | | | |
| c. Free TV | | Watches STX film on a TV network | | Free TV networks, such as A&E Networks, Univision and FX | | Free TV network pay STX a license fee |
| | | | | | |
| 4. International Excluding United Kingdom and Ireland | | All windows: Theatrical, Home Entertainment, TV | | Regional distributors, such as Sun for Latin America and Tobis for Germany | | STX has long-term output contracts where STX partners pay it an upfront license fee based on the film’s production costs plus overages if the film succeeds. STX also engages with partners on a film-by-film basis |
The principal driver of film revenue is box office performance. The exception for STX films is international revenue, which is primarily based on the film’s production cost. Because STX pre-licenses the majority of its produced films and certain distribution-only films to international output partners, the international revenue is generally known at the beginning of production or at the time distribution rights are acquired. The various post-theatrical revenues are either contracted or correlated to box office receipts. As a result, the U.S. box office receipts are an important determinant in the total expected revenue and earnings profile of any individual film.
For distribution-only films, other producers generally cover all the development, production, advertising and marketing costs, and STX earns a distribution fee and other consideration while assuming little to no risk, except to the extent of any minimum guaranteed license fee STX pays or co-financing investment in any such film or any portion of our distribution fee which is contingent on film performance. The fee-based economics of STX’s distribution-only deals generally do not provide for the same level of upside that it could earn on films it produces. Further, for distribution-only films, STX typically acquires the right to distribute for a limited period of time and does not retain the film intellectual property for future monetization opportunities.
The following chart illustrates the total contribution of STX revenue from theatrical revenue, international revenue and post-theatrical revenue recognized for the aggregate period for fiscal years 2017, 2018 and 2019 and the six months ended March 31, 2020 and 2019.
| | | For the Year Ended September 30, | | For the Six Months Ended March 31, |
| | | 2017 | | 2018 | | 2019 | | 2019 | | 2020 |
| | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| | | (in thousands, except percentages) |
| | | | | | | | | | | | | | | (unaudited) | | | | |
| Revenue | | | | | | | | | | | | | | | | | | | | |
| Film | | | | | | | | | | | | | | | | | | | | |
| Theatrical | | 20,339 | | 10.1 | | 136,474 | | 30.4 | | 109.716 | | 25.3 | | 58,619 | | 26.2 | | 49,162 | | 26.1 |
| International | | 37,836 | | 18.8 | | 154,915 | | 34.5 | | 88,633 | | 20.4 | | 46,876 | | 20.9 | | 38,198 | | 20.3 |
| Home Entertainment | | 94,457 | | 46.9 | | 102,971 | | 22.9 | | 118,716 | | 27.3 | | 71,382 | | 31.9 | | 53,405 | | 28.3 |
| TV/streaming | | 40,368 | | 20.0 | | 32,026 | | 7.1 | | 71,575 | | 16.5 | | 42,123 | | 18.8 | | 35,168 | | 18.7 |
| Other Post-Theatrical | | 2,772 | | 1.4 | | 1,245 | | 0.3 | | 4,988 | | 1.1 | | 1,506 | | 0.7 | | 2,649 | | 1.4 |
| Total Film | | 195,772 | | 97.2 | | 427,631 | | 95.2 | | 393,628 | | 90.6 | | 220,506 | | 98.5 | | 178,582 | | 94.8 |
| TV and Other | | 5,669 | | 2.8 | | 21,215 | | 4.8 | | 40,633 | | 9.4 | | 3,562 | | 1.5 | | 9,871 | | 5.2 |
| Total revenue | | 201,441 | | 100.0 | | 448,846 | | 100.0 | | 434,261 | | 100.0 | | 224,068 | | 100.0 | | 188,453 | | 100.0 |
The following chart illustrates the key lifecycle stages of a film from development through distribution and the timing of recognition of revenue:
Revenues from a film are first realized following its theatrical release. These theatrical revenues represent our share of gross box office receipts and STX expects to realize the revenue within three months of release. Following the theatrical windows, the film is made available to consumers through home entertainment channels, which may be either packaged media or digital media. Packaged media and digital media exploitation begins approximately four months after theatrical release and continues through the remainder of the ultimate period. STX expects approximately 75% and 65% of the film’s ultimate packaged media and digital home entertainment revenue, respectively, will be collected in the first two quarters following availability.
TV licensing windows, including pay TV, streaming and free TV, are the next stage of post-theatrical exploitation of a film. The initial pay TV window begins approximately nine months after theatrical release and lasts 18 months. The free TV and streaming windows open approximately 2.5 years following the initial theatrical release. For each TV license across pay TV, streaming, and free TV platforms, revenue is typically recognized at the start of each respective license while cash may be paid upfront or installments over the license period. License fees from streaming and free TV sales are established on an arm’s length basis based on negotiations with the prospective buyers and prevailing market rates. Such streaming and free TV license fees may be negotiated on a film-by-film basis or may be subject to pricing on a packaged basis under STX’s output arrangements.
Direct distribution in the United Kingdom and Ireland tends to follow a similar pattern for all revenues and costs as U.S. distribution of a title.
The STX production period (in which gross production costs are incurred) is typically six to 18 months leading up to a film’s release. The production period may be longer for certain types of films such as animated films. In addition, third-party co-financiers typically pay for their respective interest in a given project prior to release (either during the production period or directly before release of a film), and receive their respective share of proceeds as generated. Marketing costs begin six months to nine months prior to release, and STX expects that approximately 65% to 75% will be spent during the quarter in which the film is released. Film costs, with the exception of marketing costs, are capitalized costs amortized over a film’s ultimate period of ten years. However, marketing costs are expensed as they are incurred.
Film accounting rules require marketing costs to be recognized before films begin generating revenues, upon theatrical release. Hence, during the prerelease period, an individual film is expected to have negative profitability. Upon release, revenue from the theatrical window begins to be recognized, and is followed in subsequent periods by revenue from the various downstream, post-theatrical windows. During these periods, for a successful and profitable film, revenue is expected to exceed costs, resulting in profitability.
The effect of this accounting treatment is that films that are ultimately profitable will have periods of negative profitability from an accounting perspective, particularly within the first few quarters of a film’s lifecycle.
STX is typically able to borrow against future receipts from international pre-license sales, established tax incentives and co-financing commitments before the film’s box office receipts are established. Before STX begin production, it notifies its international distribution partners and presents them with a budget for the film. Due to the terms of STX’s contracts, it is obligated to commit a portion of the film’s budget through a minimum guaranteed payment. At the same time, STX typically applies for and establishes a tax incentive arrangement during development or just after the film begins production. Furthermore, STX arranges for co-financing partners to commit to fund a portion of the budget not funded by international pre-licensing or tax incentives. STX collects the majority of these receipts upon release of the film or a few months thereafter. However, STX is able to use the receivable as collateral to borrow under the Senior Credit Facility in order to fund the majority of production costs. These loans are then repaid with the collection of the receipts.
As STX approaches the release of the film and through a few weeks after release, it spends the majority of the prints and advertising budget. STX is able to borrow the majority of these amounts under the Senior Credit Facility. Once the film is released and STX begins collecting receipts from the box office sales, it is able to establish a film ultimate, which is the expected earnings of the film over its first ten years. STX is able to borrow against the ultimate film revenue as a large portion of it is contracted revenue that is correlated to box office receipts. STX typically uses this loan to repay any outstanding production and prints and advertising related debt that is not recovered by international receipts, tax incentive receipts or co-financing collateral.
As a result of these financing tools, STX is able to minimize the actual cash flow impact of any individual film on its working capital needs.
Theatrical Distribution
STX constructs release schedules to account for attendance patterns and competition from other scheduled theatrical releases. It uses either a wide release (generally, consisting of more than 2,000 screens in the U.S.) or a strategy of releasing a film initially on fewer than 2,000 screens in the U.S., depending on the film and our distribution rights.
STX distributes films directly to cinemas in the U.S., the United Kingdom and Ireland. Direct distribution of its feature films in the U.S., the United Kingdom and Ireland enables STX to achieve wide releases on 2,000 or more screens, including through leading theater operators such as AMC, Regal and Cinemax. Depending on the gross box office receipts of a film, STX typically receives between 40% and 55% of gross box office receipts from each cinema that licenses its films, with the remainder retained by the cinemas.
In the United Kingdom and Ireland, STX distributes directly from its office in the United Kingdom that it opened in 2017. STX International allows STX to directly distribute our produced and distributed films in the United Kingdom and Ireland and to acquire distribution-only films for direct distribution in the United Kingdom and Ireland. As in the U.S. market, cinemas in the United Kingdom and Ireland remit a portion of gross box office receipts to STX.
International Distribution
STX’s international sales operations are headquartered at the STX International offices in London, United Kingdom. STX International is now a significant distributor and acquirer of commercially successful and critically acclaimed content. Fiscal year 2018 was the first full year of operations for the STX U.K. office. Other than in the U.S., the United Kingdom and Ireland, STX licenses distribution rights in the films it produces and/or distributes on a territory-by-territory basis to our distribution partners.
STX has entered into long-term output and film-by-film distribution agreements with international film distributors typically covering over 150 territories worldwide, including all of the major markets where STX films are distributed outside of the U.S., the United Kingdom and Ireland. Pursuant to these agreements, each international film distributors with which STX has signed an output agreement has the exclusive territorial right to distribute STX films, including theatrical, home entertainment and TV rights. Under these output arrangements, STX’s distribution partners pay it a minimum guaranteed upfront license fee of approximately 40% to 50% in the aggregate of the film’s budget to distribute STX films. The applicable percentage is based largely upon the size of the film’s budget and the market size of the distribution area, which may be for one or more countries. STX has an opportunity to collect additional revenue after the distributor recovers its distribution costs and the minimum guarantee.
After STX delivers its completed films to international film distributors, at which time its minimum guarantee is typically fully paid, they will distribute the films to cinemas in their territories. They also typically retain the exclusive rights to distribute in their territories in all post-theatrical distribution channels. The term of the output agreements is typically one to two years, and STX has historically been able to extend the output agreements when they expire. These arrangements provide STX with greater certainty as to the amount of revenue that it will receive from any given film, while still retaining an interest in the upside if a film performs well at the box office. STX believes that these output agreement arrangements provide the appropriate balance of risk and reward for the large majority of our STX films. STX anticipates continuing with output agreement arrangements for the vast majority of STX global markets for the foreseeable future. In certain non-output territories, such as Canada and China, STX typically negotiates the sale of distribution rights on a film-by-film basis.
Post-theatrical Distribution
Following the theatrical release of a film, STX licenses the right to distribute the film in sequential post-theatrical distribution windows through a variety of channels for the purpose of extending the economic life of the film as long as possible. The post-theatrical distribution of STX films internationally is typically covered under STX’s output agreements. For STX films that it licenses from third parties, the term of STX’s post-theatrical distribution rights is limited by its license but STX seeks to license the distribution rights in its films through the first cycle of the film’s economic life.
Home Entertainment
DVD and Blu-ray disc versions of the film, which are referred to as “packaged media,” are released for rental and purchase. Packaged media distribution involves the marketing, promotion and sale and/or lease of DVD/Blu-ray discs to wholesalers and retailers who then sell or rent the DVD/Blu-ray discs to consumers for private viewing. As is common across independent film distribution businesses, STX employs the services of major studios that have capabilities in the distribution of content across home entertainment platforms. Universal Home Entertainment serves as an agent manufacturing, reproducing, distributing, marketing and selling packaged media for the films STX produces and/or distribute in the U.S. Sony has entered into a similar arrangement with us in the United Kingdom and Ireland home entertainment markets. Universal Home Entertainment and Sony coordinate with retailers which in turn sell the physical copies of STX films to consumers.
Home entertainment distribution has traditionally followed initial theatrical release. Digital media distribution involves delivering content electronically to consumers in home and on mobile devices. The first digital distribution method that typically follows theatrical release is the distribution of a film to consumers through VOD platforms, where consumers pay based on the content they watch (“transactional distribution”), such as pay-per-view, electronic sell-through, a form of digital media distribution and VOD platforms where consumers pay based on the content they watch, whereby STX licenses the distribution rights to a digital platform who sells the film to consumers for digital download or rental. STX’s in-house team distributes the films it produces and/or distributes within the U.S. to digital platforms such as iTunes, Amazon Instant Video and Google Play. In the United Kingdom and Ireland transactional distribution is handled through Sony.
Pay TV
STX has licensed the films it produces and/or distributes to Showtime for an exclusive pay TV window for distribution of STX films in the U.S. Showtime also has the right to distribute STX films in the U.S. through its pay TV platform during other non-exclusive post-theatrical windows. STX receives licensing fees for the distribution of its films by Showtime based on theatrical revenue, which is based on the U.S. box office receipts of the film. In the United Kingdom and Ireland, STX licenses the pay TV distribution rights on a film-by-film basis, but typically to a subsidiary of Metro Goldwyn Mayer. The distribution of films on international pay TV platforms is typically covered under the output agreements described above.
Other Post-Theatrical
Following the pay TV distribution window, STX licenses its films for exhibition through streaming platforms and free TV networks. Streaming services include services such as Netflix, for which consumers pay a monthly or annual fee for on demand access to a library of films and TV programs. Free TV services include broadcast and cable networks such as FX, Univision, A&E Networks and Turner Entertainment Networks. This window typically lasts for six years, where each film is licensed to a variety of licensees, each for a period of one year. Thereafter, the film continues to be licensed across pay TV and free TV platforms.
Eros
Eros has a multi-platform business model and derive revenues from the following three distribution channels:
| · | Theatrical: The theatrical channel largely includes revenues from multiplex chains, single screen theaters, distributors and content aggregators in case of dubbed and/or subtitled versions. Eros is a leading player in a growing and under-penetrated cinema market with a consistent and leading box office market share. Based on gross collections reported by comScore, Eros market share as an average over the preceding eight calendar years to 2018 is 24% of all theatrically released Indian language films in the United Kingdom and the U.S. |
| · | Television Syndication: Eros de-risks theatrical revenues while enhancing revenue predictability through pre-sales and television syndication which includes satellite television broadcasting, cable television and terrestrial television. Eros licenses Indian film content (usually a combination of new releases and existing films in our library) over a stated period of time in exchange for a license fee, where payment terms may extend up to two to three years in some cases. Eros currently has television syndication content agreements in place with over 30 international broadcasters in the U.S., Asia, Europe and the Middle East, and includes long-term television syndication agreements with broadcast companies such as Viacom 18 Media in India, SABC in South Africa, E Vision in the UAE and Tanzania TV, among others. |
| · | Digital and ancillary: In addition to Eros’ theatrical and television distribution networks, Eros has a global network for the digital distribution of our content, which consists of full-length films, music, music videos, clips and other video content. Through its digital distribution channel, Eros mainly monetizes music assets and distributes films and other content primarily in VOD (including streaming video-on-demand (“SVOD”) and satellite (“Direct to Home” or “DTH”) and online internet channels. This enables Eros to prolong the lifecycle of its films and film library. A significant portion of the Indian and international population are moving towards adoption of digital technology. A 2020 Cisco Annual Internet Report predicted that there will be over 907 million internet users and 966 million mobile users in India by 2023. Given these growth opportunities, Eros is increasing its focus on providing on-demand services via Eros Now, which leverages its extensive digital film and music libraries to stream a wide range of content. |
Eros generally monetizes each new film it releases through an initial 12-month revenue cycle commencing after the film’s theatrical release date. Thereafter, the film becomes part of the film library where Eros seeks to continue to monetize the content through various platforms. The diagram below illustrates a typical distribution timeline through the first 12 months following theatrical release of one of Eros’ films.
Eros Film release first cycle timeline
Eros currently acquires films for global distribution, including the Indian domestic market, as well as films for distribution only outside of India.
Certain information regarding initial distribution rights to films initially released in the twelve months ending March 31, 2020, 2019 and 2018 is set forth below:
| | | Year ended March 31, |
| | | 2020 | | 2019 | | 2018 |
| Global (India and International) | | | | | | |
| Hindi films | | 2 | | 7 | | 10 |
| Regional films (excluding Tamil films) | | 21 | | 49 | | 3 |
| Tamil films | | — | | 3 | | 1 |
| International Only | | | | | | |
| Hindi films | | 6 | | 7 | | 1 |
| Regional films (excluding Tamil films) | | — | | — | | — |
| Tamil films | | — | | — | | — |
| India Only | | | | | | |
| Hindi films | | — | | 1 | | 3 |
| Regional films (excluding Tamil films) | | 1 | | 5 | | 6 |
| Tamil films | | — | | — | | — |
| Total | | 30 | | 72 | | 24 |
Eros distributes content in over 50 countries through its own offices located in key strategic locations across the globe. In response to Indian cinemas’ continued growth in popularity across the world, especially in non-English speaking markets, including Germany, Poland, Russia, Southeast Asia and Arabic speaking countries, Eros offers dubbed and/or subtitled content in over 25 different languages. In addition to internal distribution resources, the global distribution network includes relationships with distribution partners, sub-distributors, producers, directors and prominent figures within the Indian film industry and distribution arena.
Theatrical Distribution and Marketing
India Distribution. The Indian theatrical market is comprised of both multiplex and single screen theaters which are 100% digitally equipped. In India, the cost of distributing a digital film print is lower than the cost of distributing a digital film print in the U.S. Utilization of digital film media also provides additional protection against unauthorized copying, which enables us to capture incremental revenue that Eros believes is at risk of loss through content piracy.
India is divided into 14 geographical regions commonly known as “Film Circuits” or “Film Territories” in the Indian film business. Eros distributes its content in all of the circuits either through its internal distribution offices (Mumbai, Delhi, East Punjab, Mysore and Bihar) or through sub-distributors in remaining circuits. The Film Circuits where Eros has direct offices comprise of a market share of up to 75% of the India theatrical revenue. Eros’ primarily internal distribution network allows greater control, transparency and flexibility over the core regions in which Eros distributes its films, and allows Eros to retain a greater portion of revenues per picture as a result of direct exploitation instead of using sub-distributors, which requires the payment of additional fees, sub-distributor margins or revenue shares.
Eros entered into agreements with certain key multiplex operators to share net box office collections for our theatrical releases with the exhibitor for a predetermined base fee of 50% of net box office collections for the first week, after which the split decreases over time.
Eros primarily enters into agreements on a film-by-film and exhibitor-by-exhibitor basis. To date, our agreements have been on terms that are no less favorable than the terms of the prior settlement agreements; however, Eros cannot guarantee such terms can always be obtained.
The largest number of screens in India that Eros books for a particular film are booked for the first week of theatrical release, because as a substantial portion of box office revenues are collected in the first week of a film’s theatrical exhibition. Eros’ agreements with pan India multiplex operators is such that 100% of the entire first week of its share of revenues from all the films from such multiplexes is paid to Eros within 10 days of the release.
In single screens Eros either obtains non-refundable minimum guarantees/refundable advances and a revenue sharing arrangement above the minimum guarantee and with certain smaller multiplex chains Eros obtains refundable advances and a revenue sharing arrangement.
Pursuant to the Cinematograph Act, Indian films must be certified for adult viewing or general viewing by the CBFC, which looks at factors such as the interest of sovereignty, integrity and security of India, friendly relations with foreign states, public order and morality. Obtaining a desired certification may require Eros to modify the title, content, characters, storylines, themes or concepts of a given film.
International Distribution. Outside of India, Eros distributes our films theatrically through multiple channels globally. We have won over 189 awardsits offices in Dubai, Singapore, the last three Fiscal Years including Best StudioU.S., the United Kingdom, Australia and through sub-distributors in other markets. In international markets, instead of focusing on wide releases, Eros selects a smaller number of theatres that play films targeted at the expatriate South Asian population or the growing international audiences for Indian films. Eros generally theatrically releases subtitled versions of its films internationally on the release date in India, and dubbed versions of films in countries outside of India 12-24 weeks after their initial theatrical release in India.
Marketing. The marketing campaign of a film is an integral part of the Yearoverall theatrical distribution strategy. It typically starts before the film goes into production with the marketing campaign peaking closer to the release of the film. Eros’ marketing team creates a comprehensive campaign with emphasis across various media platforms, including carrying out public relation campaigns and Excellenceutilizing print, brand partnerships, music pre-releases, print and outdoor advertising, brand partnerships and marketing on various social media and other digital platforms. Each film campaign is unique and has a strategic, targeted approach based on the genre, talent involved, positioning of the movie, target group and overall strategy. In addition, prior to the release of a film, Eros introduces various film assets, including posters, teasers, trailers and songs to generate momentum.
Eros’ marketing efforts are primarily managed by employees located in International Distribution. Someoffices across India or in one of our international offices in Dubai, Singapore, the U.S., the United Kingdom, and Australia. Occasionally, sub-distributors manage marketing efforts in regions that do not have a dedicated Eros STX team, using the creative aspects developed by Eros for the marketing campaigns. Managing marketing locally permits Eros to more easily identify appropriate local advertising channels and results in more effective and efficient marketing.
Television Distribution
India Distribution. Eros believes that the increasing television audience in India creates new opportunities for Eros to license our film content, and expands audience recognition of the Eros name and film products. Eros licenses Indian film content (usually a combination of new releases and existing films from fiscal year 2017in our library), to satellite television broadcasters operating in India under agreements that won awardsgenerally allow them to telecast a film over a stated period of time in exchange for a specified license fee. Eros has, directly or indirectly, licensed content for major Indian television channels such as Colors, Sony, the Star Network and Zee TV.
International Distribution. Outside of India, Eros licenses Indian film content to content aggregators to reach cable and pay subscribers and for broadcasting on major channels and platforms around the world. Eros also licenses dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include –Dishoom,Baar Baar Dekho,Phobia,Nil Battey Sannata,Parktan,Olappeeppei. Further,not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of the overall pre-sale strategy. Eros believes that our international distribution capabilities and large library of content enable Eros to generate a larger portion of its revenue through international distribution.
Digital Distribution
In addition to Eros’ theatrical and television distribution networks, Eros has a global network for the digital distribution of its content, which consists of full length films, won Best Film, Best Director, Best Story, Best Actor, Best Music, Best Special Effects awardsmusic, music videos, clips and Best Child Actor awards,other video content. Through its digital distribution channel, Eros mainly monetizes music assets and distribute movies and other content primarily in IPTV, VOD (including SVOD and DTH) and online internet channels. Eros’ film content is distributed in original language, subtitled into local languages or dubbed, in each case as driven by consumer or regional market preferences. With its large library of content and slate of new releases, Eros has sought to namecapitalize on changes in consumer demand through early adoption of new formats and services, which Eros believes enables them to generate a few.Bajrangi Bhaijaan won 37 awardslarger portion of revenue through digital distribution than the film entertainment industry average in India.
With a significant portion of the Indian and international population moving towards the adoption of digital technology, Eros is increasing its focus on providing on demand services, although the platforms and strategies differ by region. Outside of India, there is a proliferation of cable, satellite and internet services that Eros supplies. In addition, with the proliferation of internet users, Eros is increasing its online distribution presence as well. These platforms enable it to continue to monetize a film in its library long after its theatrical release period has ended. In addition, the speed, ease of availability and prices of digital film distribution diminish incentives for unauthorized copying and content piracy.
In North America, Eros has an agreement with International Networks, a subsidiary of Comcast, to provide an SVOD service fully branded as “Eros Now.” The service is carried on most of the major cable network providers including National AwardComcast, Cox Communications, Cablevision and Time Warner Cable. Eros provides all programming for Popular Film.Bajirao Mastani won over 78 award titles including National Award for Best Director.Tanu Weds Manu Returns won 18 awards including National Award for Best Female Actorthis film and music channel and share revenues with the cable providers. Eros also provides content to Amazon Digital and participate in a leading role,Hero won 7 awardsrevenue share deal. In Canada, Eros has signed a Program License Agreement for various movies with Rogers Broadcasting Limited. In Europe, Eros has partnered with My Digital Company (France), ESC Distribution (France) andBadlapur won 7 awards. Our Malayalam filmPathemari also won MT Trading Ug (Germany). To maximize the reach of digital content, Eros currently has collaborations and partnerships in India and globally with market-leading telecommunications operators, OEMs and digital distribution entities to make available its digital service Eros Now across global audiences. Eros’ partners include, among others, major telecommunications providers such as Airtel, Reliance Jio, Etisalat, Ooredoo, Vodafone and many more as well as streaming service providers such as Amazon Channels, Apple+ Channels, YouTube, Virgin Media, Roku, Sony TV and a national award for Best Malayalam Film.plethora of connected devices.
Market opportunity
Domestic: OurIndia: Eros’ distribution capabilities enable usit to target a majority of the 1.3 billion people in India, our primary market for Hindi language films where, according to bollywoodhungama.com, we participated in two, seven and four films of the top fifteen grossing films in India, in calendar year 2016, 2015 and 2014 respectively.India. Recently, as demand for regional films and other media has increased in India, ourEros’ brand recognition in Hindi films has helped usit to grow ourits non-Hindi film business by targeting regional audiences in India and overseas. With ourEros’ distribution network for Hindi, Tamil and TamilTelugu films, and additional distribution support through our majority owned subsidiary, Ayngaran, we believe weEros believes they are well positioned to expand ourtheir offering of non-Hindi content.
Overseas: Depending on the film, the distribution rights we acquireEros acquires may be global, international or India only. Indian films have a global appeal and their popularity has been increasing in many countries that consume dubbed and subtitled foreign content in local languages. These markets includesinclude Germany, Poland, Russia, France, Italy, Spain, Indonesia, Malaysia, Japan, South Korea, China, the Middle East and Latin America among others. Additionally, there is a large established Indian diaspora in North America which has a strong interest in the content of the Indian film industry. In all these markets, it is the locals who are neither English nor Hindi speaking who view the content of the Indian film in a dubbed or subtitled version in their language, similar to the manner in which they view Hollywood content. In markets withAdditionally, there is a large South Asian populations, such as the United States and the United Kingdom, comScore reported our market share (as an average over the preceding six calendar years to 2016) as 31% of all theatrically releasedestablished Indian language filmsdiaspora in North America which has a strong interest in the United Kingdom andcontent of the United States, based on gross collections.Indian film industry. Other international markets that exhibit significant demand for subtitled or dubbed Indian-themed entertainment include Europe and Southeast Asia.
In addition, China is increasingly becoming an important market, and we expectEros expects to release select films from our slate for wider release into China. In fiscal year 2017, a Bollywood Film Dangal wasEros recently released Andhadhun in China in collaboration with a leading Chinese film distributor Tang Media Partners. In March 2018, Eros released Bajrangi Bhaijan across 9,000more than 8,000 screens, including in China, and grossed about $180collected over $45 million at the box office underpinningin China, which Eros believes indicates a clear interest in Indian films by Chinese movie goers. As part of its strategy to penetrate further into the potentialChinese market, Eros Now has partnered with iQiyi, one of China’s largest online video sites, through a content licensing arrangement in September 2018, making it the first South Asian OTT platform operator to have direct access to the Chinese market.
Eros Now Market Opportunity: Eros Now is uniquely positioned to benefit from the fast-growing internet and mobile penetration in India. A 2020 Cisco Annual Internet Report predicted that there will be over 907 million internet users and 966 million mobile users in India by 2023. The adoption of 4G is gradually increasing and 3G and 4G now constitute over 75% of the China Market. As per information publishedoverall wireless internet user base in India. Initiatives such as broadband rollout and public Wi-Fi as part of the Indian government’s “Digital India” campaign and the promotion of 4G data packs by Campaign Asia-Pacific, based on data from PricewaterhouseCoopers’ Global Entertainmentleading telecoms help boost the quality of digital infrastructure in India. Eros plans to take advantage of this growth and Media Outlook 2016 — 2020 (“PwC Outlook 2016”), China is expected to overtake the U.S. box office this year. The China box office grew 49% in 2015 to $6.3 billion and was expectedcontinue to grow to $10.3 billion this year. In comparison, the U.S. box office was expected to contract from $10.3 billion to $10 billion this year. Hollywood’s share of the Chinese box office has slipped to 38.4%Eros Now’s paying user base in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screensIndia and by end of 2015 that number grew to almost 32,000, with 8,035 screens being added in 2014. Overall China is propelling Asia-Pacific’s growth (including Indonesia and Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion in 2020 and continues to emerge as an important growth markets for the Indian film industry.internationally.
Eros Now
With a significant portion of the Indian and international population moving towards the adoption of digital technology, Eros is increasing its focus on providing on-demand services via Eros Now. Eros Now hasleverages an extensive digital film and music libraries to allow the user to stream a wide range of content. Users can access Eros Now through apps, WAP and the internet. As of June 30, 2020, Eros Now had over 60205.8 million registered users across WAP, APP and Web33.8 million paying users worldwide, compared to 166 million registered users and had 2.121.1 million paying subscribers as of March 31 2017.June 30, 2019, representing increases of 24% and 60% respectively. Eros Now has steadily grown its registered user base from 19 million users in the fourth quarter of Fiscal 2015 to 60 million users in Fiscal 2017, an overall growth of 216% during the period. Eros Now has steadily grown its paying subscribers from 1.1 million users in the first quarter of Fiscal 2017 to 2.1 million users in the fourth quarter of Fiscal 2017, an overall growth of 91% in the same period. Continuing with the momentum as of June 2017, Eros Now has 68 million registered users and 2.9 million paying subscribers. We define paying subscribersdefines “paying subscribers” to mean any subscriber who has made a valid payment to subscribe to a service that includes Eros Now services as part of a bundle, or on a standalone basis, either directly or indirectly through an OEM or TELCOmobile telecom provider in any given month, be it through a daily, weekly or monthly billing pack, as long as the validity of the pack is for at least one month. While a majority of registered users are from India, Eros Now has registered users in 135 different countries.
Eros Now is focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile phones, tablets, cable or internet, including through deals with OEMs. Eros Now has integration deals around the world with telecom operators and different OEMs and connected devices. Content is a key driver behind Eros Now’s success. We believe our library size of over 10,000 films with over 50% of the library is held in perpetuity and 30% expiry over next 10 years will position Eros Now to be the largest Indian language OTT service worldwide.
Our revenue model focuses on business to business (B2B) distribution which includes our partnerships with leading mobile operators in India, including Idea Cellular, Bharti-Airtel, Vodafone, BSNL and Reliance Jio. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers. Eros Now also has partnered with Micromax, Samsung and Smartron to pre-bundle Eros Now in smart phones sold in India. It has also entered into partnerships with several leading electronic payment platforms including Paytm, Mobikwik, SBI Buddy, Freecharge and Speedpay that enable Eros Now subscribers to make easy and hassle free payments using e-wallet services. Eros Now recently announced a strategic integration deal with Ola, India's leading mobile app for transportation, using Ola’s connected in-car entertainment platform for ridesharing, Ola Play. This strategic revenue-sharing partnership will enable an immersive and personalized experience that customers can seamlessly control through their smartphones as well as through a device mounted at the back of the seat.
Eros Now has also entered the Malaysian market with partnerships with the country’s leading telecom operators, Maxis Berhad and U Mobile. Eros Now is the only Indian OTT platform to penetrate the growing Malaysian market. Eros Now recently entered into a partnership with T-Mobile’s video streaming program, Binge On. Eros Now is accessible to T-Mobile’s large customer base of approximately 71.5 million users across the U.S.A., who can stream its extensive library of Bollywood and regional language films, music, and originals. Eros Now is available on Lyca TV, which is the world’s largest OTT ethnic entertainment provider and delivers broad range of international content across multiple devices. Eros Now has also partnered with Jadoo TV, a leading distributor of internet based South Asian and multicultural content provider across the U.S.A., Europe and Australia. Eros Now is focused on the monetization of its global user base and has a target to achieve 6 to 8 million paying subscribers by the end of fiscal 2018.
Eros Now has billing integration system with Fortumo, a leading global provider of direct carrier billing. Fortumo payments cover 98 markets and connect merchants to subscribers of more than 350 mobile operator networks. Apple has featured the Eros Now app in its “App Store Best of 2016”.
Eros Now enhances its consumer appeal through exploring dynamic genres to create unseen, relatable and contemporary “Originals” that target the youth of India and are an important part of the Eros Now content strategy. Eros Now’s original content offering began with the release of Salute Siachen, India’s first ever celebrity high endurance expedition to the Siachen Glacier which was shot on a mobile phone. In addition, Eros Now originals such as Flesh by Siddharth Anand, Smoke and Side Hero will be launched in Fiscal 2018. These originals follow a rigorous greenlighting process just like films, with script, screenplay, budgeting pilot episode production, market research and testing of the pilot episode and final production. Eros Now has also added a series of short originals titled Black and White which range from interviews to teˆ te-a¨ -teˆ te with leading talent from the Indian film industry and are shot exclusively for Eros Now. Another short form of original content available on Eros Now is “E-Buzz”, this offers exclusive behind the scene to all social celebrity events on the calendar.
Eros Now — Market Opportunity
Eros Now is uniquely positioned to benefit from the fast growing internet and mobile penetration in India. As per Telecom Regulatory Authority of India (TRAI) there are over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India are likely to cross 969 million by 2021. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. It is expected that over the next couple years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.
Our portfolio of films over the last three completed fiscal years comprised 173 films. In fiscal 2017 our aggregate revenues were $253 million and we released45 films in total either in India, overseas or both. These comprised 12 Hindi films, 16 Tamil films and 17 regional language films.The Company’s strong portfolio of films likeKi & Ka, Housefull 3, Baar Baar Dekho, Kahaani 2 (Overseas), Sardaar Gabbar Singh, 24 (Tamil), Janatha Garage andDishoom drove theatrical, television and digital/ancillary revenues worldwide.
Our total revenues for fiscal 2017 decreased to$253.0 million from $274.4million in fiscal 2016, our net income decreased to$11.5 million for fiscal 2017 from $13.3 million in fiscal 2016, EBITDA (Non-GAAP) increasedto $42.5 million in fiscal 2017 from$36.3 million in fiscal 2016 and Adjusted EBITDA (Non-GAAP) decreased to $55.7 million from $70.9 million in fiscal 2016.
The tables below set forth, for the periods indicated, revenue by primary geographic area based on customer location, and the percentage share of total revenue.
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| India | | $ | 129,251 | | | $ | 158,843 | | | $ | 109,513 | |
| Europe | | | 7,695 | | | | 24,367 | | | | 27,146 | |
| North America | | | 10,132 | | | | 19,865 | | | | 19,052 | |
| Rest of the world | | | 105,916 | | | | 71,353 | | | | 128,464 | |
| Total revenue | | $ | 252,994 | | | $ | 274,428 | | | $ | 284,175 | |
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (%) | |
| India | | | 51.1 | | | | 57.9 | | | | 38.5 | |
| Europe | | | 3.0 | | | | 8.9 | | | | 9.6 | |
| North America | | | 4.0 | | | | 7.2 | | | | 6.7 | |
| Rest of the world | | | 41.9 | | | | 26.0 | | | | 45.2 | |
| Total revenue | | | 100.0% | | | | 100.0% | | | | 100.0% | |
Our Competitive Strengths
We believe the following competitive strengths position us as a leading global company in the Indian film entertainment industry.
Leading co-producer and acquirer of new Indian film content, with an extensive film library.
As one of the leading participants in the Indian film entertainment industry we believe our size, scale and market position will continue contributing to our growth in India and internationally. We have established our size and scale by aggregating a film library of over 3,000 films. We have demonstrated our leading market position by releasing, internationally or globally, Hindi language films which were among the top grossing films in India in calendar years 2016, 2015 and 2014. We believe that we have strong relationships with the Indian creative community and a reputation for quality productions. We set up Trinity Pictures to become what we believe to be one of India’s first dedicated franchise studio that develops valuable intellectual property in the form of franchise films and have already commissioned two Indo-Chinese co-production films under the Trinity Pictures.
We believe that these factors, along with our worldwide distribution platform, will enable us to continue to attract talent and film projects of a quality that we believe is one of the best in our industry, and build what we believe will continue to be a strong film slate in the coming years with some of the leading actors and production houses with whom we have previously delivered our biggest hits. We believe that the combined strength of our new releases and our extensive film library positions us well to build new strategic relationships.
Established, worldwide, multi-channel distribution network with entry proposed into China.
We distribute our films to the Indian population in India, the South Asian diaspora worldwide and to non-Indian consumers who view Indian films that are subtitled or dubbed in local languages. Internationally, our distribution network extends to over 50 countries, such as the United States, the United Kingdom and throughout the Middle East, where we distribute films to Indian expatriate populations, and to Germany, Poland, Russia, Romania, Indonesia, Malaysia, Taiwan, Japan, South Korea, China and Arabic and Spanish speaking countries, where we release Indian films that are subtitled or dubbed in local languages. China is increasingly becoming an important market and we expect to release selected successful films from our slate for wider release into China. We are also planning the release of our Indo-Chinese co-productions in Fiscal 2019 in India, China and the rest of the world. Through this global distribution network, we distribute Indian entertainment content over three primary distribution channels — theatrical, television syndication and digital and ancillary platforms. Our primarily internal distribution network allows us greater control, transparency and flexibility over the regions in which we distribute our films, which we believe results in the direct exploitation of our films without the payment of significant commissions to sub-distributors. Our digital presence – Eros Now, strategically positions us to a capture a large digital opportunity in India and globally and provides a new avenue to further monetize our content library.
Diversified revenue streams and pre-sale strategies mitigate risk and promote stable cash flow generation.
Our revenue model is diversified by three major distribution channels:
| · | theatrical distribution; |
| · | television syndication; and |
| · | digital distribution and ancillary products and services, including Eros Now. |
In fiscal 2017 our revenues from theatrical distribution accounted for nearly39.9% of our aggregate revenues, revenues from television syndication accounted for 34.8% and digital distribution and ancillary revenues accounted for25.3%, reflecting our diversified revenue base that reduces our dependence on any single distribution channel.
We bundle library titles with new releases to maximize cash flows and we also utilize a pre-sale strategy to mitigate new production project risks by obtaining contractual commitments to recover a portion of our capitalized film costs through the licensing of television, music and other distribution rights prior to a film’s completion.
Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. For Fiscal 2018, we already have pre-sales visibility for some of our films such asMunna Micheal,Sarkar3, Shubh Mangal Savdhaan. For Fiscal 2017 pre sales from sale of satellite television rights was achieved for our films such asHousefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. In fiscal 2017, for our two high budget Hindi films we recouped 31% to 57% of the direct production cost through television and other pre-sales. We recouped 108% and 93% of our direct production cost of the two Telugu films released through contractual commitments prior to the films releases, and we recouped 96% of our direct production cost of one Tamil film released through contractual commitments prior to the film’s release.
In addition, we further seek to reduce risk to our business by building a diverse film slate, with a mix of films by budget, region and genre that reduces our reliance on “hit films.” This broad-based approach also enables us to bundle old and new titles for our television and digital distribution channels to generate additional revenues long after a film’s theatrical release period is completed. We believe our multi-pronged approach to exploiting content through theatrical, television syndication and digital distribution channels, our pre-sale strategies and our portfolio approach to content sourcing and exploitation mitigates our dependence on any one revenue stream and promotes cash flow generation.
Strong brand with fast growing international reach
Theatrical Distribution Outside India: Outside India, we distribute our films theatrically through our offices in Dubai, Singapore, the United States, the United Kingdom, Australia and Fiji and through sub-distributors in other markets. In our international markets, instead of focusing on wide releases, we select a smaller number of theaters that play films targeted at the expatriate South Asian population or the growing international audiences for Indian films. We generally theatrically release subtitled versions of our films internationally on the release date in India, and dubbed versions of films in countries outside India 12-24 weeks after their initial theatrical release in India sometimes after a long gap. In Russia, we recently partnered with Central Partnership, an affiliate of Gazprom Media, to promote, develop and distribute Indian and Russian content across multiple platforms in both countries.
International Broadcasting Distribution: Outside of India, we license Indian film content to content aggregator to reach cable and pay TV subscriber and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania) amongst others. We also license dubbed content to Europe, Arabic and Spanish speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.
Dynamic management of our film library
We have the ability to combine our new release strategy with our library monetization efforts to maximize our revenues. We believe our extensive film library provides us with unique opportunities for content monetization, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films. The existence of high margin library monetization avenues especially in television and digital platforms reduce reliance on theatrical revenues.
Strong and experienced management team with established relationships with key industry participants.
Our management team has substantial industry knowledge and expertise, with a majority of our executive officers and executive directors having been involved in the film, media and entertainment industries for 20 or more years, and has served as a key driver of our strength in content sourcing. In particular, several members of our management team have established personal relationships with leading talent, production companies, exhibitors and other key participants in the Indian film industry, which have been critical to our success. Through their relationships and expertise, our management team has also built our global distribution network, which has allowed us to effectively exploit our content globally.
Our Strategy
Our strategy is driven by the scale and variety of our content and the global exploitation of that content through diversified channels. Specifically, we intend to pursue the following strategies:
Scaling up productions and co-productions including a unique dedicated franchise studio model, Trinity Pictures, to augment our film library and distribute high quality content globally ..
We will continue to leverage the longstanding relationships with creative talent, production houses and other key industry participants that we have built since our founding to source a wide variety of content. Our focus will be on investing in future slates comprised of a diverse portfolio mix ranging from high budget global theatrical releases to lower budget movies with targeted audiences. We intend to maintain our focus on high and medium budget films and augment our library with quality content for exploitation through our distribution channels and explore new bundling strategies to monetize existing content.
We continue to be focused on ramping up our own productions and co-productions through key partnerships. These partnerships include the ones we have with talented producer-director, Aanand L Rai (Colour Yellow Production) and Trinity Pictures, Eros’ in-house franchise label. We have recently partnered with Phars Film, one of the UAE’s largest film distribution and exhibition network. The partnership will involve Eros and Phars Films jointly co-producing Malayalam films along with exploration of theatrical rights between the two entities. The partnership licenses Eros to exploit the distribution of all Malayalam movies produced jointly in India, while Phars Films would exploit the same overseas. We will also partner with Pana Film, one of the largest Turkish film studios for Indo-Turkish co-productions. Original stories blending Indian and Turkish cultures will be conceptualized and developed by Eros’ in-house writers along with top Turkish writers, and both films will be bilingual. This will expand our presence to Turkey, the Middle East and North African regions. These strategic partnerships not only help us augment our in-house content production model but also expand our geographical canvas for content monetization. We also have distribution partnership with Central Partnership in Russia, that we believe will open new markets for Eros releases.
To promote Eros Now, our OTT digital entertainment service platform, as the preferred choice for online entertainment by consumers across digital platforms.
As per Telecom Regulatory Authority of India (TRAI) there are over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India are likely to cross 969 million by 2021. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. It is expected that over the next couple years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.
Eros Now is increasingly focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile, tablets, cable or internet, including through deals with OEMs. Eros Now had over 60 million registered users and over 2.1 million paying users in March 2017. While a majority of users are from India, Eros Now has registered users in 135 different countries. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages. Eros Now service is integrated with some of India’s leading telecom operators, Bharti Airtel, Idea Cellular, BSNL and Jio and has partnered with Micromax, Samsung and Smartron to pre-bundle Eros Now in smart phones to be sold in India. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers. We continue to believe that Eros Now will be a significant player within the OTT online Indian entertainment industry, especially given the rapidly growing internet and mobile penetration within India.
Eros Now was also the number one trending app on the Google Play Store in the month of July. Demonetization in India increased the access to large addressable market through mobile wallets for Eros Now. Eros expands its reach by having tied up exclusively with SBI Buddy and other e-wallets in India such as Paytm, Mobikwik, Freecharge and Speedpay with an aggregate addressable market of 260 million.
Capitalize on positive industry trends driven by roll-out of high speed 4G services in the Indian market.
Propelled by the economic expansion within India and the corresponding increase in consumer discretionary spending, the FICCI Indian Media and Entertainment Industry Report 2017 (FICCI Report 2017) projects that the dynamic Indian media and entertainment industry will grow at a 13.9% compound annual growth rate, or CAGR, from $19.6 billion in 2016 to $37.5 billion by 2021, and that the Indian film industry will grow from $2.2 billion in 2016 to $3.2 billion in 2021. India is one of the largest film markets in the world. In fiscal 2017 the average ticket price amongst the two leading multiplex cinema chains in India was $.2.90 compared to $2.77 in fiscal 2016, a 4.5% increase year-on-year.
The Indian television market is the second largest in the world after China, reaching an estimated 181 million television, or TV households in 2016, of which over 169 million were subscribing cable and satellite households. FICCI Report 2017 projects that the Indian television industry will grow from $9.1 billion in 2016 to $18.1 billion in 2021. The growing size of the television industry has led television satellite networks to provide an increasing number of channels, resulting in competition for quality feature films for home viewing in order to attract increased advertising and subscription revenues.
Broadband and mobile platforms present growing digital avenues to exploit content. As per the latest Telecom Regulatory Authority of India report, there were over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India is likely to exceed 969 million by 2021. It is expected that over the next couple of years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. The average selling price of internet-enabled mobile phones is currently just below INR9,000 (~$140) which is half of that in China. Online video consumption is expected to increase the share of video in overall mobile internet traffic from 49% in 2016 to 75% in 2021.
We will take advantage of the opportunities presented by these trends within India to monetize our library and distribute new films through existing and emerging platforms, including by exploring new content options for expanding our digital strategy such as filming exclusive short form content for consumption through emerging channels such as mobile and internet streaming devices.
Further extend the distribution of our content outside of India to new audiences.
We currently distribute our content to consumers in more than 50 countries, including in markets where there is significant demand for subtitled and dubbed Indian themed entertainment, such as Europe and South East Asia, as well as to markets where there is significant concentration of South Asian expatriates, such as the Middle East, the United States and the United Kingdom.
Our growth from non-diaspora international markets shows a growing appetite for the content of the Indian Film Industry in many new markets. One of our strongest potential markets, China, with a market size of $6.3 billion and almost 32,000 screens, is projected to soon surpass the United States as the largest film market in the world. We believe our memorandum of understanding to collaborate with China Film Corp., Shanghai Film Group Co. Ltd. and Fudan University Press Co. Ltd. to co-produce and distribute Sino-Indian films will be an important step in maximizing our opportunity in China. With Trinity’s launch, the studio is also expanding into new film markets, which includes entry into China. Two projects will be co-produced with a leading Chinese studio, based on stories organically weaving the socio-cultural worlds of India and China. Additionally, the films will be shot in both Chinese and Hindi. We intend to promote and distribute our films in additional countries, and further expand in countries where we already distribute, when we believe that demand for Indian filmed entertainment exists or the potential for such demand exists. We have also entered into arrangements with local distributors in Taiwan, Japan, South Korea, and China to distribute dubbed or subtitled Eros films through theatrical release, television broadcast or DVD release. Additionally, we believe that the general population growth in India experienced over recent years may eventually lead to increasing migration of Indians to other regions, resulting in increased demand for our films internationally. In Russia, we recently partnered with Central Partnership, an affiliate of Gazprom Media, to promote, develop and distribute Indian and Russian content across multiple platforms in both countries.
Expand our regional Indian content offerings.
We continue to be committed towards promoting regional content films and growing the regional movie industry. Our recent association with Phars Films towards jointly producing and distributing Malayam movies is another strong step in this direction. We will utilize our resources, international reputation and distribution network to continue expanding our non-Hindi content offerings to reach the substantial Indian population whose main language is not Hindi. While Hindi films retain a broad appeal across India, the diversity of languages within India allows us to treat regional language markets as distinct markets where particular regional language films have a strong following. In fiscal 2017, we released 33 non-Hindi regional language films. as compared to 30 films in fiscal 2016.
Our regional language films include Marathi, Malayalam, Punjabi and Bengali films. Our Malayalam filmPathemari won a national award for Best Malayalam Film. We intend to use our existing distribution network across India to distribute regional language films to specific territories. Where opportunities are available and where we have the rights, we also intend to exploit re-make rights to some of our popular Hindi films into non-Hindi language content targeted towards these regional audiences.
Slate Profile
The success of our film distribution business lies in our ability to acquire content. Each year, we focus on the acquisition and distribution of a diverse portfolio of Indian language and themed films that we believe will have a wide audience appeal. For fiscal 2017, our releases included 12 new Hindi films, of which 2 were high budget films, and 18 Tamil and Telugu language films, of which 3 were high budget films. Our typical annual slate of new releases consists of both Hindi language films as well as films produced specifically for audiences whose main language is not Hindi, primarily Tamil, and to a lesser extent other regional Indian languages. Our most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) that we release globally each year. Of these Hindi, Tamil and Telugu films, we generally have four to six high budget films. The remainder of the films (mainly Hindi but also Tamil and/or Telugu) included in each annual release slate is built around these high budget films to create a slate that will attract varying segments of the audience, and typically includes eight to thirteen medium budget films. The remainder of the slate consists of Hindi, Tamil, Telugu and other language films of a lower budget.
We have maintained our focus on high and medium budget Hindi films because these films typically have better production values and more recognizable stars that typically attract larger theatrical audiences. These high and medium budget films also typically drive higher revenues from television syndication in India. We seek to mitigate the risks associated with these higher budget films through the use of our extensive pre-sale strategies. We have increased our focus on high and medium budget Tamil and Telugu films for similar reasons. In addition, we can release a Tamil and Hindi film on the same date as they cater to different audiences, which allow us to effectively schedule releases for our film portfolio and to take a greater combined share of the box office on those release dates. Our slate contained five high budget films in fiscal 2017, of which two were Hindi, one Tamil and two were Telugu and six high budget films in fiscal 2016, of which three were Hindi, two Tamil and one was Telugu.
Hindi Film Content. Our typical annual slate of films is comprised of high or medium budget films in the popular comedy and romance genres, supported by lower budget films.
Selected Hindi Releases in fiscal 2017(a)
Film | | Cast/(Director) | | Co-production/
Acquisition | | Genre | | Actual Month
of Release | |
Housefull 3 | | Akshay Kumar, Riteish Deshmukh, Abhishek / (Nadiadwala / Sajid Farhad) | | Co Production | | Comedy | | June 16 | |
| | | | | | | | | |
Dishoom | | John Abraham, Varun Dhawan, Jackie Fernandez / (Nadiadwala / Rohit Dhawan) | | Co Production | | Action | | Jul 2016 | |
| | | | | | | | | |
Ki & Ka | | Arjun Kapoor & Kareena Kapoor / (R. Balki) | | Co Production | | Drama | | Apr 2016 | |
| | | | | | | | | |
Baar Baar Dekho | | Siddharth Malhotra & Katrina Kaif / (Dharma / Nitya Mehra) | | Acquisition | | Romantic Drama | | Sep 2016 | |
| | | | | | | | | |
Rock On 2 | | Farhan Akhtar, Arjun Rampal / (Excel / Shujaat Saudagar) | | Acquisition | | Drama | | Nov 2016 | |
| | | | | | | | | |
Kahaani 2 | | Vidya Balan, Arjun Rampal (Sujoy Ghosh) | | Acquisition (Overseas) | | Thriller | | Dec 2016 | |
| | | | | | | | | |
Banjo | | Riteish Deshmukh & Nargis Fakhri / (Ravi Jadhav) | | Production | | Drama | | Sep 2016 | |
| | | | | | | | | |
Happy Bhag Jayegi | | Diana Penty, Abhay Deol, Jimmy Shergill | | Co Production | | Romantic Comedy | | Aug 2016 | |
(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Hindi film releases. We released a total of 45 films in fiscal 2017 of which 12 were Hindi films.
Tamil, Telugu and Other Regional Film Content.In order to respond to consumer demand for regional films, we have a slate of films produced in languages other than Hindi, such as Tamil, Telugu, Marathi, Malayalam and Punjabi.
Selected Tamil, Telugu and other regional language releases in fiscal 2017(a)
Film | | Cast/(Director) | | Co-production/
Acquisition | | Genre | | Actual Month
of Release | |
| | | | | | | | | |
Sardaar Gabbar Singh (Telugu) | | Pawan Kalyan / (North Star / K S Ravindra) | | Co Production | | Action | | April 2016 | |
| | | | | | | | | |
24 (Tamil) | | Suriya, Samantha / Studio Green / Vikram Kumar | | Acquisition | | Science Fiction | | May 2016 | |
| | | | | | | | | |
Chaar Sahibzaade 2 (Punjabi) | | 3D Animation / (Harry Baweja) | | Co Production | | Animation, History | | Nov 2016 | |
| | | | | | | | | |
Janatha Garage (Telugu) | | Junior NTR, Mohanlal, Samantha Ruth and Nithya Menen / (Koratala Siva) | | Acquisition | | Action/Romance | | Sep 2016 | |
(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Tamil and Telugu film releases. We released a total of 45 films in fiscal 2017 of which 33 were regional films other than Hindi.
Our typical annual slate includes between 18 to 30 Tamil films and Telugu, of which 5 were global Tamil and Telugu releases in fiscal 2017 compared to 10 in fiscal 2016. Tamil films are predominantly star-driven action or comedy films, which appeal to audiences distinct from audiences for more romance-focused Hindi films. We believe that a Tamil or Telugu film and a Hindi film can be released simultaneously on the same date without adversely affecting business for either film as each caters to a different audience.
We believe we can capitalize on the demand for regional films and replicate our success with Tamil and Telugu films for other distinct regional language films, including Marathi, Malayalam and Punjabi. In addition, the key Indian release dates for films, during school and other holidays, vary by region and therefore the ability to release films on different holidays in various regions, in addition to being able to release films in different regional languages simultaneously, expands the likely periods in which films can be successfully released. We intend to build up our portfolio of films targeting other regional language markets gradually.
Selected Major Releases in fiscal 2018(a)
Film | | Cast/(Director) | | Production/
Co-Production/
Acquisition |
| | | | |
Sarkar 3 | | Amitabh Bachchan, Amit Sadh, Ronit Roy, Yami, Jackie Shroff (Ram Gopal Verma) | | Co Production |
| | | | |
Posto | | Soumitra Chatterjee, Lily Chakraborty (Shibhoprasad Mukherjee & Nandita Roy) | | Acquisition |
| | | | |
Oru Kidayin Karunai Manu | | Vidharth, Raveena Ravi (Suresh Sangiah) | | Co Production |
| | | | |
Tujha Tu Majha Mi | | Lalit Prabhakar, Neha Mahajan (Kuldeep Jadhav) | | Acquisition |
| | | | |
Munna Michael | | Tiger Shroff, Nidhhi Agerwal, Nawazuddin Siddiqui (Sabbir Khan) | | Co Production |
| | | | |
Sniff | | Khushmeet Gill, Surekha Sikri, Manmeet Singh among others (Amole Gupte) | | Production |
| | | | |
Shubh Mangal Savdhaan | | Ayushman Khurana, Bhumi Pednekar (Prasanna / Colour Yellow Productions) | | Production |
| | | | |
Bhavesh Joshi | | Harshvardhan Kapoor (Vikram Motwane / Phantom Films) | | Co Production |
| | | | |
Happy Bhag Jayegi 2 | | Diana Penty, Abhay Deol, Jimmy (Mudassar Aziz / Colour Yellow Productions) | | Production |
| | | | |
Chandamama Door Ke | | Sushant Singh Rajput, Nawazuddin Siddiqui (Sanjay Puran Singh) | | Co Production |
| | | | |
Soorma | | Saif Ali Khan & Others (Navdeep Singh / Colour Yellow Productions) | | Production |
_______________
| (a) | The list of films set forth in the table above is for illustrative purposes only, is not complete and only includes released and anticipated future releases. Due to the uncertainties involved in the development and production of films, the date of their completion can be significantly delayed, planned talent can change and, in certain circumstances, films can be cancelled or not approved by the Indian Central Board of Film Certification. See “Part I — Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business — Our films are required to be certified in India by the Central Board of Film Certification.” |
Seasonality
Theater attendance in India has traditionally been highest during school holidays, national holidays and during festivals, and we typically aim to release high budget films at these times. This timing of releases also takes account of competitor film releases, Indian Premier League cricket matches and the timing dictated by the film production process and as a result, our quarterly results can vary from one year to the next.
Content Development and Sourcing
We currently acquire films using two principal methods — by acquiring rights for films produced by others, generally through a license agreement, and by co-producing films with a production house, typically referred to as a banner, that is usually owned by a top Indian actor, director or writer, on a project by project basis. We regularly co-produce and acquire film content from some of the leading banners in India. We continue to be focused on ramping up our own productions and co-productions through key partnerships. These partnerships include the ones we have with - talented producer-director, Aanand L Rai (Colour Yellow Production) and Trinity Pictures, Eros’ in-house franchise label. We have recently partnered with Phars Film, one of the UAE’s largest film distribution and exhibition network. The partnership will involve Eros and Phars Films jointly co-producing Malayalam films along with exploration of theatrical rights between the two entities. The deal licenses Eros to exploit the distribution of all Malayalam movies produced jointly in India, while Phars Films would exploit the same overseas. We will also partner with Pana Film, one of the largest Turkish film studios for Indo-Turkish co-productions. Original stories blending Indian and Turkish cultures will be conceptualized and developed by Eros’ in-house writers along with top Turkish writers, and both films will be bilingual. This will expand our presence to Turkey, the Middle East and North African regions. These strategic partnerships not only helps us augment our in-house content production model but also expands our geographical canvas for content monetization.
Regardless of the acquisition method, over the past five years, we have typically obtained exclusive global distribution rights in all media for a minimum period of ten to twenty years from the Indian initial theatrical release date, although the term can vary for certain films for which we may only obtain international or only Indian distribution rights, and occasionally soundtrack or other rights are excluded from the rights acquired. For co-produced films, we typically have exclusive distribution rights for at least twenty years, co-own the copyright in such film in perpetuity and, after the exclusive distribution right period, share control over the further exploitation of the film.
We believe producers bring proposed films to us not only because of established relationships, but also because they want to leverage our proven distribution and marketing capabilities. Our in-house creative team also directly develops film ideas and contracts with writers and directors for development purposes. When we originate a film concept internally, we then approach appropriate banners for co-production. Our in-house creative team also participates in the selection of our slate with other members of our management in our analysis focused on the likelihood of the financial success of each project. Our management is extensively involved in the selection of our high budget films in particular.
Through Trinity Pictures, our franchise feature studio, plans to release Sniff during the fiscal 2018. Two additions of Sniff comics are already available in store along with iconic Chacha Choudhary comics which are available in five languages. The video game will also be launched before the movie release along with merchandising and animation series in the pipeline. We believe, Trinity Pictures is one of the first Bollywood studios in India with a dedicated in-house team of writers (the ”Trinity Writers Room”)and has created around twenty original franchises since its inception, out of which we expect atleast two films will release in fiscal 2019. Trinity’s initial film slate lineup includes a range of character driven franchises across budgets, genres and languages. The first Indo-China film “The Zookeeper” (working title), written and developed in-house by Trinity Pictures to be co-produced with Chinese studio Peacock Mountain Culture & Media Ltd, will be directed by Kabir Khan who also directed Bajrangi Bhaijaan and will be shot simultaneously in both languages. The Company expects this film to be released in fiscal 2019. Another Indo-China film will be co-produced with Huaxia Film Distribution Co Ltd and is currently titled, Love in Beijing (working title), and will be directed by Siddharth Anand It will be shot in both languages and is also expected to be released in fiscal 2019. Other projects includes a children’s action franchise, live action elephant film and a buddy cop film. Trinity Pictures is in discussions with third parties to create a digital comic book series, online gaming, animation series and merchandise for these franchise films.
Regardless of whether a film will be acquired or co-produced, we determine the likely value to us of the rights to be acquired for each film based on a variety of factors, including the stars cast, director, composer, script, estimated budget, genre, track record of the production house, our relationship with the talent and historical results from comparable films. Our primary focus is on sourcing a diversified portfolio of films expected to generate commercial success. We generally co-produce our high budget films and acquire rights to more medium and low budget films. Our model of primarily acquiring or co-producing films rather than investing in significant in-house production capability allows us to work on more than one production with key talent simultaneously, since the producer or co-producer takes the lead on the time intensive process of production, allowing us to scale our film slate more effectively. The following table summarizes typical terms included in our acquisition and co-production contracts.
| | Acquisition | | Co-production |
Film Cost | | Negotiated “market value” | | Actual cost of production or capped budget and 10-15% production fee |
| | | | |
Rights | | 10 years-20 years | | Exclusive distribution rights for at least 20 years after which Eros shares control over the further exploitation of the film, and co-owned copyright in perpetuity, subject to applicable copyright laws |
| | | | |
Payment Terms | | 10-30% upon signature
Balance upon delivery or in installments between signing and delivery | | In accordance with film budget and production schedule |
| | | | |
Recoupment Waterfall | | “Gross” revenues
Less 10-20% Eros distribution fee (% of cost or gross revenues)
Less print, advertising costs (actuals)
Less cost of the film
Net revenues generally shared equally | | Generally same as Acquisition except sometimes Eros also charges interest and/or a production or financing fee for the cost of capital and overhead recharges |
Where we acquire film rights, we pay a negotiated fee based on our assessment of the expected value to us of the completed film. Although the timing of our payment of the negotiated fee for an acquired film to its producer varies, typically we pay the producer between 10% and 30% of a film’s negotiated acquisition cost upon signing the acquisition agreement, and the remainder upon delivery of the completed film or in installments paid between signing and delivery. In addition to the negotiated fee, the producer usually receives a share of the film’s revenue stream after we recoup a distribution fee on all revenues, the entire negotiated fee and distribution costs, including prints and ads. After we sign an acquisition agreement, we do not exercise any control over the production process, although we do retain complete control over the distribution rights we acquire.
For films that we co-produce, in exchange for our commitment to finance typically 100% of the agreed-upon production budget for the film and agreed budget adjustments, we typically share ownership of the intellectual property rights in perpetuity and secure exclusive global distribution rights for all media for at least twenty years. After we recoup our expenses, we and the co-producers share in the proceeds of the exploitation of the intellectual property rights. Pending determination of the actual production cost of the film, we also agree to a pre-determined production fee to compensate the co-producer for his services, which typically ranges from 10%-15% of the total budget. We typically also provide a share of net revenues to our co-producers. Net revenues generally means gross revenues less our distribution fee, distribution cost and the entire amount we have paid as committed financing for production of the film. Our distribution fee varies from co-produced film to co-produced film, but is generally either a continuing 10% to 20% fee on all revenues, or a capped amount that is calculated as a percentage of the committed financing amount for production of the film. In some cases, net revenues also deduct an overhead charge and an amount representing an interest charge on some or all of the committed financing amount. Typically, once we agree with the co-producer on the script, cast and main crew including the director, the budget and expected cash flow through a detailed shooting schedule, the co-producer takes the lead in production and execution. We normally have our executive producer on the film to oversee the project.
We reduce financing risk for both acquired and co-produced films by capping our obligation to pay or advance funds at an agreed-upon amount or budgeted amount. We also frequently reduce financial risk on a film to which we have committed funds by pre-selling rights in that film.
Pre-sales give us advance information about likely cash flows from that particular film product, and accelerate cash flow realizable from that product. Our most common pre-sale transactions are the following:
| · | pre-selling theatrical rights for certain geographic areas, such as theaters outside the main theater circuits in India or certain non-Indian territories, for which we generally get nonrefundable minimum guarantees plus a share of revenues above a specified threshold; |
| · | pre-selling television rights in India, generally by bundling releases in a package that is licensed to satellite television operators for a specified run; and |
| · | pre-selling certain music rights, including for movie soundtracks and ringtones. |
From time to time we also acquire specific rights to films that have already been released theatrically. We typically do not acquire global all-media rights to such films, but instead license limited rights to distribution channels, like digital, television, audio and home entertainment only, or rights within a certain geographic area. As additional rights to these films become available, we frequently seek to license them as well, and our package of distribution rights in a particular film may therefore vary over time. We work with producers not only to acquire or co-produce new films, but also to license from them other rights they hold that would supplement rights we hold or have previously held related to older films in our library. In certain cases, we may not hold full sequel or re-make rights or may share these rights with our co-producers.
Our Film Library
We currently own or license rights to over 3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal library as well as third party aggregated content, which we believe makes it one of the largest Indian movie offering platforms around the world. Our film library has been built up over more than 40 years and includes hits from across that time period, including, among others,Ki & Ka, Housefull 3, Dhishoom, Baar Baar Dekho, Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas,Hum Dil De Chuke Sanam,Lage Raho Munna Bhai,Om Shanti Om,Vicky Donor, English Vinglish, andGoliyon Ki Raasleela: Ram-Leela. We have acquired most of our film content through fixed term contracts with third parties, which may be subject to expiration or early termination. We own the rights to the rest of our film content as co-producers or sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to 60 to 70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least December 31, 2025.
In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. More than 65% of the films in our Hindi library are films produced in the last 15 years. We own or license rights to films produced in several regional languages, including Tamil, Telugu, Kannada, Marathi, Bengali, Malayalam and Punjabi.
We treat our new releases as part of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.
A summary of certain key features of our film library rights as of March 31, 2017 follows below.
| | | Hindi Films | | Regional Language Films
(excluding Kannada films) | | Kannada Films |
| | | | | | | |
| Approximate percentage of total library | | 19% | | 65% | | 16% |
| | | | | | | |
| Approximate percentage of co-production films | | 1% | | Less than 1% | | Not applicable |
| | | | | | | |
| Minimum remaining term of exclusive distribution rights for total films (approximate percentage of rights expiring at the earliest in the periods indicated) | | 2020 or earlier:29%
2021-2025: 35%
2026-2030: 6%
2031-2045: 22%
Perpetual rights, subject to applicable copyright law limitations: 9% | | 2020 or earlier: 21%
2021-2025: 17%
2026-2030: 7%
2031-2045: 0%
Perpetual rights, subject to applicable copyright law limitations: 55% | | Not applicable |
| | | | | | | |
| Remaining term of exclusive distribution rights for co-production (approximate percentage of rights expiring earliest in the periods indicated) | | 2020 or earlier: 0%
2021-2025: 0%
2026-2030: 0%
2031-2045: 0%
Perpetual rights, subject to applicable copyright law limitations: 100% | | Perpetual rights, subject to applicable copyright law limitations: 100% | | Perpetual rights, subject to applicable copyright law limitations: 100% |
| | | | | | | |
| Date of first release (by Eros or prior rights owner) | | 1933-2017 | | 1935-2017 | | * |
| | | | | | | |
| Rights in major distribution channels | | Theatrical: 19%
Television syndication: 19%
Digital: 92% | | Theatrical: 12%
Television syndication: 15%
Digital: 93% | | Digital: 100% |
| | | | | | | |
| Music Rights (approximate percentage of films) | | 10% | | 13% | | 0% |
| | | | | | | |
| Production Years (approximate percentage of films produced in the periods indicated) | | 1933-1965: 13%
1966-1990: 20%
1991-2017: 67% | | 1933-1965: 4%
1966-1990: 25%
1991-2017: 72% | | * |
| * | Our Kannada digital rights library was acquired in September 2010, subsequent to the production and date of first release for these films, and consequently this information is not in our records. |
Distribution Network and Channels
We distribute film content primarily through the following distribution channels:
| · | theatrical, which includes multiplex chains and stand-alone theaters; |
| · | television syndication, which includes satellite television broadcasting, cable television and terrestrial television; and |
| · | digital and ancillary which primarily includes IPTV, VOD, music, inflight entertainment, home video, internet channels and Eros Now. |
We generally monetize each new film we release through an initial twelve month revenue cycle commencing after the film’s theatrical release date. Thereafter, the film becomes part of our film library where we seek to continue to monetize the content through various platforms. The diagram below illustrates a typical distribution timeline through the first twelve months following theatrical release of one of our films.
Film release first cycle timeline
We currently acquire films both for global distribution, which includes the Indian domestic market as well as international markets and for international distribution only.
Certain information regarding our initial distribution rights to films initially released in the three fiscal years 2017, 2016 and 2015 is set forth below:
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Global (India and International) | | | | | | | | | | | | |
| Hindi films | | | 8 | | | | 27 | | | | 30 | |
| Regional films (excluding Tamil films) | | | 12 | | | | 6 | | | | — | |
| Tamil films | | | 3 | | | | 8 | | | | 6 | |
| International Only | | | | | | | | | | | | |
| Hindi films | | | 3 | | | | 5 | | | | 15 | |
| Regional films (excluding Tamil films) | | | — | | | | — | | | | 1 | |
| Tamil films | | | 12 | | | | 10 | | | | 13 | |
| India Only | | | | | | | | | | | | |
| Hindi films | | | 1 | | | | 1 | | | | — | |
| Regional films (excluding Tamil films) | | | 5 | | | | 5 | | | | — | |
| Tamil films | | | 1 | | | | 1 | | | | — | |
| Total | | | 45 | | | | 63 | | | | 65 | |
“High budget” films refer to Hindi films with direct production costs in excess of $8.5 million and Tamil and Telugu films with direct production costs in excess of $7.0 million, in each case translated at the historical average exchange rate for the applicable fiscal year. “Low budget” films refer to Hindi, and regional films with less than $1.0 million in direct production costs, in each case translated at the historical average exchange rate for the applicable fiscal year. “Medium budget” films refer to Hindi, and regional films within the remaining range of direct production costs.
We distribute content in over 50 countries through our own offices located in key strategic locations across the globe. In response to Indian cinemas’ continued growth in popularity across the world, especially in non-English speaking markets, including Germany, Poland, Russia, Southeast Asia and Arabic speaking countries, we offer dubbed and/or subtitled content in over 25 different languages. We have entered into co-production deals with Chinese film companies. In addition to our internal distribution resources, our global distribution network includes relationships with distribution partners, sub-distributors, producers, directors and prominent figures within the Indian film industry and distribution arena.
Theatrical Distribution and Marketing
Indian Theatrical Distribution. The Indian theatrical market is comprised of both multiplex and single screen theaters which are 100% digitally equipped. In India, the cost of distributing a digital film print is lower than the cost of distributing a digital film print in the United States. Utilization of digital film media also provides additional protection against unauthorized copying, which enables us to capture incremental revenue that we believe are at risk of loss through content piracy.
India is divided into 14 geographical regions known as “Film Circuits” or “Film Territories” in the Indian Film Trade. We distribute our content in all of the circuits either through our internal distribution offices (Mumbai, Delhi, East Punjab, Mysore, Kerala, West Bengal and Bihar) or through sub-distributors in remaining circuits. The Film Circuits where we have direct offices comprise of a market share of up to 75% of the India theatrical revenue. Our primarily internal distribution network allows us greater control, transparency and flexibility over the core regions in which we distribute our films, and allows us to retain a greater portion of revenues per picture as a result of direct exploitation instead of using sub-distributors, which requires the payment of additional fees, sub distributor margins or revenue shares.
We entered into agreements with certain key multiplex operators to share net box office collections for our theatrical releases with the exhibitor for a predetermined fee of 50% of net box office collections for the first week, after which the split decreases over time.
We primarily enter into agreements on a film-by-film and exhibitor-by-exhibitor basis; however, we also have annual agreements with some of the top national multiplex chains. To date, our agreements have been on terms that are no less favorable than the terms of the prior settlement agreements; however, we cannot guarantee such terms can always be obtained.
The largest number of screens in India that we book for a particular film are booked for the first week of theatrical release, because as a substantial portion of box office revenues are collected in the first week of a film’s theatrical exhibition. Our agreements with pan India multiplex operators is such that 100% of the entire first week of Eros share of revenues from all our films from such multiplexes is paid to us within 10 days of the release.
In single screens we either obtain non-refundable minimum guarantees/refundable advances and a revenue sharing arrangement above the minimum guarantee and with certain smaller multiplex chainswe obtain refundable advances and a revenue sharing arrangement.
Pursuant to the Cinematograph Act, Indian films must be certified for adult viewing or general viewing by the Central Board of Film Certification, or CBFC, which looks at factors such as the interest of sovereignty, integrity and security of India, friendly relations with foreign states, public order and morality. Obtaining a desired certification may require us to modify the title, content, characters, storylines, themes or concepts of a given film.
International Distribution.Outside of India, we license Indian film content to content aggregator to reach cable and pay TV subscriber and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania), amongst others. We also license dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.
Marketing. The pre-release marketing of a film is an integral part of our theatrical distribution strategy. Our marketing team creates marketing campaigns tailored to market and movie, utilizing print, brand tie-ups, music pre-releases, television, print and outdoor advertising, social media marketing on Facebook and Twitter and online advertising to generate momentum for the release of a film. We generally begin print media public relations as soon as a film commences shooting, with full marketing efforts commencing two to three months in advance of a film’s release date, starting with a theatrical trailer for the film promoted as part of another film currently playing in theaters. In addition, usually between six to eight weeks before the initial Indian theatrical release date, we separately release clips from the films featuring musical numbers. Those clips and the accompanying music tracks are separately available for purchase and add to consumer awareness and anticipation of the upcoming film release. We also maintain a Facebook page, which supplies background detail, chat opportunities and photos of upcoming films as well as links to our YouTube content.
We also use promotional agreements and integrated television marketing to subsidize marketing costs and expand our marketing reach. We partner with leading consumer companies in India which support our marketing campaigns in exchange for including their brands in promotional billboards, print ads and other marketing materials for our new film releases. Our marketing teams also work with our film stars to coordinate promotional appearances on popular television programming, timed to coincide with the marketing period for upcoming theatrical releases.
Our marketing efforts are primarily managed by employees located in offices across India or in one of our international offices in Dubai, Singapore, the U.S., the United Kingdom, Australia and Fiji. Occasionally, sub-distributors manage marketing efforts in regions that do not have a dedicated Eros marketing team, using the creative aspects developed by us for our marketing campaigns. Managing marketing locally permits us to more easily identify appropriate local advertising channels and results in more effective and efficient marketing.
Television Distribution
India Distribution. We believe that the increasing television audience in India creates new opportunities for us to license our film content, and expands audience recognition of the Eros name and film products. We license Indian film content (usually a combination of new releases and existing films in our library), to satellite television broadcasters operating in India under agreements that generally allow them to telecast a film over a stated period of time in exchange for a specified license fee. We have, directly or indirectly, licensed content for major Indian television channels such as Colors, Sony, the Star Network and Zee TV.
Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. Where we do pre-sales, we negotiate a set license fee which is payable over time with the last payment due on delivery of the film. For Fiscal 2018, we already have pre-sales visibility for some of our films such asMunna Micheal,Sarkar3, Shubh Mangal Savdhaan and others.For fiscal 2017 pre sales from sale of satellite television rights was achieved for our films such asHousefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. We recouped 108% and 93% of our direct production cost of the two Telugu films released through contractual commitments prior to the films releases, and we recouped 96% of our direct production cost of one Tamil film released through contractual commitments prior to the film’s release.
Our content is typically released on satellite television three to six months after the initial theatrical release. In India there are currently six direct to home, or DTH, providers. We have offered some of our films through DTH service providers, but we have also licensed these rights with the satellite TV rights to satellite channel providers. As the number of DTH subscribers increase in India, we anticipate that we will have an opportunity to license directly for DTH exploitation. We have also provided content to regional cable operators. Although DTH distribution is still relatively small in India, with Indian telecom networks and DTH platforms expanding their services, we are beginning to see an increased interest for video on demand in India. We also sub-license some of our films for broadcast on Doordarshan, the sole terrestrial television broadcast network, which is government owned. We are seeing increasing growth from the Indian cable system which is predominantly digital. We believe that as the cable industry migrates towards digital technology and moves toward consolidation, cable television licensing will represent a more significant revenue stream for our business.
International Distribution. Outside of India, we license Indian film content to content aggregators to reach cable and pay subscribers and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania), amongst others. We also license dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.
Digital Distribution
In addition to our theatrical and television distribution networks, we have a global network for the digital distribution of our content, which consists of full length films, music, music videos, clips and other video content. Through our digital distribution channel we mainly monetize music assets and distribute movies and other content primarily in IPTV, VOD (including SVOD and DTH) and online internet channels. Our film content is distributed in original language, subtitled into local languages or dubbed, in each case as driven by consumer or regional market preferences. With our large library of content and slate of new releases, we have sought to capitalize on changes in consumer demand through early adoption of new formats and services, which we believe enables us to generate a larger portion of our revenue through digital distribution than the film entertainment industry average in India.
pack. With a significant portion of the Indian and international population rapidly moving towardtowards the adoption of digital technology, we areEros is increasing ourits focus on providing on demandon-demand services although the platforms and strategies differ by region. Outside of India, there is a proliferation of cable, satellite and internet services that we supply. In addition, with the proliferation of internetvia Eros Now. Eros Now users we are increasing our online distribution presence as well. These platforms enable us to continue to monetize a film in our library long after its theatrical release period has ended. In addition, the speed, ease of availability and prices of digital film distribution diminish incentives for unauthorized copying and content piracy.
In North America, we have an agreement with International Networks, a subsidiary of Comcast, to provide a SVOD service fully branded as ‘Eros Now’. The service is carried on mostdemonstrated some of the major cable network providers including Comcast, Cox Communications, Cablevision and Time Warner Cable. We provide all programming for this film and music channel and share revenues withhighest levels of engagement in the cable providers. We also provide contentIndian OTT space. According to Amazon Digital and participatea report published by Counterpoint in a revenue share deal. We have also appointed Royalty Network Inc. and have granted sub-publishing rights to collect revenues. In Canada, Eros has signed a Program License Agreement for various movies with Rogers Broadcasting Limited.
On YouTube, where we have exceeded 6.4 billion views to date since our launch in 2007 and have over 7.9 million free subscribers asJune 2019, 68% of June 2017, we sell banner and pre-roll advertisements, and share these advertising revenues with Google.
Eros Now
As per the latest Telecom Regulatory Authority of India report, there are over 1.2 billion wireless subscribers in India at the end of March 2017. The number of wireless internet users in India is likely to exceed 969 million by 2021. 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. The average selling price of internet-enabled mobile phones is currently just below INR9,000 (USD 140) which is half of that in China. Online video consumption is expected to increase the share of video in overall mobile internet traffic from 49% in 2016 to 75% in 2021.
Eros Now our digitalusers indicated that they watch content daily as compared to 58% average in case of other OTT entertainment service has over 60 million registered users across WAP, APP and Web and had 2.1 million paying subscribers as of March 31 2017.platforms. According to the same report, Eros Now has grown its registered user base from 19 millionthe largest share (59%) of users in the fourth quarter of fiscal 2015 to 60 million users25-39 age bracket in fiscal 2017.Tier II/III cities, the highest among Indian OTT platforms.
Eros believes Eros Now has grown its paying subscribers from 1.1 million usersthe largest Indian language movie content library worldwide with over 12,000 digital titles, out of which approximately 5,000 films are owned in the first quarter of fiscal 2017 to 2.1 million users in the fourth quarter of fiscal 2017. Continuing with the momentum as of June 2017 Eros Now has 68 million registered users and 2.9 million paying subscribers. We define paying subscribers to mean any subscriber who has made a valid payment to subscribe to a service that includes Eros Now services as part of a bundle or on a standalone basis, either directly or indirectly through an OEM or TELCO in any given month, be it through a daily, weekly or monthly billing pack, so long as the validity of the pack is for at least one month.
Our revenue model focuses on B2B distribution which includes our partnerships with leading mobile operators in India, including Idea Cellular, Bharti-Airtel, Vodafone, BSNL and Reliance Jio. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers.perpetuity. Eros Now also has partnered with leading OEMs such as Micromax, Samsunga deep library of short-form content, including music videos, trailers, original shorts exclusive interviews and Smartron to pre-bundlemarketing shorts. During the twelve months ended March 31, 2020, Eros Now digitally released a total of 630 films in smart phones sold in India. It has also entered into partnerships with several leading electronic payment platforms including Paytm, Mobikwik, SBI Buddy, Freecharge12 different Indian languages. Over the same period over 8,000 music audio and Speedpay that enablevideo files were released on Eros Now subscribers to make easy and hassle free payments using e-wallet services. Eros Now recently announced a strategic integration deal with Ola, India's leading mobile app for transportation, using Ola’s connected in-car entertainment platform for ridesharing, Ola Play. This strategic revenue-sharing partnership will enable an immersive and personalized experience that customers can seamlessly control through their smartphones as well as throughover 500 units of short form and Eros Now Originals & Quickie content. Since the inception of Eros Now, Eros has digitally premiered (first ever digital release) over 250 films on the Eros Now platform. Eros has also introduced the concept of theatrical films launching on OTT prior to its satellite premiere, which is a device mounted attestament to the backstrength of our platform and breadth and depth of our offering.
To maximize the seat.
reach of Eros Now, Eros currently has partnerships and strategic collaborations globally with telecommunications operators, OEMs and streaming services providers to offer Eros Now content to their users and subscribers. For instance, Eros recently announced our arrangement with Apple to make Eros Now available on the new Apple TV app. Eros Now is also available to customers of Reliance Jio, a major Indian mobile network operator owned by Reliance and BSNL, an Indian state-owned telecommunications company in accordance with a recent agreement that Eros entered into with BSNL, as well as the Malaysia-based Celcom and Maxis Berhad, Mauritius Telecom, Etisalat and Indonesia-based XL Axiata. Under these partnerships, subscribers on these networks gain access to Eros Now’s extensive content including full-length movies and thematically-created playlists along with functions such as multi-language subtitles for movies, music video playlists, regional language filters, video progression and a watch list of titles. In addition, Eros Now has entered the MalaysianSri Lankan market through a partnership with partnerships withDialog Axiata, Sri Lanka’s premier connectivity provider, and will be available on the country’s leading telecom operators, Maxis Berhad and U Mobile. Dialog ViU app.
Eros Now is also available in the only Indian OTTApple App Store and Google Play Store for download and can be streamed on any device including Amazon Fire TV stick, all iOS enabled devices and Roku, making the entertainment experience platform to penetrate the growing Malaysian market. Eros Now recently entered into a partnership with T-Mobile’s video streaming program, Binge On. Eros Now is accessible to T-Mobile’s large customer base of approximately 71.5 million users across the US, who can stream its extensive library of Bollywood and regional language films, music, and originals. Eros Now is available on Lyca TV, which is the world’s largest OTT ethnic entertainment provider and delivers broad range of international content across multiple devices.agnostic. Eros Now has also partnered with Jadoo TV, a leading distributor of internet based South Asian & multicultural content provider acrossover 60 distribution partners around the U.S.world including Apple TV+, Europe & Australia.
Amazon Channels, Virgin Media, Roku, Etisalat and xfinity.
Eros Now partnereduses advanced technologies in the creation of content, giving each Eros Now original series or episode the same production treatment a film receives. In addition, Eros Now uses advanced technologies to allow its users easy maneuverability on its platform, including categorization, search function and stacking of content under different domains.
In September 2019, Eros announced a ground-breaking commercial partnership with IIFA (International Indian Film Academy) to beMicrosoft with the first exclusive digitalgoal of transforming the content streaming experience for consumers globally. Eros expects that this collaboration will help Eros Now develop a new intuitive online video platform to airensure seamless delivery of content across countries and languages. It will also create a host of new interactive voice command offerings for customers, including video search experiences across multiple Indian languages, and personalized content suggestions. This collaboration will help the awards weekend toEros Now platform enhance and strengthen its millions of subscribers worldwide. It also penetrated deeper into the market in Fiscal 2017 by forming long term partnershipsreach across the leading Telecom operators in India including Reliance Jio, Vodafone, Idea, BSNLglobe and Airtel.
increase consumer engagement.
Eros Now has billing integration system with Fortumo, a leading global provider of direct carrier billing. Fortumo payments cover 98 markets and connect merchantsbeen increasingly focused on delivering product features to subscribers of more than 350 mobile operator networks. Applefurther monetize its growing registered user base. For example, Eros has featured thelaunched Eros Now app in its “App Store Best of 2016”.Quickie, a platform where viewers can access quality short stories to further supplement our existing vast digital content library.
The Eros Now wasplatform also the number one trending apppartners with leading companies in July 2017 on Google Play store.
various industries other than entertainment in an effort to create vertical synergy and attract more users for its content. These companies cover industries including banking and lifestyle. For example, Eros Now enhances its consumer appeal through exploring dynamic genres to create unseen, relatablehas partnerships with three major electronic payment platforms: Paytm, CashKaro and contemporary “Originals” that target the youth of India and are an important part of theFreecharge. Eros Now content strategy. Eros Now’s original content offering began with the release of Salute Siachen, India’s first ever celebrity high endurance expeditioncan have access and advertise its services to the Siachen Glacier.users of these payment platforms and existing viewers can more easily purchase Eros Now content. In addition, Eros Now has partnerships with other brands like Cathay Pacific, Emirates, ICICI Bank, and Grofers, among others.
Eros Now has focused on the core of the video technology business actively and will continue to invest in development over the coming years. At the helm of this initiative is Eros’ relationship with Microsoft to develop the next generation video technology backend to deliver language based content to audiences over the world through investments in remote villages in India wherein Eros enables Village Level Entrepreneurs to distribute Eros Now on Internet cards across the country, its relationship with Dolby and being the first partner to introduce Dolby Atmos and Vision on Eros applications for OTT customers, its strategic relationship with Epic Games and the work being done on Unreal Engine to revolutionize pre-visualization technology based content production.
The Indian audience’s propensity to consume content in local language has been increasing, and in recent times regional films are breaking language barriers as they cross over with dubbed versions to other markets especially the Hindi market. The regional industry also has strong releases in the next year and the market is only expected to expand further. Eros Now is well placed to capitalize on this growth given its strong regional content library and slate of compelling new regional content planned for release over the coming quarters.
Eros Now Originals
Eros Now’s various digital series, comprising a broad mix of genres from comedy to horror and crime thriller, have been well received by its viewers. Eros has a uniquely compelling slate of films and original series scheduled for release over the coming quarters, and Eros expects this to help drive continued growth in its Eros Now business as well as box-office revenue.
With compelling global concepts and productions in partnership with the best talent available, Eros believes that Eros Now’s slate of original films and series will appeal to a wide range of audiences. In fiscal year 2021 Eros Now is planning to launch an exclusive stable of feature films, made-for-digital originals such asfilms and original episodic programs, some including: Flesh by Siddharth Anand, SmokeAnand; Halahal by Zeishan Qadri; Bhumi by Pavan Kripalani; and Side Hero will be launched in Fiscal Year 2018. These originals follow a rigorous greenlighting process just like films, with script, screenplay, budgeting pilot episode production, market research and testingmost awaited Season 2 of its well-known series Metro Park. Over the pilot episode and final production.past few months, despite the COVID-19 pandemic, Eros Now has also added a series of short originals titled Black & White which range from interviews to teˆte-a¨-teˆte with leading talent from the Indian film industry and are shot exclusively for Eros Now. Another short formreleased several pieces of original content available on the Eros Now is “E-Buzz”platform, A Viral Wedding, Metro Park (Quarantine Edition), this offers exclusive behind the scenes to all key social celebrity events on the calendar.Date Gone Wrong (Quarantine Edition).
Physical and Other Distribution
We also distribute globally our film content through physical formats (DVDs and Video Compact Discs, or VCDs), in hotels and with airlines, and for use on mobile networks. We distribute and license content on physical media throughout the world, including on Blu-ray and DVDs, and in India on VCD and DVD. In India, and in servicing South Asian consumers internationally, we distribute to wholesalers & corner shop retailers and internet platforms such as Amazon, as well as supply local wholesalers and retailers. We also license content to third party distributors internationally to provide content dubbed in local languages for consumption by non-South Asian audiences. We also have direct sales to corporate customers, primarily in India, who bundle our DVDs or VCDs with their own products for promotional purposes. This aspect of our business works on a volume basis, with the low margins being offset by large confirmed orders. We have provided content for various mobile platforms such as Singtel and Shotformats Digital Productions.
Music
Music is integral to our films, and when we obtainEros obtains global, all-media rights in our acquired or co-produced films, music rights typically are included. Film music rights are often marketed and monetized separateseparately from the underlying film, both before and after the release of the related films. In addition, we actEros acts as a music publisher for third partythird-party owned music rights within India. Through our internal resources and network of licensees, we areEros is able to provide ourits consumers with music content directly, through third partythird-party platforms or through licensing deals. The content is primarily taken from our film content and the revenues are derived from mobile rights, MP3 tracks, sold via third party platforms such as iTunes and Rhapsody as well as streaming services such as Spotify and Google Music digital streaming, physical CDs and publishing/master rights licensing.
WeEros also exploitexploits the music publishing and master rights wethey own, which involves directly licensing songs to radio and television channels in India, synchronizing of music content to film, television and advertisers globally, as well as receiving royalties from public performance of these songs when they are played at public events. Ancillary revenues from public performances in India are collected and paid over to us through Novex, , which monitor, collectmonitors, collects and distributedistributes royalties to theirits members.
During the fiscal year, 2020 Eros announced a transformational alliance between Eros Now and YouTube Music Premium. This was the first time ever, in any geography, that Google/YouTube had partnered with a SVOD OTT player for a joint bundling and marketing opportunity. In addition, Eros Now developed the customer journey to provision access to both products and leveraged our new payment funnel. The campaign was supported by a robust digital marketing push from both sides.
Impact of COVID-19
COVID-19 has had, and is likely to continue to have, a severe and unprecedented impact throughout the world. The outbreak and resulting steps taken by governments to contain the virus significantly affected Eros’ and STX’s businesses in the first quarter of fiscal year 2021. Measures to prevent its spread, including restrictions on social gatherings, effectively shut down theatrical exhibition and content production in India, the US and other major markets for extended and varying periods of time. These factors will influence future releases across the theatrical, television and digital distribution windows. Overall, the pandemic’s effect on our business has been negative and the continued, indefinite disruption of operations has created uncertainty around near-term cash flows and results.
During the period from March 31, 2020 to October 23, 2020, Eros had several theatrical film releases scheduled in India and overseas, namely Haathi Mere Saathi in three languages (Hindi, Tamil and Telugu) and Shokuner Lobh (Bengali), among others. However, under the present circumstances of the COVID-19 pandemic, Eros has made the decision to defer the release of these (and other) films indefinitely until the situation changes, so that the revenue opportunities from these films can be maximized and improve cash flows to better serve our commitments to stakeholders.
Similarly, the pandemic has caused STX to adapt its release strategy on several projects. My Spy, for instance, was originally slated for a worldwide theatrical release starting in March 2020. While some territories released the film as scheduled, others including the US, the UK, France and Italy bypassed theaters in favor of a deal with Amazon to make it exclusively available on the company’s Prime Video streaming service. The rollout of Greenland, originally scheduled for a worldwide theatrical release starting in summer 2020, was also affected. A number of markets moved forward with successful theatrical releases, but a deal was struck with AT&T’s HBO Max for distribution in the US on its streaming platform following a premium video on-demand (PVOD) release in December 2020. And finally, a deal was made with Disney’s Hulu for US distribution of The Secret Garden on its streaming platform following the film’s PVOD release in August 2020. These examples have not only allowed the company to generate meaningful cash flows under difficult circumstances, but also demonstrate the viability of alternative business models to effectively monetize its content.
The COVID-19 pandemic has changed the social lives of people across regions and economic sections. While theatres are still not fully available, home consumption mediums, such as television channels and OTT platforms (digital platforms) have gained in popularity and viewership. Going forward, along with industry peers, Eros has started to consider changes to various operational and legal aspects of the business, such as project timelines, product costs, schedules, legal commitments, etc., in order to adjust to the ‘new normal’ being presented to the world.
Eros’ OTT platform Eros Now, for which the majority of the content library comprises its own existing content and acquired content, has also started considering innovative ways of updating its existing content libraries. Given the rise in demand for content and increasing online viewership, and the disruption in production of new content, existing content is likely to become more valuable in the future which will benefit us.
The Company believes, but cannot guarantee, that the cinematic exhibition industry will ultimately rebound and benefit from pent-up consumer demand for out-of-home entertainment once government restrictions are lifted and home sheltering subsides. However, the ultimate significance of the pandemic, including the extent of the adverse impact on our financial and operational results, will be dictated by the currently unknowable duration and the effect on the overall economy and of responsive governmental regulations, including shelter-in-place orders of the pandemic and mandated suspension of operations. See “Part I—Item 3. Key Information—D. Risk Factors.”
Given the above, while the media and entertainment sector is currently grappling with various challenging issues as people strive to return to normalcy, eventually the entertainment sector may be amongst the first to recover and continue to provide premium entertainment to consumers around the world.
Intellectual Property
As ourEros’s revenues are primarily generated from commercial exploitation of ourits films and other audio and/or audio-visual content, ourits intellectual property rights are a critical component of ourits business. Unauthorized use/access of intellectual property, particularly piracy of DVDs and CDs, as well as on-line piracy through unauthorized streaming/downloads, is widespread in India and other countries, and the mechanisms for protecting intellectual property rights in India and such other countries are not as effective as those of the United StatesU.S. and certain other countries. In order to restrictfight against piracy, we participateEros participates directly and through industry organizations by way of actions including legal claims against persons/entities who illegally pirate ourEros content. Further weFurthermore, Eros also dealdeals with piracy issues by promoting and marketing ourits films to the highest standards in order to ensure maximum viewership and revenues early in its release and shortening the period between the theatrical release of a film and its legitimate availability on DVD and VCD in the market. This is supported by the trend in the Indian market for a significant percentage of a film’s box office receipts to be generated in the first few weeks after release.
Recently, there has been a rapid transition of consumer preference from physical to digital modes of consumption of film and related content via on-line, mobile and digital platforms. This has enabled ourEros’ OTT platform “Eros Now”Eros Now to grow rapidly. However this business facesrapidly, which subjects it to competition from other such OTT platforms along with sites offering unauthorized pirated content. In order to tackle this issue of on-line piracy, we have adapted modernizedEros has adopted Digital RightRights Management technology in order to ensure that ourits content is protected from unauthorized and illegal access and copying.
Copyright protectionProtection in India
The Indian Copyright Act, 1957 (as amended)amended from time to time) (“Copyright Act”), has prescribedprescribes provisionsinter alia relating to registration of copyrights, transfer of ownership and licensing of copyrights and infringement of copyrights and remedies available in that respect. The Copyright Act affords copyright protection to cinematographic films and sound recordings and all other audio-visual content.original literary, dramatic, musical and artistic work. For cinematographic films, copyright is granted for a certain period of time, usually for a period of 60 years from the beginning of the calendar year following the year in which such film is published, subsequent to which the work falls in the public domain and any act of reproduction of such work by any person other than the author would not amount to infringement.
India is a signatory to number of international conventions and treaties that provides for universal provisions for protection and enforcement of Copyrights.copyrights. In addition to above, following the issuance of the International Copyright Order, 1999, subject to certain conditions and exceptions, certain provisions of the Copyright Act apply to nationals of all member states of the World Trade Organization, the Berne Convention and the Universal Copyright Convention.
Recently, theThe Copyright Act was amended in 2012 to allow authors of literary and musical works (which may be included as part of a cinematograph film) to retain the right to receive royalty for the utilization of such work (other than exhibition as part of the cinematograph film in a cinema hall) as mandated by the law.
Although the state governments in India serve as the enforcing authorities of the Copyright Act, the Indian government serves an advisory role in assisting with enforcement of anti-piracy measures.
In December 2009, the Union Information & Broadcasting Ministry established a task force to recommend measures to combat film, video and cable piracy, which submitted recommendations in September 2010, including:
| · | as a condition to licenses being granted to theaters and multiplexes by district authorities, theater and multiplex operators should be required to prohibit viewers from carrying a cam-cording device inside the theater; |
| · | encouraging state governments to enact legislation providing for preventive detention of video and audio pirates and bring video pirates under the Goonda Act; and |
| · | undertaking measures to ensure high fidelity in genuine DVDs to discourage the public from buying pirated versions. |
However, these are recommendations of the task force, and there can be no assurance that any of these recommendations will be accepted and become binding law or regulation in a timely manner, or at all.
It is pertinent to note that piracy continues to be one of the major issues affecting the Indian Film Industry with an annual loss of substantial revenues, to the tune of around INR 180 Billionbillion every year. In an effort to protect their IP,Intellectual Property rights, filmmakers in India have started getting ‘John Doe’orders typically known as “John Doe” orders from court that putwhich is a pre-infringement injunction remedy provided to protect the onusintellectual property rights of the ISP to block access to websitescreator of artistic works, including movies and URL’s that facilitate pirated content.songs. We obtain similar protective orders from court for our films and also engage the services of a specialized anti-piracy agency to vigilantly monitor and take down on-line pirated content from our cinematograph films.
Recently, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India issued the NationalU.S. Intellectual Property Rights PolicyLaws
The U.S. Copyright Office regulates copyrights in the U.S. under the authority granted by the federal Copyright Act. In the U.S., federal law grants a copyright owner exclusive control over several rights, including the right to distribute, copy, publicly display, and otherwise exploit the work embodied in the copyright. The Digital Millennium Copyright Act (the “DMCA”) provides additional protection for our media content by prohibiting the circumvention of access or copy controls. Under the DMCA, we utilize technology to limit the platforms on which aims, amongothers can play our copyright containing media. We can also protect our copyright protected content by bringing copyright infringement suits seeking injunctions or damages. In the U.S., copyright owners must generally register a copyright before bringing a claim against a third-party for copyright infringement in a U.S. federal court.
Part of our business involves establishing a reputation for quality entertainment content and services and associating that quality with our recognizable brands. Trademarks are symbols or words used to designate the source of a particular good or service. In the U.S., the Lanham Act governs the rules of eligibility for federal trademark registration and protection. A trademark owner can bring an action to prevent unauthorized third parties from using similar marks in a way that would create confusion as to the source of any associated goods or services. Trademark rights may be maintained indefinitely in the U.S., but protection may be lost if the mark is no longer used to identify goods or services or the mark otherwise loses its significance as a designator of source or affiliation. We have successfully registered trademarks for our principal brands both in the U.S. and in other things,countries around the world.
Our business also relies upon the protection of certain business, financial, and technical information protected as trade secrets. Trade secrets are protected in the U.S. under the federal Defend Trade Secrets Act, and at the state level, generally, through the Uniform Trade Secrets Act. There is no official registration policy for trade secrets, and our continued right to stimulate intellectual property creation and protectionprotect our trade secrets are preserved by Indian and foreign corporates,our own efforts to commercialize intellectual property rightsmaintain secrecy. Trade secret owners can bring an action against third parties for misappropriation if a third-party obtains access to a trade secret by exploring the feasibility of creation of an IPR exchange and to enable valuation of intellectual property rights as intangible assets. The policy contemplates the review of existing intellectual property related laws, wherever necessary, and states that the Indian Cinematography Act, 1952 should be suitably amended to provide for penal provisions for illegal duplication of films.improper means.
Trademark protectionProtection in India:
India
We use a number of trademarks in our business, all of which are owned by our subsidiaries. Our Indian subsidiaries currently own over 70120 Indian registered trademarks and domain names, which are used in their business, including the registered trademark “Eros,” “Eros International,” “Eros Music,” and “Eros Now”, “Trinity Media”, “Trinity Pictures” and “Trinity Movies”.Now.” However, certain of our trademarks used in India are still under the process of registration. A majority of these registrations, and certain applications for registrations, are in the name of our subsidiaries Eros India, Eros Films or Eros Digital Private Limited, with whom we have an informal arrangement with respect to the use of such trademarks. The registration of any trademark in India is a time-consuming process, and there can be no assurance as to when any such registration will be granted.
The Indian Trade Marks Act, 1999, or the Trademarks Act,(the “Trademarks Act”), governs the registration, acquisition, transfer and infringement of trademarks and remedies available to a registered proprietor or user of a trademark. The registration of a trademark is valid for a period of ten years but can be renewed in accordance with the specified procedure. The registration of certain types of trademarkmarks is prohibited, including where the mark sought to be registered is not distinctive.
Until recently, to obtain registration of a trademark in multiple countries, an applicant was required to make separate applications in different languages and countries and disburse different fees in the respective countries. However, the Madrid Protocol enables nationals of member countries, including India, to secure protection of trademarks by filing a single application with one fee and in one language in their country of origin.
In lieu of the above, the Trademarks Act 1999 of India was amended by the Trade Marks (Amendment) Act 2010, or the Trademarks(the “Trademarks Amendment Act.Act”). The Trademarks Amendment Act empowers the Registrar of Trade Marks to deal with international applications originating from India as well as those received from the International Bureau and to maintain a record of international registrations. This amendment also removes the discretion of the trademark registrarRegistrar of Trademarks to extend the time for filing a notice of opposition of published applications and provides for a uniform time limit of four months in all cases. Further, it simplifies the law relating to transfer of ownership of trademarks by assignment or transmission and brings the law generally in line with international practice. Pursuant to the Madrid Protocol and the Trademarks Amendment Act, we have obtained trademarks in Egypt, the European Community, United Arab Emirates, Australia and the United States.U.S.
Recently, inIn order to match the international standards of trademark protection and enforcement, and to speed up the trademark registration process the Trademark Rules, 2002 were amendedreplaced by the Trademark Rules, 2017. Some notable amendments were; reduction in the number of Trademark proceduralapplication forms; specific concessions in filing fees to Start Ups, Individuals and Small Enterprises and for e-filing; Expedited ProcessingEnterprises; expedited processing of Trademark Application;trademark application; registration of sound marks; etc.
Remedies for Infringement in Copyright Act and Trademark Act:
Act
The remedies available in the event of infringement under the Copyright Act and the Trademarks Act include civil proceedings for damages, account of profits, injunction and the delivery of the infringing materials to the owner of the right, as well as criminal remedies including imprisonment of the accused and the imposition of fines and seizure of infringing materials.
Competition
CompetitionEros
The Indian film industry’sindustry has experienced robust growth over the last few years and the same is changing the competitive landscape. By opening up and relaxing the entry barriers for foreign investments in certain key areas of this industry, including the relaxation norms for the broadcasting sector (DTH, cable networks, internet & OTT Platforms etc.), the Government of India has provided the sector much needed impetus for growth. Several segments of the industry (such as broadcasting, films, sports and gaming) have especially undergone unprecedented advancements on multiple dimensions. The use of the latest technology in all phases of production, digitization and globalization of content, the availability of multiple revenue streams, financial transparency and corporatization have contributed towards the paradigm shift that the Media & Entertainment industry in India has witnessed over the last decade or so.
WeEros believe we wereit was one of the first companies in India to create an integrated business of sourcing new Indian film content through co-productions and acquisitions while building a valuable library of rights in existing content and also distributing Indian film content globally across formats.
Some of ourEros’ direct competitors, such as The Walt Disney, Company (“Disney”), 20th Century Fox Pictures and Viacom Studio 18, have moved towardtowards similar models in addition to their other business lines within the Indian entertainment industry. WeEros also facefaces competition from the direct or indirect presence in India of significant global media companies, including the major Hollywood studios. Disney has acquired 100% of UTV and Viacom Inc. has ownership interests in Viacom Studio 18, while other Hollywood studios, such as News Corporation and Sony, have established local operations in India for film distribution, and have released a limited number of Indian films. OurEros’ primary competitors for Indian film content in the markets outside of India are UTV, Fox, Viacom and Yash Raj Films. We believe ourEros believes its experience and understanding of the Indian film market positions usit well to compete with new and existing entrants to the Indian media and entertainment sector. Based on gross collections reported by comScore, reported ourEros’ market share (asas an average over the preceding sixseven calendar years to 2016) as 31%2018 is 24% of all theatrically released Indian language films in the United Kingdom and the U.S., based on gross collections. Competition within the industry is based on relationships, distribution capabilities, reputation for quality and brand recognition.
STX
Our Film Library
We currently own or license rights to films currently comprising over 3,000 films, including recentSTX operates in a highly competitive environment for creative talent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal libraryintellectual property, as well as third party aggregated content which it believes makes it one of the largest Indian movie offering platforms around the world. Our film library has been built up over more than 40 yearsaudience and includes hits from across that time period, including among othersKi & Ka, Housefull 3, Baar Baar Dekho, Sardaar Gabbar Singh, 24 (Tamil), Janatha Garage,Dishoom Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas,Hum Dil De Chuke Sanam,Lage Raho Munna Bhai,Om Shanti Om,Vicky Donor, English Vinglish, andGoliyon Ki Raasleela: Ram-Leela. We have acquired mostdistribution of our content. STX competes with a variety of entertainment and media companies that have substantial resources to produce and acquire content worldwide, including broadcast networks, basic and premium cable networks, streaming services, film content through fixed term contracts with third parties,and television studios, production groups, independent producers and syndicators, television stations and television station groups.
STX competes for the acquisition of film and television properties, the services of performing artists, directors, producers and other creative and technical personnel as well as for production financing, all of which may be subject to expiration or early termination.
We own the rightsare essential to the restsuccess of our film content as co-producers or sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to at least 65-70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least March 31, 2020.
businesses.
In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio ofaddition, STX films spanning various genres, generationscompete for audience acceptance and languages. More than half of our library is comprised of films first released ten or more years ago, including films released as early as the 1940s. We own or license rights toexhibition outlets with films produced in several regional languages, including Tamil, Kannada, Marathi, Telugu, Bengali Malayalam and Punjabi.distributed by other companies. Likewise, STX’s television productions face significant competition from independent distributors as well as major studios.
As a result, the success of STX’s film or television product is dependent not only on the quality and acceptance of a particular film or program, but also on the quality and acceptance of other competing content released into the marketplace at or near the same time.
We treat our new releases as partGiven this level of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides uscompetition, STX attempts to operate with a reliable source of recurring cash flow afterdifferent business model than others. STX’s production strategy typically emphasizes a lower cost structure, risk mitigation, and financial partnerships and innovative financial arrangements. STX has a streamlined corporate structure and entrepreneurial culture that enables flexibility and agility throughout the theatrical release period for a film has ended. In addition, because our film library is largeproduction and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.distribution process.
Litigation
From time to time, we and our subsidiaries are involved in various lawsuits and legal proceedings that arise in the ordinary course of business. The following discussion summarizes examples of such matters. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Beginning on November 13, 2015, the Company was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company. The threeOn May 17, 2016, the putative class actions filed in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United StatesU.S. District Court for the Southern District of New York where they were thensubsequently consolidated with the other two actions on May 27, 2016. In general, theactions. The Court-appointed lead plaintiffs alleged that the Company, and in some cases also Company’s management, violated federal securities laws by overstating Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices.
On April 5, 2016,filed a lead plaintiff and lead counsel were appointed in the now-consolidated New York action. A single consolidated amended complaint was filed on July 14, 2016 and amended on October 10, 2016. The plaintiffs haveamended consolidated complaint alleged that the Company and certain individual defendants — Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran — have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act. The amended consolidated complaint has narrowed in scope significantly and doesAct, but did not assert certain claims that had been asserted in prior complaints, including (i) claims arising under Sections 11 and 15 of the Securities Act, (ii) accounting and GAAP allegations, and (iii) claims against certain individual defendants, who are not now named defendants.complaints. The remaining claims arewere primarily focused on whether the Company and individual defendants made material misrepresentations concerning the Company’s film library and materially misstated the usage and functionality of Eros Now.Now, our digital OTT entertainment service. On September 25, 2017, the U.S. District Court for the Southern District of New York entered a Memorandum & Order dismissing the putative class action with prejudice. On October 23, 2017, lead plaintiffs filed a Notice of Appeal. On August 24, 2018, the U.S. Court of Appeals for the Second Circuit issued a summary order affirming the district court’s earlier dismissal, with prejudice.
On September 29, 2017, the Company filed a lawsuit against Mangrove Partners, Manuel P. Asensio, GeoInvesting, LLC, and other individuals and entities alleging the defendants and other co-conspirators disseminated material false, misleading, and defamatory information about the Company and are engaging in other misconduct that has harmed the Company. On May 31, 2018, the Company filed an amended complaint that added two new defendants and expanded the scope of the Company’s initial allegations. The amended complaint alleges that Mangrove Partners and many of its co-conspirators held substantial short positions in the Company’s most recentstock and profited when its share price declined in response to their multi-year disinformation campaign. The Company seeks damages and injunctive relief for defamation, civil conspiracy, and tortious interference, including but not limited to interference with its customers, producers, distributors, investors, and lenders. On March 12, 2019, the Supreme Court of the State of New York entered a Decision and Order granting defendants’ motions to dismiss. On March 13, 2019, the Company filed a Notice of Appeal. The matter is ongoing.
Beginning on June 21, 2019, the Company was named a defendant in two substantially similar putative class action lawsuits filed in federal court in New Jersey by purported shareholders of the Company. The lawsuits allege that the Company and certain individual defendants violated Sections 10(b) and 20(a) of the Exchange Act by making false and/or misleading statements regarding the Company’s accounting for trade receivables. On September 27, 2019, the putative class action filed in California was transferred to the U.S. District Court for the District of New Jersey. On April 14, 2020, the three putative class actions were consolidated, and a lead plaintiff was appointed. On July 1, 2020, the court-appointed lead plaintiff filed a consolidated complaint. The consolidated complaint expands the scope of the allegations. The Company expects to file a motion to dismiss, the amended consolidated complaint was filed on November 11, 2016 and its reply brief was filed on January 6, 2017. The Court has not scheduled oral argument or indicated when it will rule on this motion.which is due August 28, 2020.
Eros India and its subsidiaries are involved in ordinary course government tax audits and assessments, which typically include assessment orders for previous tax years including on account of disallowance of certain claimed deductions.
During the year ended March 2015, Eros India and its subsidiaries received twoshow causes notices and assessment order from the Commissioner of Service Tax (India)Authorities in India levying amounts to show cause why anbe paid on account of several grounds of non-compliance with the Service Tax Laws. An amount aggregating to $30$56 million (net of monies paid under protest $1.8 including interest and penalty) for the period April 1, 2009 to March 31, 2014 should not be levied on and paidperiods under dispute on account of service tax arising on temporary transfer of copyright services and certain other related matters.matters have been considered contingent. Eros has filed its objections against the notice with the authorities. Subsequently in June 2015, Eros received assessment orders from the Commissioner of Service Tax (India) levying tax as stated above and ordering Eros to pay an additional amount of $30 million as interest and penalties in connection with the aforesaid matters. On September 3, 2015, the Company filed an appeal against the said order before the authorities. In April 2016, Eros, received a show cause notice from the Commissioner of Service Tax on similar grounds amount aggregating to $1 million for the period 1 April 2014 to 31 March 2015. Considering the facts and nature of levies and the ad-interim protection for service tax levy for a certain period granted by the Honorable High Court of Mumbai, the Group expects that the final outcome of this matter will be favorable. Accordingly, basedThere is no further update on the assessment made after taking appropriate legal advice, no additional liability has been recorded in Group’s consolidated financial statements.these matters as preliminary hearing is yet to begin.
During the year ended March 2015, Eros India and its subsidiaries received several assessment orders and demand notices from value added taxVAT and sales tax authorities in India forIndia. Several revised orders have been received during the payment of amounts aggregatingyear. Eros has considered an amount equal to $3 million (including(net of monies paid under protest $0.1 million and including interest and penalties)penalty) for certain fiscal years between April 1, 2005 and March 31, 2011.the periods under dispute as contingent. Eros has appealed against each of thesethe orders outstanding, and such appeals are pending before relevant tax authorities. Though, there uncertainties are inherent in the final outcome of these matters, the CompanyGroup believes, based on assessment made after taking legal advice, that the final outcome of the matters will be favorable. Accordingly, no additional liability
Eros India and its subsidiaries received several assessment orders and demand notices from Income Tax Authorities in India. The orders are on account of disallowance of certain expenditures claimed by the Company. Eros has been recorded in Group’s consolidated financial statements.
During Fiscal 2017, a claim has been filed against Eros International Plc in the Commercial Court, Queen’s Bench Division of the High Court in London. The plaintiff (former employee) alleged that he is notconsidered an amount equal to be treated as a “Leaver”$0.1 million for the purpose of share options awarded to himperiod under dispute as contingent. Eros has contested the two Joint Ownership Deeds (“the JSOP Agreement”) entered into with the Company on April 20, 2012 at the time he served his vesting noticessaid cases and believes that he was entitled to exercise his share options under the JSOP Agreement in accordance with the Vesting Notices. The estimated amount of claim is US$ 2.5 million. The Company is contesting the claimthere will not be any significant liability on the grounds thatgroup as the employee hasmisstatements were bonafide and without any wrongful intentions and do not met the JSOP Agreement terms and therefore not eligible for awards. Given the uncertaintyinvite penalty. However, uncertainties are inherent in the matter, based on assessment madefinal outcome of these matters and hence, after makingtaking appropriate legal advice, group has considered the Company does not believe that the ultimate outcome of this matter will be unfavorable. Accordingly, no liability has been recorded in Group’s consolidated financial statements.
amount as contingent liability.
Eros India is also named in various lawsuits challenging its ownership of some of its intellectual property or its ability to distribute these films in India. A number of these lawsuits seek injunctive relief restraining Eros from releasing or otherwise exploiting various films, including Om Shanti Om, Kochadaiiyaan, Bhoot Returns, and Goliyon Ki Rasleela-Ram-leela,Rasleela-Ram-Leela, Munna Michael, Heer Ranjha (Ishak Di Misal), Sarkar 3, Bajrangi Bhaijaan, Welcome Back, Sardar Gabbar Singh, Aligarh,and Housefull 3.
2.
In India, private citizens are permitted to initiate criminal complaints against companies and other individuals by filing complaints or initiating proceedings with the police. Eros and certain executives have been named in certain criminal complaints from time to time.
If, as a result of such complaints, criminal proceedings are initiated by the relevant authorities in India and the Company or any of its executives are found guilty in such criminal proceedings, our executives could be subject to imprisonment as well as monetary penalties. We believe the claims brought to date are without merit and we intend to defend them vigorously.
For instance, in relation to the film Goliyon Ki Rasleela-Ram-leela,Rasleela-Ram-Leela, certain civil and criminal proceedings had been initiated in various local courts in India in and around November 2013, including arrest warrants against Mr. Kishore Lulla and others involved in the making of this film, alleging that this film disrespected religious sensibilities and seeking to restrain its release or seeking directions for a review of its film certification. We have contested such claims in the local courts as well as by way of petitions filed by us before the Supreme Court of India. While hearings or investigations continue in some of these proceedings are pending, we have obtained interimstay orders in our favor from the Supreme Court of India as well as certain of the local courts where such proceedings are being heard, including stays on all criminal proceedings against Eros India, Mr. Kishore Lulla and other persons involved in the making of the film.heard. This film was released in November 2013.
Government Regulations
The following description is a summary of various sector-specific laws and regulations applicable to Eros.the Company.
Material Isle of Man Regulations
Companies Regime.The Isle of Man is an internally self-governing dependent territory of the British Crown. It is politically and constitutionally separate from the United Kingdom and has its own legal system and jurisprudence based on English common law principles.
Isle of Man company law is largely based on that of England and Wales. There are two separate codes of company law, embodied in the Companies Acts of 1931-2004 (commonly referred to as the 1931 Act as the principal Act is the Companies Act 1931) and the Companies Act 2006 (commonly referred to as the 2006 Act), respectively. Our Company was incorporated on March 31, 2006 under the 1931 Act. Effective September 29, 2011, it re-registered as a company incorporated under the 2006 Act.
The 2006 Act updatesupdated and modernizesmodernized Isle of Man company law by introducing a new simplified corporate vehicle into Isle of Man law. The new2006 Act corporate vehicle follows the international business company model available in a number of other jurisdictions. Companies incorporated or re-registered under the 2006 Act are governed solely by its provisions and, except in relation to liquidation and receivership, are not subject to the provisions of the 1931 Act.
The following are some of the key characteristics of companies incorporated under the 2006 Act:
Share Capital.Under the 2006 Act, there is no longer the concept of authorized capital. Therefore, shares may be issued with or without par value.
Dividends, Redemptions and Buy-Backs.Subject to compliance with the memorandum and articles of association, the 2006 Act allows a company to declare and pay dividends, and to purchase, redeem or otherwise acquire its own shares subject only to meeting a solvency test set out in the 2006 Act. A company satisfies the solvency test if: (i) it is able to pay its debts as they become due in the normal course of business: and (ii) the value of the company’s assets exceeds the value of its liabilities.
Capacity and Powers.Companies incorporated under the 2006 Act have separate legal personality and perpetual existence. In addition, such companies have unlimited capacity to carry on or undertake any business or activity; this is so regardless of corporate benefit and regardless of whether or not it is in the best interests of the company to do so.
The 2006 Act specifically states that no corporate act is beyond the capacity of a company incorporated under the 2006 Act by reason only of the fact that the relevant company has purported to restrict its capacity in any way in its memorandum or articles or otherwise. A person who deals in good faith with a company incorporated under the 2006 Act is entitled to assume that the directors of the company are acting without limitation.
Miscellaneous.In addition to the foregoing, the following other points should be noted in relation to companies incorporated under the 2006 Act:
| (a)· | there are no prohibitions in relation to the company providing financial assistance for the purchase of its own shares;shares provided the directors are satisfied, on reasonable grounds, that the company will satisfy the statutory solvency test (as referred to under “Differences in Corporate Law” below); |
| (b)· | there is no differentiation between public and private companies, but a company may adopt a name ending in the words “Public Limited Company” or “public limited company” or the abbreviation “PLC” or “plc”; |
| (c)· | there are simple share offering/annual report requirements; |
| (d)· | there are reduced compulsory registry filings; |
| (e)· | the statutory accounting requirements are simplified; and |
| (f)· | the 2006 Act allows a company to indemnify and purchase indemnity insurance for its directors. Shareholders should note that the above list is not exhaustive. |
Shareholders should note that the above list is not exhaustive.
Exchange Controls
No foreign exchange control regulations are in existence in the Isle of Man in relation to the exchange or remittance of sterling or any other currency from the Isle of Man and no authorizations, approvals or consents will be required from any authority in the Isle of Man in relation to the exchange and remittance of sterling and any other currency whether awarded by reason of a judgment or otherwise falling due and having been paid in the Isle of Man. By virtue of the Bretton Woods Order in Council, any obligation which involves the currency of any member of the International Monetary Fund and which is contrary to the exchange control regulations of that member may not be enforceable in the Isle of Man courts.
Material Indian Regulations
We are subject to other Indian and internationalInternational regulations which may impact our business. In particular, the following regulations have a significant impact on our business.business:
Notification of Industry Status.
Prior to 1998, the lack of industry status barred legitimate financial institutions and private investors from financing films. However, on May 10, 1998, the Indian film industry was conferred industry status by a press release issued by the Minister of Information and Broadcasting (MIB).
Foreign direct investment (FDI) in Indian media and entertainment industry
Through the liberalization of the foreign exchange regulations, the Government of India has allowed 100 percent FDI in the film sector. For the purposes of FDI, film sector broadly covers film production, exhibition, and distribution, including related services and products. FDI in the sector is permitted without any prior approval from Government of India.
However, according to the recent amendments made by the Government of India in the FDI Policy, any entity situated in or a citizen of any country sharing a land border with India, including but not limited to China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan, shall be required to get a prior approval from the Government of India for making any investment(s) in any entity in India (“Government Route”). This has been done to prevent any opportunistic takeover of any domestic firms amid the ongoing COVID-19 pandemic.
Film Certification.The Cinematograph Act authorizes the Central Board of Film Certification (CBFC), in accordance with the Cinematograph (Certification) Rules, 1983, or the Certification Rules, for sanctioning films for public exhibition in India. Under the Certification Rules, the producer of a film/person exhibiting the film is required to apply in the specified format for certification of such film, with the prescribed fee. The film is examined by an examining committee, which determines whether the film:
| · | is suitable for unrestricted public exhibition;exhibition i.e. fit for “U” certificate; or |
| · | is suitable for unrestricted public exhibition, with a caution that the question as to whether any child below the age of 12 years may be allowed to see the film should be considered by the parents or guardian of such child;child i.e. fit for “UA” certificate; or |
| · | is suitable for public exhibition restricted to adults;adults i.e. fit for “A” certificate; or |
| · | is suitable for public exhibition restricted to members of any profession or any class of persons having regard to the nature, content and theme of the film;film i.e. fit for “S” certificate; or |
| · | is suitable for certification in termsgrant of “U”, “UA” or “A” or “S” certificate, as the abovecase may be, if a specified portion or portions be excised or modified therefrom; or |
| · | that the film is not suitable for unrestricted or restricted public exhibitions, or that the film be refused a certificate. |
A film will not be certified for public exhibition if, in the opinion of the CBFC, the film or any part of it is against the interests of the sovereignty, integrity or security of India, friendly relations with foreign states, public order, decency or morality, or involves defamation or contempt of court or is likely to incite the commission of any offence. Any applicant, if aggrieved by any order of the CBFC either refusing to grant a certificate or granting a certificate that restricts exhibition to certain persons only, may appeal to the Film Certification Appellate Tribunal constituted by the Central Government in India under the Cinematograph Act.
A certificate granted or an order refusing to grant a certificate in respect of any film is published in the Official Gazette of India and is valid throughout India for ten years from the date of grant. Films certified for public exhibition may be re-examined by the CBFC if any complaint is received. Pursuant to grant of a certificate, film advertisements must indicate that the film has been certified for such public exhibition.
The Central Government in India may issue directions to licensees of cinemas generally or to any licensee in particular for the purpose of regulating the exhibition of films, so that scientific films, films intended for educational purposes, films dealing with news and current events, documentary films or indigenous films secure an adequate opportunity of being exhibited.
The Central Government in India, acting through local authorities, may order suspension of exhibition of a film, if it is of the opinion that any film being publicly exhibited is likely to cause a breach of peace. Failure to comply with the Cinematograph Act may attract imprisonment and/or monetary fines.
Separately, the Cable Television Networks Rules, 1994 require that no film or film song, promotional material, trailer or film music video, album or their promotional materials, whether produced in India or abroad, shall be carried through cable services unless it has been certified by the CBFC as suitable for unrestricted public exhibition in India.
AThere are several draft bills proposing to replace and/or amend the Cinematograph Bill, 2013 has been prepared by the Ministry of Information and Broadcasting and isAct which are awaiting approval.
Insolvency and Bankruptcy Code, 2016. An act to consolidate and amend the laws relating to reorganisationreorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisationmaximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.
Financing.In October 2000, the Ministry of Finance, GOI notified the film industry as an industrial concern in terms of the Industrial Development Bank of India Act, 1964, pursuant to which loans and advances to industrial concerns became available to the film industry.
The Reserve Bank of India, or the RBI, by circular dated May 14, 2001, permitted commercial banks to finance up to 50.0% of total production cost of a film. Further, by an RBI circular dated June 8, 2002, bank financing is now available even where total film production cost exceeds approximately $1.6 million. Banks which finance film productions customarily require borrowers to assign the film’s intellectual property or music audio/video/CDs/DVDs/internet, satellite, channel, export/international rights as part of the security for the loan, such that the banks would have a right in negotiation of valuation of such intellectual property rights.
LabourLabor Laws.Depending on the nature of work and number of workers employed at any workplace, various labourlabor related legislations may apply. Certain significant provisions of such labourlabor related laws are provided below.
herewith. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, or the EPF Act, applies to factories employing 20 or more employees and such other establishments as notified by the Government from time to time. It requires all such establishments to be registered with the relevant Provident Fund Commissioner. Also, such employers are required to contribute to the employees’ provident fund the prescribed percentage of the basic wages and certain cash benefits payable to employees. Employees are also required to make equal contributions to the fund. A monthly return is required to be submitted to the relevant Provident Fund Commissioner in addition to the maintenance of registers by employers.
Competition Act.The Competition Act, 2002, or the Competition Act, prohibits practices that could have an appreciable adverse effect on competition in India. Under the Competition Act, any arrangement, understanding or action, whether formal or informal, which causes or is likely to cause an appreciable adverse effect on competition in India is void. Any agreement among competitors which directly or indirectly determines purchase or sale prices, results in bid rigging or collusive bidding, limits or controls production, supply, markets, technical development, investment or the provision of services, or shares the market or source of production or provision of services in any manner, including by way of allocation of geographical area or types of goods or services or number of customers in the market, is presumed to have an appreciable adverse effect on competition. Further, the Competition Act prohibits the abuse of a dominant position by any enterprise either directly or indirectly, including by way of unfair or discriminatory pricing or conditions in the sale of goods or services, using a dominant position in one relevant market to enter into, or protect, another relevant market, and denial of market access. Further, acquisitions, mergers and amalgamations which exceed certain revenue and asset thresholds require prior approval by the Competition Commission of India.
Under the Competition Act, the Competition Commission has powers to pass directions/impose penalties in cases of anti-competitive agreements, abuse of dominant position and combinations which are not in compliance with the Competition Act.
If there is a continuing non-compliance the person may be punishable with imprisonment for a term extending up to three years or with a fine or with both as the Chief Metropolitan Magistrate, Delhi may deem fit. In case of offences committed by companies, the persons responsible to the company for the conduct of the business of the company will be liable under the Competition Act, except when the offense was committed without their knowledge or when they had exercised due diligence to prevent it. Where the contravention committed by the company took place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such person is liable to be punished.
The Competition Act also provides that the Competition Commission has the jurisdiction to inquire into and pass orders in relation to an anti-competitive agreement, abuse of dominant position or a combination, which even though entered into, arising or taking place outside India or signed between one or more non-Indian parties, but causes or is likely to cause an appreciable adverse effect in the relevant market in India. The Competition Act was amended in 2009, and cases which were pending before the Monopolies and Restrictive Trade Practice Commission were transferred to the Competition Commission of India.
Indian Takeover Regulations.The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 came into effect on October 22, 2011, which was last amended on March 06,August 14, 2017, superseding the earlier takeover regulations. The Takeover Regulations provide the process, timing and disclosure requirements for a public announcement of an open offer in India and the applicable pricing norms.
Pursuant to the Takeover Regulations, a requirement to make a mandatory open offer by an “acquirer” (together with persons acting in concert with it) for at least 26% of the total shares of the Indian listed company, to all shareholders of such company (excluding the acquirer, persons acting in concert with it and the parties to any underlying agreement including persons deemed to be acting in concert) is triggered, subject to certain exemptions including transfers between promoters, if an acquirer acquires shares or voting rights in the Indian listed company, which together with its existing holdings and those of any persons acting in concert with him entitle the acquirer and persons acting in concert to exercise 25% or more of the voting rights in the Indian listed company; or an acquirer that holds between 25% and the maximum permissible non-public shareholding of an Indian listed company, acquires additional voting rights of more than 5% during a financial year; or an acquirer acquires, directly or indirectly, control over an Indian listed company, irrespective of acquisition of shares or voting rights in the Indian listed company.
An acquisition of shares or voting rights in, or control over, any company that would enable a person to exercise or direct the exercise of such percentage of voting rights in, or control over, an Indian listed company, the acquisition of which would otherwise attract the obligation to make an open offer under the Takeover Regulations will also trigger a mandatory open offer under the Takeover Regulations. Where the primary target of the acquisition is an overseas parent of an Indian listed company and the Indian listed company represents over 80% of a specified materiality parameter (including asset value, revenue or market capitalization) of the overseas parent company, such acquisition would be treated as a “direct acquisition” of the Indian listed company.
Indian Companies Act.A majority of the provisions of the Companies Act, 2013 are now in effect,read with Companies (Amendment) Act 2017, bringing into effect significant changes to the Indian company law framework, such as in the provisions related to issue of capital, disclosures, corporate governance norms, audit matters, and related party transactions. The Companies Act, 2013 has also introduced additional requirements which do not have equivalents under the Companies Act, 1956, including the introduction of a provision allowing the initiation of class action suits in India against companies by shareholders or depositors, a restriction on investment by an Indian company through more than two layers of subsidiary investment companies (subject to certain permitted exceptions), and prohibitions on advances to directors. Indian companies with net worth, turnover or net profits of INR 5,000 million or higher during any financial year are also required to spend 2.0%2% of their average net profits during the three immediately preceding financial years on activities pertaining to corporate social responsibility. Further, the Companies Act, 2013 imposes greater monetary and other liability on Indian companies, their directors and officers in default, for any non-compliance.
Material U.S. Regulations
U.S. Employment Laws
In the U.S., employment law covers all aspects of the employer-employee relationship and workplace activity. Federal, state and local laws often differ, with any federal restrictions generally taking precedence over state or local regulations. Among the aspects of the employer-employee relationship subject to applicable law are hours of work, minimum wages, overtime, immigration, equal employment opportunity, equal pay, employee benefits, mass layoffs, leave entitlements, collective bargaining, occupational safety and health, workers compensation, unemployment benefits, and affirmative action. Key federal agencies responsible for the enforcement of these laws include the Department of Labor, the Equal Employment Opportunity Commission, the National Labor Relations Board, and the Immigrations and Customs Enforcement division of the Department of Homeland Security. Among the major such laws are:
| · | Occupational Health and Safety. The U.S. Occupational Safety and Health Act (“OSHA”) and the regulations adopted pursuant to OSHA, and similar statutes and regulations adopted by the states and other local governments that concern occupational health and safety, require employers to, among other things, (i) provide a workplace that is free from serious recognized hazards, (ii) comply with applicable safety standards and regulations, (iii) make certain that employees have and use safe tools and equipment, (iv) provide safety and health training and develop operating procedures that facilitate employee compliance with safety and health requirements, (v) keep records of work-related injuries and illnesses, and (vi) obtain information, keep records and develop a written program regarding hazardous chemicals to which its employees are exposed and provide such information to employees as well as the relevant government authorities upon request. |
| · | Collective Bargaining Laws. The National Labor Relations Act (“NLRA”) states and defines the rights of employees to organize and to bargain collectively with their employers through representatives of their own choosing or not to do so. To ensure that employees can freely choose their own representatives for the purpose of collective bargaining, or choose not to be represented, the NLRA establishes a procedure by which they can exercise their choice at a secret-ballot election conducted by the National Labor Relations Board. Further, to protect the rights of employees and employers, and to prevent labor disputes that would adversely affect the rights of the public, the NLRA defines and prohibits certain practices of employers and unions as unfair labor practices. |
| · | Wage and Hour Laws. The Fair Labor Standards Act (“FLSA”) establishes standards for minimum wages, overtime, child labor, and employer recordkeeping. FLSA does not limit an employee’s work hours, but it does require covered workers who work more than forty (40) hours in a week to be paid at least 1 1/2 times the regular rate of pay for hours worked in excess of 40 hours. The FLSA also sets minimum wage levels, restrictions on the engagement of minors, and related matters. Many U.S. states, including California, set their own levels of minimum wage and overtime that exceed the federal standard. For example, covered employees in California are entitled to overtime pay for all hours worked in excess of eight (8) in a day. |
| · | U.S. Employment Eligibility Verification Laws. The Immigration Reform and Control Act prohibits U.S. employers from hiring or referring individuals who are not authorized to work in the U.S. Employers are also required to thoroughly check the identity and employment authorization of employees. |
Differences in Corporate Law
The following chart summarizes certain material differences between the rights of holders of our A ordinary shares and the rights of holders of the common stock of a typical corporation incorporated under the laws of the State of Delaware that result from differences in governing documents and the laws of Isle of Man and Delaware.
| | | Isle of Man Law | | Delaware Law |
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| General Meetings | | The 2006 Act does not require a company to hold an annual general meeting of its shareholders. Subject to anything contrary in the company’s memorandum and articles of association, a meeting of shareholders can be held at such time and in such place, within or outside the Isle of Man, as the convener of the meeting considers appropriate. Under the 2006 Act, the directors of a company (or any other person permitted by the company’s memorandum and articles of association) may convene a meeting of the shareholders of a company. Further, the directors of a company must call a meeting to consider a resolution requested in writing by shareholders holding at least 10% of the company’s voting rights. The Isle of Man Court may order a meeting of members to be held and to be conducted in such manner as the Court orders, among other things, if it is of the opinion that it is in the interests of the shareholders of the company that a meeting of shareholders is held. Our articles require our Board of Directors to convene annually a general meeting of the shareholders at such time and place, and to consider such business, as the Board of Directors may determine. | | Shareholders of a Delaware corporation generally do not have the right to call meetings of shareholders unless that right is granted in the certificate of incorporation or bylaws. However, if a corporation fails to hold its annual meeting within a period of 30 days after the date designated for the annual meeting, or if no date has been designated for a period of 13 months after its last annual meeting, the Delaware Court of Chancery may order a meeting to be held upon the application of a shareholder. |
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| Quorum Requirements for General Meetings | | The 2006 Act provides that a quorum at a general meeting of shareholders may be fixed by the articles. Our articles provide a quorum required for any general meeting consists of shareholders holding at least 30% of the issued share capital of the Company. | | A Delaware corporation’s certificate of incorporation or bylaws can specify the number of shares that constitute the quorum required to conduct business at a meeting, provided that in no event will a quorum consist of less than one-third of the shares entitled to vote at a meeting. |
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| Board of Directors | | Our articles provide that unless and until otherwise determined by our Board of Directors, the number of directors will not be less than three or more than twelve, with the exact number to be set from time to time by the Board of Directors. While there is no concept of dividing a boardBoard of directorsDirectors into classes under Isle of Man law, there is nothing to prohibit a company from doing so. Consequently, under our articles, our Board of Directors is divided into three classes, each as nearly equal in number as possible and at each annual general meeting, each of the directors of the relevant class the term of which shall then expire shall be eligible for re-election to the Board of Directors for a period of three years. | | A typical certificate of incorporation and bylaws would provide that the number of directors on the boardBoard of directorsDirectors will be fixed from time to time by a vote of the majority of the authorized directors. Under Delaware law, a boardBoard of directorsDirectors can be divided into up to three classes. |
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| | | Isle of Man Law | | Delaware Law |
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| Removal of Directors | | Under Isle of Man law, notwithstanding anything in the memorandum or articles or in any agreement between a company and its directors, a director may be removed from office by way of shareholder resolution. Such resolution may only be passed (a) at a meeting of the shareholders called for such purposes including the removal of the director or (b) by a written resolution consented to by a shareholder or shareholders holding at least 75% of the voting rights. The 2006 Act provides that a director may be removed from office by a resolution of the directors if the directors are expressly given such authority in the memorandum or articles, but our articles do not provide this authority. | | A typical certificate of incorporation and bylaws provide that, subject to the rights of holders of any preferred stock, directors may be removed at any time by the affirmative vote of the holders of at least a majority, or in some instances a supermajority, of the voting power of all of the then outstanding shares entitled to vote generally in the election of directors, voting together as a single class. A certificate of incorporation could also provide that such a right is only exercisable when a director is being removed for cause (removal of a director only for cause is the default rule in the case of a classified board). |
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| Vacancy of Directors | | Subject to any contrary provisions in a company’s memorandum or articles of association, a person may be appointed as a director (either to fill a vacancy or as an additional director) by a resolution of the directors or by a resolution of the shareholders. Our articles provide that any vacancy resulting from, among other things, removal, resignation, conviction and disqualification, may be filled by another person willing to act as a director by way of shareholder resolution or resolution of our Board of Directors. Any director appointed by the Board of Directors will hold office only until the next annual general meeting of the Company, when he will be subject to retirement or re-election. | | A typical certificate of incorporation and bylaws provide that, subject to the rights of the holders of any preferred stock, any vacancy, whether arising through death, resignation, retirement, disqualification, removal, an increase in the number of directors or any other reason, may be filled by a majority vote of the remaining directors, even if such directors remaining in office constitute less than a quorum, or by the sole remaining director. Any newly elected director usually holds office for the remainder of the full term expiring at the annual meeting of shareholders at which the term of the class of directors to which the newly elected director has been elected expires. |
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Interested Director
Transactions | | Under Isle of Man law, as soon as a director becomes aware of the fact that he is interested in a transaction entered into or to be entered into by the company, he must disclose this interest to the boardBoard of directors.Directors. Our articles provide that no director may participate in approval of a transaction in which he or she is interested. | | Under Delaware law, some contracts or transactions in which one or more of a Delaware corporation’s directors has an interest are not void or voidable because of such interest provided that some conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. For an interested director transaction not to be voided, either the shareholders or the boardBoard of directorsDirectors must approve in good faith any such contract or transaction after full disclosure of the material facts or the contract or transaction must have been “fair” as to the corporation at the time it was approved. If board or committee approval is sought, the contract or transaction must be approved in good faith by a majority of disinterested directors after full disclosure of material facts, even though less than a majority of a quorum. |
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| | | Isle of Man Law | | Delaware Law |
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| Cumulative Voting | | There is no concept of cumulative voting under Isle of Man law. | | Delaware law does not require that a Delaware corporation provide for cumulative voting. However, the certificate of incorporation of a Delaware corporation may provide that shareholders of any class or classes or of any series may vote cumulatively either at all elections or at elections under specified circumstances. |
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Shareholder Action
Without a Meeting | | A written resolution will be passed if it is consented to in writing by shareholders holding in excess of 50% or 75% in the case of a special resolution of the rights to vote on such resolution. The consent may be in the form of counterparts, and our articles provide that, in such circumstances, the resolution takes effect on the earliest date upon which shareholders holding a sufficient number of votes to constitute a resolution of shareholders have consented to the resolution in writing. Any holder of B ordinary shares consenting to a resolution in writing is first required to certify that it is a permitted holder as defined in our articles. If any written resolution of the shareholders of the company is adopted otherwise than by unanimous written consent, a copy of such resolution must be sent to all shareholders not consenting to such resolution upon it taking effect. | | Unless otherwise specified in a Delaware corporation’s certificate of incorporation, any action required or permitted to be taken by shareholders at an annual or special meeting may be taken by shareholders without a meeting, without notice and without a vote, if consents, in writing, setting forth the action, are signed by shareholders with not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote were present and voted. All consents must be dated. No consent is effective unless, within 60 days of the earliest dated consent delivered to the corporation, written consents signed by a sufficient number of holders to take the action are delivered to the corporation. |
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Business
Combinations | | Under Isle of Man law, a merger or consolidation must be approved by, among other things, the directors of the company and by shareholders holding at least 75% of the voting rights. A scheme of arrangement (which includes, among other things, a sale or transfer of the assets of the company) must be approved by, among other things, the directors of the company, a 75% shareholder majority and also requires the sanction of the court. | | With certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a Delaware corporation must be approved by the boardBoard of directorsDirectors and a majority (unless the certificate of incorporation requires a higher percentage) of the outstanding shares entitled to vote thereon. |
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| | Isle of Man Law | | Delaware Law |
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Interested
Shareholders | | There are no equivalent provisions under Isle of Man law relating to interested shareholders. | | Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in specified corporate transactions (such as mergers, stock and asset sales and loans) with an “interested shareholder” for three years following the time that the shareholder becomes an interested shareholder. Subject to specified exceptions, an “interested shareholder” is a person or group that owns 15% or more of the corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or more of the voting stock at any time within the previous three years. |
| | Isle of Man Law | | Delaware Law |
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| | | | | A Delaware corporation may elect to “opt out” of, and not be governed by, Section 203 through a provision in either its original certificate of incorporation or its bylaws, or an amendment to its original certificate or bylaws that was approved by majority shareholder vote. With a limited exception, this amendment would not become effective until 12 months following its adoption. |
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Limitations on Personal
Liability of Directors | | Under Isle of Man law, a director who vacates office remains liable under any provisions of the 2006 Act that impose liabilities on a director in respect of any acts or omissions or decisions made while that person was a director. | | A Delaware corporation may include in its certificate of incorporation provisions limiting the personal liability of its directors to the corporation or its shareholders for monetary damages for many types of breach of fiduciary duty. However, these provisions may not limit liability for any breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, the authorization of unlawful dividends, shares repurchases or shares barring redemptions, or any transaction from which a director derived an improper personal benefit. A typical certificate of incorporation would also provide that if Delaware law is amended so as to allow further elimination of, or limitations on, director liability, then the liability of directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended. However, these provisions would not be likely to bar claims arising under U.S. federal securities laws. |
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| | Isle of Man Law | | Delaware Law |
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Indemnification of
Directors and Officers | | A company may indemnify against all expenses, any person who is or was a party, or is threatened to be made a party to any civil, criminal, administrative or investigative proceedings (threatened, pending or completed), by reason of the fact that the person is or was a director of the company, or who is or was, at the request of the company, serving as a director or acting for another company. Any indemnity given will be void and of no effect unless such person acted honestly and in good faith and in what such person believed to be in the best interests of the company and, in the case of criminal proceedings, had no reasonable cause to believe that the conduct of such person was unlawful. | | Under Delaware law, subject to specified limitations in the case of derivative suits brought by a corporation’s shareholders in its name, a corporation may indemnify any person who is made a party to any third partythird-party action, suit or proceeding on account of being a director, officer, employee or agent of the corporation (or was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of directors who were not parties to the suit or proceeding (even though less than a quorum), if the person: |
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| | Isle of Man Law | | Delaware Law |
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| | | | | · acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or, in some circumstances, at least not opposed to its best interests; and · in a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. Delaware law permits indemnification by a corporation under similar circumstances for expenses (including attorneys’ fees) actually and reasonably incurred by such persons in connection with the defense or settlement of a derivative action or suit, except that no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless the Delaware Court of Chancery or the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for the expenses which the court deems to be proper. To the extent a director, officer, employee or agent is successful in the defense of such an action, suit or proceeding, the corporation is required by Delaware law to indemnify such person for reasonable expenses incurred thereby. Expenses (including attorneys’ fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that that person is not entitled to be so indemnified. |
| | Isle of Man Law | | Delaware Law |
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| Appraisal Rights | | There is no concept of appraisal rights under Isle of Man law. | | A shareholder of a Delaware corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive cash in the amount of the fair value of the shares held by that shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction. |
| | Isle of Man Law | | Delaware Law |
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| Shareholder Suits | | The Isle of Man Court may, on application of a shareholder, permit that shareholder to bring proceedings in the name and on behalf of the company (including intervening in proceedings to which the company is a party). In determining whether or not leave is to be granted, the Isle of Man Court will take into account such things as whether the shareholder is acting in good faith and whether the Isle of Man Court itself is satisfied that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. Under Isle of Man law, a shareholder may bring an action against the company for a breach of a duty owed by the company to such shareholder in that capacity. | | Under Delaware law, a shareholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation, including for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. An individual also may commence a class action suit on behalf of himself or herself and other similarly situated shareholders where the requirements for maintaining a class action under Delaware law have been met. A person may institute and maintain such a suit only if such person was a shareholder at the time of the transaction which is the subject of the suit or his or her shares thereafter devolved upon him or her by operation of law. Additionally, under established Delaware case law, the plaintiff generally must be a shareholder not only at the time of the transaction which is the subject of the suit, but also through the duration of the derivative suit. Delaware law also requires that the derivative plaintiff make a demand on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff, unless such demand would be futile. In such derivative and class actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action. |
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Inspection of Books and
Records | | Upon giving written notice, a shareholder is entitled to inspect and to make copies of (or obtain extracts of) the memorandum and articles and any of the registers of shareholders, directors and charges. A shareholder may only inspect the accounting records (and make copies or take extracts thereof) in certain circumstances. Our articles provide that no shareholder has any right to inspect any accounting record or other document of the company unless he is authorized to do so by statute, by order of the Isle of Man Court, by our Board of Directors or by shareholder resolution. | | All shareholders of a Delaware corporation have the right, upon written demand, to inspect or obtain copies of the corporation’s shares ledger and its other books and records for any purpose reasonably related to such person’s interest as a shareholder. |
| | | Isle of Man Law | | Delaware Law |
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Amendment of Governing
Documents | | Under Isle of Man law, the shareholders of a company may, by resolution, amend the memorandum and articles of the company. The memorandum and articles of a company may authorize the directors to amend the memorandum and articles, but our memorandum and articles do not contain any such power. Our memorandum of association provides that our memorandum of association and articles of association may be amended by a special resolution of shareholders. | | Under Delaware law, amendments to a corporation’s certificate of incorporation require the approval of shareholders holding a majority of the outstanding shares entitled to vote on the amendment. If a class vote on the amendment is required by Delaware law, a majority of the outstanding stock of the class is required, unless a greater proportion is specified in the certificate of incorporation or by other provisions of Delaware law. Under Delaware law, the boardBoard of directorsDirectors may amend bylaws if so authorized in the certificate of incorporation. The shareholders of a Delaware corporation also have the power to amend bylaws. |
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Dividends and
Repurchases | | The 2006 Act contains a statutory solvency test. A company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of its business and where the value of the company’s assets exceeds the value of its liabilities. Subject to the satisfaction of the solvency test and any contrary provision contained in a company’s articles, a company may, by a resolution of the directors, declare and pay dividends. Our articles provide that where the solvency test has been satisfied, our Board of Directors may declare and pay dividends (including interim dividends) out of our profits to shareholders according to their respective rights and interests in the profits of the company. Under Isle of Man law, a company may purchase, redeem or otherwise acquire its own shares for any consideration, subject to, among other things, satisfaction of the solvency test. | | Delaware law permits a corporation to declare and pay dividends out of statutory surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. Under Delaware law, any corporation may purchase or redeem its own shares, except that generally it may not purchase or redeem those shares if the capital of the corporation is impaired at the time or would become impaired as a result of the redemption. A corporation may, however, purchase or redeem capital shares that are entitled upon any distribution of its assets to a preference over another class or series of its shares if the shares are to be retired and the capital reduced. |
Changes in Capital
The conditions in our articles of association governing changes in capital are not more stringent than as required under the 2006 Act. Our articles of association provide that our directors may, by resolution, alter our share capital. The 2006 Act subjects any reduction of share capital to the statutory solvency test. The 2006 Act provides that a company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of the company’s business and where the value of the company’s assets exceeds the value of its liabilities.
C. Organizational Structure
We conduct our global operations through our Indian and international subsidiaries, including STX our majority-owned subsidiary Eros International Media Limited, or Eros India, a public company incorporated in India and listed on the BSE Limited and National Stock Exchange of India Limited, or the Indian Stock Exchanges. Our agent for service of process in the United StatesU.S. is Prem Parameswaran,Noah Fogelson, located at 550 County3900 West Alameda Avenue, Secaucus, New Jersey.
32nd Floor, Burbank, California 91505.
As of June 30, 2017,October 23, 2020, the Founders Group holds approximately 43.93%12.9% of our issued share capital, which comprise all of our B ordinary shares and certain5,080,188 A ordinary shares. Beech Investments Limited, a company incorporated in the Isle of Man, is owned by discretionary trusts that include Eros director Kishore Lulla as a potential beneficiary. Ganesh Holdings Limited is a wholly-owned subsidiary of the Ganesh Trust of which Vijay Ahuja and his family are beneficiaries.
The following diagram summarizes the corporate structure of our consolidated group of companies as of June 30, 2017:October 23, 2020:
Eros Organizational Chart (as of June 30, 2017)
(a) | Eros India holds 100% of each of its Indian subsidiaries other than Big Screen Entertainment Private Limited (India) and Colour Yellow Productions Private Limited (India), Ayngaran International Media Private Limited, Ayngaran Anak Media Private Limited and Eros International Distribution LLP. |
(b) | Ayngaran International Limited (Isle of Man) holds 51% of Ayngaran Anak Media Private Limited (India) and 100% of each of its other subsidiaries |
D. Property Plant and Equipment
Our properties consist primarily of studios, office facilities, warehouses and distribution offices, most of which are located in Mumbai, India.India and Burbank California. We own our corporate and registered offices in Mumbai and our warehouse in England and rent our remaining properties in India. FiveIndia, the United Arab Emirates and the United States. Four of these leased properties are owned by members of the Lulla family. The leases with the Lulla family were entered into at what we believe were market rates. See “Part I. — I—Item 7. Major Shareholders and Related Party Transactions” and “Part I — I—Item 3. Key Information — Information—D. Risk Factors. Factors—We have entered into certain related party transactions and may continue to rely on our founders for certain key development and support activities.” We also own or lease eight properties in the United Kingdom, the United States and Dubai in connection with our international operations outside of India.activities” Property plant and equipment with a net carrying amount of approximately $7.8$8.2 million (2016: $10.1(2019: $6.7 million) have been pledged to secure borrowings, and we currently do not have any significant plans to construct new properties or expand or improve our existing properties.
The following table provides detail regarding our properties in India and globally.
| Location | Size | Size | | Primary Use | | Leased / Owned |
| Mumbai, India | | 13,992 sq. ft. | | Corporate Office | | Owned |
| Mumbai, India | | 2,750 sq. ft. | | Studio Premises | | Leased(1)Leased(1) |
| Mumbai, India | | 8,094 sq. ft. | | Executive Accommodation | | Leased(1)Leased(1) |
| Mumbai, India | | 17,120 sq. ft. | | Office | | Leased(1)Leased(1) |
| Mumbai, India | | 1,000 sq. ft. | | Film Negatives Warehouse | | Leased |
| Mumbai, India | | 120100 sq. ft. | | Film Prints Warehouse | | Leased |
| Mumbai, India | | 2,750 sq. ft. | | Corporate | Owned |
| Mumbai, India | Owned900 sq. ft. | Film Prints Warehouse | Leased |
| Mumbai, India | 1200 sq. ft. | Film Prints Warehouse | Leased |
| Delhi, India | | 600 sq. ft. | | Film Distribution Office | | Leased |
Kolkata, India | | 640 sq. ft. | | Film Distribution Office | | Leased |
| Punjab, India | | 438 sq. ft. | | Film Distribution Office | | Leased |
| Bihar, India | | 1,130633 sq. ft | | Film Distribution Office | | Leased |
Kerala,Chennai, India | 841 sq. ft. | 1,800 sq. ft | | Film DistributionBranch Office | | Leased |
Kerala, India | | 1,500 sq. ft | | Film Distribution Office | | Leased |
| Mumbai, India | | 6004,610 sq. ft. | Executive Accommodation | DVD warehouse | | Leased |
Mumbai, India | | 1,600 sq. ft. | | Warehouse | | Leased |
Chennai, India | | 8,942 sq. ft. | | Corporate Office | | LeasedLeased(1) |
| Delhi, India | | 3,915994 sq. ft. | | Branch Office | | Leased |
Mumbai, India | | 750 sq. ft. | | Branch Office | | Leased |
Bangalore, India | | 5,100 sq. ft. | | Branch Office | | Leased |
| Dubai, United Arab Emirates | | 5362,473 sq. ft. | | Corporate Office | | Leased |
| Dubai, United Arab Emirates | | 7472,473 sq. ft. | ft | Corporate Office | Leased |
| London, England | Leased7,549 sq. ft. | DVD Warehouse | Owned |
| Secaucus, New Jersey, U.S. | | 10,000900 sq. ft. | | Corporate Office | | Leased(1) |
London, England | | 7,549 sq. ft. | | DVD Warehouse | | Owned |
London, England | | 4,506 sq. ft. | | Corporate Office | | Leased(1) |
Fujairah, United Arab Emirates | | 676 sq. ft. | | Corporate Office | | Leased |
Fujairah, United Arab Emirates | | 676 sq. ft. | | Corporate Office | | Leased |
| San Francisco, California, U.S. | | 2,315 sq. ft. | Digital Team | Digital teamLeased |
| Burbank, California, U.S. | 18,980 sq. ft | Corporate Office | Leased |
| Burbank, California, U.S. | 19,097 sq. ft | Corporate Office | Leased |
| Los Angeles, California, U.S. | 18,500 sq. ft | Post-Production Facility | Leased |
| London, England | 2,857 sq. ft | Corporate Office | Leased |
| London, England | 1,578 sq. ft | Corporate Office | Leased |
(1) Leased directly or indirectly from a member of the Lulla family.
(1) | Leased directly or indirectly from a member of the Lulla family. |
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The Merger was accounted for as a business combination using the acquisition method of accounting under the provisions of ASC 805, with STX selected as the accounting acquirer under this guidance. Consequently, our historical financial statements and the financial information discussed in this Item 5 are those of STX.
A. Operating ResultsPrior to the Merger, STX’s fiscal year ends on September 30 of each year. For the purpose of this Item 5, unless the context otherwise requires, references to 2017, 2018 and 2019 refer to the fiscal years ended September 30 of such years. Unless the context otherwise requires, financial information described in this Item 5 is described on a consolidated basis.
You should read the information contained in the table below in conjunction with our audited consolidated financial statementsfollowing discussion and the related notes included elsewhere in this annual report. The tables set forth below with our resultsanalysis of operations and period over period comparisons are not adjusted for the fluctuations in exchange rates described in “Part I — Item 3. Key Information — A. Selected Financial Data.”
Outlook
Our primary revenue streams are derived from three channels: theatrical, television syndication and digital and ancillary. For the fiscal year ended March 31, 2017, the aggregate revenues from theatrical, television syndication and digital and ancillary were $101.0 million, $88.0 million and $64 million respectively, compared to $138.4 million, $72.1 million and $63.9 million, respectively, for the fiscal year ended March 31, 2016.
The contribution from these three distribution channels can fluctuate year over year based on, among other things, our mix of films and budget levels, and the size of our television syndication deals.
The largest component of our revenue is attributable to the theatrical distribution of our films in India. We anticipate that as additional multiplex theaters are built in India, there will be increased opportunities to exploit our film content theatrically. We expect that this multiplex theater growth coupled with the rise in ticket prices and the anticipated increase in the number of high budget Hindi and Tamil films in our slate will result in increased revenue. In addition, in India, we cannot predict the share of theatrical revenue we will receive, as we currently negotiate film-by-film and exhibitor-by-exhibitor. We set up Trinity Pictures in fiscal year 2015 as a dedicated franchise studio that develops valuable intellectual property in the form of franchise films. With a focus on creating intellectual property in-house along with delivering wholesome entertainment to audiences, we have entered into key co-production partnerships with producers and directors. Colour Yellow Production, a subsidiary of Eros India with Anand L Rai has announced film releases across budgets, genres and languages. This co-production model along with our in-house production franchise ‘Trinity’ gives us better visibility on actual cost of production ensuring capped budgets and exclusive distribution rights, typically for at least 20 years.
We believe China to be a significant market opportunity for Indian films. As per PwC Global Entertainment & Media Outlook, 2016-2020, China is expected to overtake the US box office next year. China box office grew 49% in 2015 to $6.3 billion and is expected to grow to $10.3 billion next year. In comparison the US box office is expected to contract from $10.3 billion to $10 billion next year. Hollywood’s share of the Chinese box office has slipped to 38.4% in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screens and by end of 2015 that number grew to almost 32,000. Overall China is propelling Asia-Pacific’s growth (including Indonesia, Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion by 2020 and this continues to emerge as an important growth markets for Indian films. We are exploring the release of our films in bigger markets such as China. In fiscal year 2017, a Hindi FilmDangal was released in China across 9,000 screens and grossed about $180 million at the box office.
Increasing the number of Tamil and Telugu global releases in our film mix allows us to expand our audience within significant regional markets. As we expand into other regional languages such as Marathi, Bengali, Punjabi and Malayalam, we may see the composition of our film mix changing over time in order to allow us to successfully scale our business around Hindi as well as regional language content. At the same time, the distribution window for the theatrical release of films, and the window between the theatrical release and distribution in other channels, have each been compressing in recent years and may continue to change. In fiscal year 2017, we released 18 Tamil and Telugu films as compared to 21 films in fiscal year 2016.
A substantial portion of our revenue is also derived from television syndication. Because of increased demand for Indian film content on television in India as the number of DTH subscribers increase and the cable industry migrates toward digital technology, we expect a significant increase in demand for premium content such as movies and sports and a resultant increase in licensing fees payable to us by satellite and cable television operators. However, as competitors with compelling products, including international content providers, expand their content offerings in India, we expect competition for television syndication revenues to increase, and license fees for such content could decrease.
Currently, the remainder of our revenue is derived from digital distribution and ancillary products and services. With a significant portion of the Indian and international population moving toward adoption of digital technology, we are increasing our focus on providing on-demand services. We have expanded our digital presence with the launch of our on-demand entertainment portal Eros Now, which leverages our film and music libraries by providing ad-supported and subscription-based streaming of film and music content via internet-enabled devices. Eros Now has been increasingly focused on delivering product features, being truly platform agnostic and monetizing it’s growing registered user base. We also have an ad-supported YouTube portal site on Google that hosts an extensive collection of clips of our content. Accordingly, we anticipate that our revenue and costs associated with digital distribution are likely to increase over time. Ancillary revenues also include all other revenues that are not theatrical or television, including licensing to airlines and cable operators.
We anticipate that our costs associated with the co-production and acquisition of film content are likely to increase over time as we continue to focus more on investing in high budget Hindi films as well as high budget Tamil and Telugu films. In addition, increased competition in the Indian film entertainment industry, including from international film entertainment providers such as Disney, Twentieth Century Fox and Viacom, is likely to cause the cost of film production and acquisition to increase. In fiscal year 2017, we invested $173.5 million in film content, and in fiscal year 2018, we expect to invest approximately $180 to $200 million in film content.
We anticipate our administrative costs will increase as we expand our management team, especially to support the expansion of our digital businesses. In addition, our administrative costs will increase due to the costs associated with being a U.S.-listed public company. Although aggregate spending will increase, we do not anticipate that this will result in a material change in aggregate administrative costs as a percentage of revenue.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with IFRS as issued by the IASB, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management considers the following accounting policies to be critical because they are important to our financial condition and results of operations and require significant judgment and estimates on the part of management in their application. The development and selection of these critical accounting policies have been determined by our management and the related disclosures have been reviewedconjunction with the Audit Committee of our board of directors. For a summary of all our accounting policies, see Note 3 to our audited Consolidated Financial Statements appearing elsewhere in this annual report.
Use of estimates
Estimates and judgments are evaluated on a regular basis and are based on historical experience and other factors, such as expectations of future events that are believed to be reasonable under the present circumstances.
The Group makes estimates and assumptions concerning the future. These estimates, by definition, will rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are highlighted below:
Revenue
Revenue is recognized, net of sales related taxes, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, the product is delivered or services have been rendered and collectability is reasonably assured. The Group considers the terms of each arrangement to determine the appropriate accounting treatment.
The following additional criteria apply in respect of various revenue streams within filmed entertainment:
| · | Theatrical — Contracted minimum guarantees are recognized on the theatrical release date. The Group’s share of box office receipts in excess of the minimum guarantee is recognized at the point they are notified to the Group. |
| · | Television —License fees received in advance which do not meet all the above criteria are included in deferred income until the above criteria is met. In arrangements for catalogue sales the Company recognizes revenue if the recognition criteria set forth above is met, including whether a valid sales contract exists, all films are delivered, the Company is reasonably certain on collectability, and the Company’s contractual obligations are complete, even if the arrangement provides for a deferred payment term of up to a year. |
| · | Digital - Digital and ancillary media revenues are recognized at the earlier of when the content is accessed or declared. |
| · | Other— DVD, CD and video distribution revenue is recognized on the date the product is delivered or if licensed in line with the above criteria. Visual effects, production and other fees for services rendered by the Group and overhead recharges are recognized in the period in which they are earned and in certain cases, the stage of production is used to determine the proportion recognized in the period. |
Goodwill and trade name
The Group tests annually whether goodwill and trade name have suffered impairment, in accordance with its accounting policy. The recoverable amount of cash-generating units has been determined based on value in use calculations. We use market related information and estimates (generally risk adjusted discounted cash flows) to determine value in use. Cash flow projections take into account past experience and represent management’s best estimate about future developments. Key assumptions on which management has based its determination of fair value less costs to sell and value in use includes estimated growth rates, weighted average cost of capital and tax rates. As at March 31, 2017, for assessing impairment of goodwill, value in use is determined using discounted cash flow method. The estimated cash flows for a period of four years were developed using internal forecasts, extrapolated for the fifth year, and a pre-tax discount rate of 17.2% and terminal growth rate of 4%. As of March 31, 2017, for assessing the impairment of the trade name, value in use is determined using the relief from royalty method based on a Royalty rate of 3% on the estimated total revenue for a period of four years, extrapolated for the fifth year, and, a pre-tax discount rate of 22.5% and terminal growth rate of 4%.These estimates, includes the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill and tradename impairment.
Basis of consolidation
The Group evaluates arrangements with special purpose vehicles in accordance with of IFRS 10 – Consolidated Financial Statements to establish how transactions with such entities should be accounted for. This requires a judgment over control such that it is exposed, or has rights, to variable returns and can influence the returns attached to the arrangements.
Intangible assets
The Group is required to identify and assess the useful life of intangible assets and determine their income generating life. Judgment is required in determining this and then providing an amortization rate to match this life as well as considering the recoverability or conversion of advances made in respect of securing film content or the services of talent associated with film production.
Accounting for the film content requires Management’s judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each film or its license period, whichever is the shorter. These judgments are used to determine the amortization of capitalized film content costs. The Group uses a stepped method of amortization on first release film content writing off more in year one which recognizes initial income flows and then the balance over a period of up to nine years. In the case of film content that is acquired by the Group after its initial exploitation, commonly referred to as Library, amortization is spread evenly over the lesser of 10 years or the license period. Management’s policy is based upon factors such as historical performance of similar films, the star power of the lead actors and actresses and others. Management regularly reviews, and revises when necessary, its estimates, which may result in a change in the rate of amortization and/or a write down of the asset to the recoverable amount.
The Group tests annually whether intangible assets have suffered any impairment, in accordance with the accounting policy. These calculations require judgments and estimates to be made, and, as with Goodwill, in the event of an unforeseen event these judgments and assumptions would need to be revised and the value of the intangible assets could be affected. There may be instances where the useful life of an asset is shortened to reflect the uncertainty of its estimated income generating life. This is particularly the case when acquiring assets in markets that the Group has not previously exploited.
Allowances for doubtful accounts
The Group extends credit to customers and other parties in the normal course of business and maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. The Group bases such estimates on historical experience, existing economic conditions, and any specific customer collection issues the Group has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding balance or when the Group determines that the balance will not be collected. The allowance for doubtful accounts as of March 31, 2017 and March 31, 2016, was $2,430 and $1,315 respectively.
Valuation of available-for-sale financial assets
The Group follows the guidance of IAS 39 – Financial Instruments: Recognition and Measurement to determine, where possible, the fair value of its available-for-sale financial assets. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less or more than its cost; the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.
Income taxes and deferred taxation
The Group is subject to income taxes in various jurisdictions. Judgment is required in determining the worldwide provision for income taxes. We are subject to tax assessment in certain jurisdictions. Significant judgment is involved in determining the provision for income taxes including judgment on whether the tax positions are probable of being sustained in tax assessments.
Judgment is also required when determining whether the Group should recognize a deferred tax asset, based on whether Management considers there is sufficient certainty in future earnings to justify the carry forward of assets created by tax losses and tax credits. Judgment is also required when determining whether the Group should recognize a deferred tax liability on undistributed earnings of subsidiaries. Where the ultimate outcome is different than that which was initially recorded there will be an impact on the income tax and deferred tax provisions.
Share-based payments
The Group is required to evaluate the terms to determine whether share based payment is equity settled or cash settled. Judgment is required to do this evaluation. Further, the Group is required to measure the fair value of equity settled transactions with employees at the grant date of the equity instruments. The fair value is determined principally by using the Black Scholes model and/or Monte Carlo Simulation Models which require assumptions regarding risk free interest rates, share price volatility, the expected term and other variables. The basis and assumptions used in these calculations are disclosed within Note 28. The aforementioned inputs entered in to the option valuation model that we use to determine the fair value of our share awards are subjective estimates and changes to these estimates will cause the fair value of our share-based awards and related share- based compensations expense we record to vary.
Business combinations
Business combinations are accounted for using the acquisition method under the provisions of IFRS 3 (Revised), “Business Combinations”.
The cost of an acquisition is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred at the date of acquisition. The cost of the acquisition also includes the fair value of any contingent consideration. Identifiable tangible and intangible assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value on the date of acquisition. Significant estimates are required to be made in determining the value of contingent consideration and intangible assets.
Year Ended March 31, 2017 Compared to Year Ended March 31, 2016
| | | Year ended March 31, | | | | | | As a % of revenue | |
| | | 2017 | | | 2016 | | | Change % | | | 2017 | | | 2016 | |
| | | (in thousands) | | | | | | | | | | |
| Revenue | | $ | 252,994 | | | $ | 274,428 | | | | (7.8% | ) | | | 100.0 | | | | 100.0 | |
| Cost of sales | | | (164,240 | ) | | | (172,764 | ) | | | (4.9% | ) | | | 64.9 | | | | 63.0 | |
| Gross profit | | | 88,754 | | | | 101,664 | | | | (12.7% | ) | | | 35.1 | | | | 37.0 | |
| Administrative costs | | | (63,309 | ) | | | (64,019 | ) | | | (1.1% | ) | | | 25.0 | | | | 23.3 | |
| Operating profit | | | 25,445 | | | | 37,645 | | | | (32.4% | ) | | | 10.1 | | | | 13.7 | |
| Net finance costs | | | (17,156 | ) | | | (8,010 | ) | | | 114.2% | | | | 6.8 | | | | 2.9 | |
| Other gains/(losses) | | | 14,205 | | | | (3,636 | ) | | | 490.7% | | | | 5.6 | | | | 1.3 | |
| Profit before tax | | | 22,494 | | | | 25,999 | | | | (13.5% | ) | | | 8.9 | | | | 9.5 | |
| Income tax expense | | | (11,039 | ) | | | (12,711 | ) | | | (13.2% | ) | | | 4.4 | | | | 4.6 | |
| Net income | | $ | 11,455 | | | $ | 13,288 | | | | (13.8% | ) | | | 4.5 | | | | 4.8 | |
The following table sets forth, for the period indicated, the revenue by region of domicile of Group’s operation.
| | | Year ended March 31, | | | | |
| | | 2017 | | | 2016 | | | Change (%) | |
| | | (in thousands) | | | | |
| India | | $ | 121,966 | | | $ | 159,855 | | | | (23.7% | ) |
| Europe | | | 25,686 | | | | 34,209 | | | | (24.9% | ) |
| North America | | | 2,549 | | | | 14,622 | | | | (82.6% | ) |
| Rest of the world | | | 102,793 | | | | 65,742 | | | | 56.4% | |
| Total revenue | | $ | 252,994 | | | $ | 274,428 | | | | (7.8% | ) |
Revenue
In fiscal year 2017, revenue decreased by 7.8% to $253.0 million, compared to $274.4 million in fiscal year 2016.
In fiscal year 2017, Eros film slate comprised 45 films of which 5 were high budget, 10 were medium budget and 30 were low budget as compared to 63 films in fiscal year 2016, of which 6 was high budget, 16 were medium budget and 41 were low budget.
In fiscal year 2017, the Company’s slate of 45 films comprised 12 Hindi films, 16 Tamil, 2 Telugu films and 15 other regional films as compared to the same period last year where it was slate of 63 films comprised 33 Hindi films, 19 Tamil, 2 Telugu films and 9 other regional films.
In fiscal year 2017, the aggregate theatrical revenue decreased by 27.0% to $101.0 million as compared to $138.4 in fiscal year 2016. The decrease in theatrical revenue reflects the mix of films released in each period as mentioned above. Theatrical revenue in fiscal year 2016 comprised revenue from Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns which were three out of the top four highest grossing films of 2016 compared to 2017 where Housefull 3 was the only top 10 film so far coupled with the negative impact of demonetisation on the Indian film industry since November 2016, which necessitated the Company to defer some of its Hindi and regional releases indefinitely. As a result, in fiscal year 2017, the Company released only 45 films of which only 12 were Hindi compare to 33 Hindi films out of a total 63 films in fiscal year 2016 which explains the decline in theatrical revenues.
In fiscal year 2017, the aggregate revenue from television syndication increased by 22.1% to $88.0 million from $72.1 million in fiscal year 2016. This was due to strong catalogue sales in fiscal year 2017 to offset the weaker new release slate, while in fiscal year 2016, the Company had decided to hold back and sacrifice some catalogue sales which come with longer payment terms to bring about working capital efficiencies.
In fiscal year 2017, the aggregate revenues from digital and ancillary increased by 0.2% to $64 million from $63.9 million in fiscal year 2016 mainly driven by catalogue monetization strategy, revenues from Eros Now and contribution from other ancillary revenues streams.
In fiscal year 2017, revenue from India decreased by 23.7% to $122 million, compared to $159.9 million in fiscal 2016. The decrease was mainly due to lower theatrical revenue on the back of weaker slate mix coupled with rupee demonetisation impact whereas fiscal year 2016 slate comprised of highly acclaimed and commercial successful films such as Bajrangi Bhaijaan, Bajirao Mastani and Tanu Weds Manu. The decrease in overall theatrical revenue was offset by a stronger catalogue revenue contribution.
In fiscal year 2017, revenue from Europe decreased by 24.9% to $25.7 million, compared to $34.2 million in fiscal year 2016. The decrease is on account of lower theatrical revenues due to weaker mix of films partially offset by catalogue sales.
In fiscal year 2017, revenue from North America decreased by 82.9% to $2.5 million, compared to $14.6 million, in fiscal year 2016. The decrease is on account of relatively weaker slate mix coupled with lower catalogue revenues.
In fiscal year 2017, revenue from the rest of the world increased by 56.5% to $102.8 million, compared to $65.7 million in fiscal year 2016, mainly due to increase in catalogue revenues which were muted in last two quarters of fiscal year 2016 to bring-in working capital efficiencies.
Cost of sales
In fiscal year 2017, cost of sales decreased by 4.9% to $164.2 million compared to $172.8 million in fiscal year 2016, which is attributable to decrease in accrual of overages to $1 million in fiscal year 2017 compared to $10.1 million due to an overall weaker slate mix. Further, decrease in publicity and distribution cost by $5.2 million in fiscal year 2017 compared to fiscal year 2016 contributed to the overall decrease in cost of sales which was partially offset by increase in cumulative amortisation costs of film library by $7 million in fiscal year 2017 as compared to fiscal year 2016.
Gross profit
In fiscal year 2017 gross profit decreased by 12.68% to $88.8 million, compared to $101.7 million, in fiscal year 2016. As a percentage of revenues, gross profit margin is 35.1% in the fiscal 2017, compared to 37.0% in fiscal year 2016. The decrease in margin is primarily due to an overall weaker slate mix resulting in overall decrease of theatrical revenue by $37.4 million or 27.0% in fiscal year 2017 as compared to fiscal year 2016, offset by increase in television syndication revenue by $15.9 million or 22.1% and increase in amortization charge by $7.0 million or 5.5% in fiscal 2017.
Adjusted EBITDA (Non-GAAP)
In fiscal year 2017, adjusted EBITDA decreased by 21.4% to $55.7 million, compared to $70.9 million in fiscal year 2016 due to an overall weaker slate mix, reduced theatrical revenues for the films released during the rupee demonetization in India which was partially offset by significant high margin catalogue revenues.
Administrative costs
In fiscal year 2017, administrative costs decreased by 1.1% to $63.3 million compared to $64.0 million for the fiscal year 2016, primarily due to decrease in share based payments, of $23.5 million in fiscal year 2017 as compared to $31 million in fiscal year 20l6which was partially offset by increase in salaries by $4 million in fiscal year 2017 as compared to fiscal year 2016.
Net finance costs
In fiscal year 2017, net finance costs increased by 115% to $17.2 million, compared to $8 million in fiscal year 2016, mainly due to decrease in finance income by $3.3 million in fiscal year 2017 as compared to fiscal year 2016. Further, the finance cost has increased $5.8 million in fiscal year 2017 as compared to fiscal year 2016 primarily due to high cost of debt due to higher debt within India as well as increased interest for the Revolving Credit Facility and decrease in capitalisation of interest on content assets by $2 million in fiscal year 2017 as compared to fiscal year 2016.
Income tax expense
In fiscal year 2017, the provisions for income taxes are $11.0 million, compared to $12.7 million in fiscal year 2016. Effective income tax rates were 31% and 21.1% for fiscal year 2017 and 2016, respectively excluding non-deductible share-based payment charges and gain / loss on fair valuation of derivative liabilities. The change in effective tax rate principally reflects a change in the mix of the profits earned from taxable and non-taxable jurisdictions.
Net income
In fiscal year 2017, net income decreased by 13.5% to 11.5 million compares to 13.3 for the fiscal 2016 as cost of sales remained relatively consistent with fiscal 2016 whereas revenue decreased by 7.8% in fiscal year 2017 as compared to fiscal 2016, which was offset by fair value gain on held for trading derivative liabilities of $10.3 million as compared to loss of $3.6 million in fiscal year 2016.
Trade receivables
In fiscal year 2017, trade receivables increased to $226.8 million from $169.3 million as of March 31, 2016 mainly due to resumption of catalogue sales from April 2016 compared to muted catalogue sales in fiscal year 2016 primarily due to sales held back during last two quarters of fiscal 2016 to achieve working capital efficiencies. Catalogue sales have payment terms extended up to a year. We have collected approximately $ 35 million of fiscal year 2017 trade receivables subsequent to reporting date.
Net debt
In fiscal year 2017, net debt increased to $157.6 million compared to $120.4 million in fiscal year 2016 mainly due to decrease in cash and bank balances by $70.5 million and repayment of $33.4 million debt.
Year Ended March 31, 2016 Compared to Year Ended March 31, 2015
| | | Year ended March 31, | | | | | | As a % of revenue | |
| | | 2016 | | | 2015 | | | Change % | | | 2016 | | | 2015 | |
| | | (in thousands) | | | | | | | | | | |
| Revenue | | $ | 274,428 | | | $ | 284,175 | | | | (3.4 | ) | | | 100.0 | | | | 100.0 | |
| Cost of sales | | | (172,764 | ) | | | (155,777 | ) | | | 10.9 | | | | 63.0 | | | | 54.8 | |
| Gross profit | | | 101,664 | | | | 128,398 | | | | (20.8 | ) | | | 37.0 | | | | 45.2 | |
| Administrative costs | | | (64,019 | ) | | | (49,546 | ) | | | 29.2 | | | | 23.3 | | | | 17.4 | |
| Operating profit | | | 37,645 | | | | 78,852 | | | | (52.3 | ) | | | 13.7 | | | | 27.7 | |
| Net finance costs | | | (8,010 | ) | | | (5,861 | ) | | | 36.7 | | | | 2.9 | | | | 2.1 | |
| Other gains/(losses) | | | (3,636 | ) | | | (10,483 | ) | | | (65.3 | ) | | | 1.3 | | | | 3.7 | |
| Profit before tax | | | 25,999 | | | | 62,508 | | | | (58.4 | ) | | | 9.5 | | | | 22.0 | |
| Income tax expense | | | (12,711 | ) | | | (13,178 | ) | | | (3.5 | ) | | | 4.6 | | | | 4.6 | |
| Net income | | $ | 13,288 | | | $ | 49,330 | | | | (73.1 | ) | | | 4.8 | | | | 17.4 | |
The following table sets forth, for the period indicated, the revenue by region of domicile of Group’s operation.
| | | Year ended March 31, | | |
| | | 2016 | | 2015 | | Change (%) |
| | | (in thousands) | | |
| India | | $ | 159,855 | | | $ | 110,015 | | | | 45.3 | |
| Europe | | | 34,209 | | | | 29,528 | | | | 15.9 | |
| North America | | | 14,622 | | | | 10,014 | | | | 46.0 | |
| Rest of the world | | | 65,742 | | | | 134,618 | | | | (51.2 | ) |
| Total revenue | | $ | 274,428 | | | $ | 284,175 | | | | (3.4 | ) |
Revenue
In fiscal year 2016, Eros film slate comprised 63 films of which 6 were high budget, 16 were medium budget and 41 were low budget as compared to very similar mix of 65 films in fiscal year 2015, of which 6 were high budget, 12 were medium budget and 47 were low budget.
In fiscal year 2016, the Company’s slate of 63 films comprised 33 Hindi films, 19 Tamil/Telugu films and 11 regional films as compared to fiscal year 2015 where its slate of 65 films comprised 45 Hindi films, 19 Tamil/Telugu films and one regional film. For the twelve months ended March 31, 2016, revenue decreased marginally by 3.4% to $274.4 million, compared to $284.2 million for the twelve months ended March 31, 2015.
In fiscal year 2016, the aggregate theatrical revenues increased by 12.4% to $138.4 million from $123.1 million in fiscal year 2015. Fiscal year 2016 proved to be a successful year for the Company’s films at the box office demonstrating the quality and robustness of its content with three out of the top four Hindi films and seven out of the top 15 Hindi films in Calender year 2015 being Eros films. Some of our successful global releases wereBajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, Welcome Back, Srimanthuduand overseas releases wereDil Dhadakne Do, Singh is BlingandGabbar is Backreinforcing the portfolio and film mix strategy.
The aggregate revenues from television syndication decreased by 28.8% to $72.1 million in fiscal year 2016 from $101.2 million in fiscal year 2015 mainly as a result of higher television sales in India offset by lower sales in territories outside of India due to the Company’s decision to forego a portion of their potential catalogue revenues that have relatively longer payment cycles, in order to improve days sales outstanding.
The aggregate revenues from digital, ancillary and the newly acquired “Techzone” increased 6.7% to $63.9 million in fiscal year 2016 from $59.9 million in fiscal year 2015. This is on account of contribution from Techzone and better realizations from other ancillary revenues such as music sales and in-flight entertainment.
We derived approximately 41.7% of our fiscal year 2016 revenues from the exploitation of our films in territories outside of India compared to 61.3% in fiscal year 2015. This percentage is calculated (as required under International Financial Reporting Standards) based on revenue by region of domicile of Group’s operation.
Revenue from India increased by 45.3 % to $159.9 million in fiscal year 2016, compared to $110 million in fiscal year 2015. This was account of the stronger Indian box office collection of the Company’s movies and the better realizations with respect to television syndication revenues associated with these movies.
Revenue from Europe increased by 15.9 % to $34.2 million in fiscal year 2016, compared to $29.5 million in fiscal year 2015 and North America increased 46 % to $14.6 million in fiscal year 2016, compared to $10 million in fiscal year 2015. This was account of the stronger overseas box office collection of the Company’s movies.
Revenue from rest of the world decreased by 51.2 % to $65.7 million in fiscal year 2016, compared to $134.6 million in fiscal year 2015. This was mainly due to lower catalogue sales.
We also report percentage of revenue calculated (as required under International Financial Reporting Standards) based on where the customer who entered into a contract with any of its entities is based and not strictly on the geography of the rights being exploited or licensed. Accordingly, this may not be reflective of the potential of any given market because it is not necessarily reflective of where the films are actually distributed. As a result, the Company’s revenue by customer location may vary year on year. On this basis, we derived approximately 42.1% of our Fiscal year 2016 revenues from the exploitation of our films in territories outside of India compared to 61.5% in Fiscal year 2015.
Cost of sales
In fiscal year 2016 cost of sales increased by 10.9% to $172.8 million compared to $155.8 million in fiscal year 2015. $11.0 million out of the total $17 million increase or 65% of the increase was primarily on account of increase in film amortization costs associated with mix of the Company’s films of fiscal year 2016 as compared to fiscal year 2015 as well as cumulative amortization costs of its larger film library, and 35% of the increase was due to accrued overages to co-producers from hit films as well as an increase in selling and distribution expenses.
Gross profit
In fiscal year 2016 gross profit decreased by 20.8% to $101.7 million, compared to $128.4 million in fiscal year 2015 primarily due to lower revenue from high margin catalogue sales and higher cost of sales, mainly due to increased amortization charge.
Net income
In fiscal year 2016 net income decreased by 73% to $13.3 million, compared to $49.3 million in fiscal year 2015 primarily due to lower high-margin catalogue revenues, lower gross profit and higher administrative cost in fiscal year 2016.
Adjusted EBITDA (Non-GAAP)
In fiscal year 2016 adjusted EBITDA decreased by 29.9% to $70.9 million compared to $101.2 million in fiscal year 2015 mainly due to higher theatrical revenues being offset by proportionately higher cost of sales including film amortisation costs and relatively higher margin lower catalogue revenues.
Administrative costs
In fiscal year 2016, administrative costs increased by 29.3% to $64 million compared to $49.5 million in fiscal year 2015, which was attributable to an increase in share based payment charges by 41.6% to $31.0 million in fiscal year 2016 compared to $21.9 million in fiscal year 2015 as well as increased personnel cost of $2.7 million on account of expansion of the Eros Now team and newly acquired “Techzone”.
Net finance costs
In fiscal year 2016, net finance increased by 35.6% to $8 million, compared to $5.9 million in fiscal year 2015. This was mainly due to the higher blended cost of debt during the year with the full year retail bond costs coming in which was only partial in the previous year.
Other losses
In fiscal year 2016, other losses decreased by 65.7% to $3.6 million, compared to $10.5 million in fiscal year 2015. This was primarily due to a decrease in the fair value of derivative liability instruments not designated in a hedging relationship and net foreign exchange losses. In fiscal year 2015 there was also impairment loss on available-for-sale financial asset, while their was no such impairment in fiscal year 2016
Income tax expense
The expense for income taxes was $12.7 million and $13.2 million for the twelve months ended March 31, 2016 and 2015, respectively. The decrease for income taxes is due to lower net profit earned in the twelve months ended March 31, 2016. Effective tax rates were 21% and 21.1% for fiscal year 2016 and 2015, respectively, excluding non-deductible share-based payment charges and net loss on held for trading financial liabilities.
Exchange rates
Our reporting currency is the U.S. dollar. Transactions in foreign currencies are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rates at the date of the applicable statement of financial position. For the purposes of consolidation, all income and expenses are translated at the average rate of exchange during the period covered by the applicable statement of income and assets and liabilities are translated at the exchange rate prevailing on the date of the applicable statement of financial position. When the U.S. dollar strengthens against a foreign currency, the value of our sales and expenses in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales and expenses in that currency converted to U.S. dollars increases.
Recently, there have been periods of higher volatility in the Indian Rupee and U.S. dollar exchange rate. This volatility is illustrated in the table below for the periods indicated:
| | | Period End | | Average(1) | | High | | Low |
| Fiscal Year | | | | | | | | |
| 2011 | | 44.54 | | 45.46 | | 47.49 | | 43.90 |
| 2012 | | 50.89 | | 48.01 | | 53.71 | | 44.00 |
| 2013 | | 54.52 | | 54.36 | | 57.13 | | 50.64 |
| 2014 | | 60.35 | | 60.35 | | 68.80 | | 53.65 |
| 2015 | | 62.58 | | 61.15 | | 63.70 | | 58.46 |
| 2016 | | 66.25 | | 65.39 | | 68.84 | | 61.99 |
| 2017 | | 64.85 | | 67.01 | | 68.86 | | 64.85 |
| | | | | | | | | |
| Months | | | | | | | | |
| April 2016 | | 66.39 | | 66.42 | | 66.70 | | 66.05 |
| May 2016 | | 66.96 | | 66.88 | | 67.59 | | 66.36 |
| June 2016 | | 67.51 | | 67.27 | | 67.92 | | 66.51 |
| July 2016 | | 66.77 | | 67.16 | | 67.49 | | 66.77 |
| August 2016 | | 66.94 | | 66.90 | | 67.18 | | 66.63 |
| September 2016 | | 66.58 | | 66.71 | | 67.10 | | 66.28 |
| October 2016 | | 66.72 | | 66.74 | | 66.94 | | 66.49 |
| November 2016 | | 68.56 | | 67.64 | | 68.86 | | 66.39 |
| December 2016 | | 67.92 | | 67.81 | | 68.29 | | 67.38 |
| January 2017 | | 67.48 | | 68.05 | | 68.39 | | 67.48 |
| February 2017 | | 66.67 | | 66.97 | | 67.40 | | 66.67 |
| March 2017 | | 64.85 | | 65.80 | | 66.83 | | 64.85 |
| April 2017 | | 64.27 | | 64.54 | | 65.10 | | 64.08 |
| May 2017 | | 64.50 | | 64.42 | | 64.87 | | 64.03 |
| June 2017 | | 64.62 | | 64.45 | | 64.66 | | 64.23 |
(1) | Represents the average of the U.S. dollar to Indian Rupee exchange rates on the last day of each month during the period for all fiscal years presented, and the average of the noon buying rate for all days during the period for all months presented. |
This volatility in the Indian Rupee as compared to the U.S. dollar and the increasing exchange rate has impacted our results of operations as shown in the table below comparing the reported results against constant currency comparable based upon the average rate of exchange for the year ended March 31, 2017, of INR 67.0 to $1.00. In addition to the impact on gross profit, the volatility during the year ended March 31, 2017 also led to a non-cash foreign exchange gain of 3.9 million principally on our Indian subsidiaries’ foreign currency loans in the year ended March 31, 2017 compared to $0.07 million loss in the year ended March 31, 2016.
The following table sets forth our constant currency revenue (a non-GAAP financial measure) for the periods indicated. Constant currency revenue is a non-GAAP financial measure. We present constant currency revenue so that revenue may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Constant currency revenue is presented by recalculating prior period’s revenue denominated in currencies other than in US dollars using the foreign exchange rate used for the latest period. Our non-US dollar denominated revenue includes, but is not limited to, revenue denominated in Indian rupee, pound sterling and United Arab Emirates Dirham.
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | (in thousands) | | | | | | | |
| | | Reported | | | Constant
Currency
(Non-GAAP) | | | Reported | | | Constant
Currency
(Non-GAAP) | | | Reported | | | Constant
Currency
(Non-GAAP) | |
| Revenue | | $ | 252,994 | | | $ | 252,994 | | | $ | 274,428 | | | $ | 266,853 | | | $ | 284,175 | | | $ | 266,125 | |
| Cost of sales | | | (164,240 | ) | | | (164,240 | ) | | | (172,764 | ) | | | (168,347 | ) | | | (155,777 | ) | | | (145,080 | ) |
| Gross Profit | | $ | 88,754 | | | $ | 88,754 | | | $ | 101,664 | | | $ | 98,506 | | | $ | 128,398 | | | $ | 121,045 | |
The percentage change for the data comparing the constant currency amounts against the reported results referenced in the table above:
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Revenue | | | — | % | | | (2.8 | )% | | | (6.8 | )% |
| Cost of sales | | | — | | | | (2.6 | ) | | | (7.4 | )% |
| Gross profit | | | — | % | | | (3.1 | )% | | | (6.1 | )% |
The Indian Rupee experienced an approximately 2% drop in value as compared to the U.S. dollar in fiscal year 2016, in fiscal year 2015 the drop was 9%.
B. Liquidity and Capital Resources
Our operations and strategic objectives require continuing capital investment, and our resources include cash on hand and cash provided by operations, as well as access to capital from bank borrowings and access to capital markets. Management believes that cash generated by or available to us should be sufficient to fund our capital and liquidity needs for at least the next 12 months.
Our future financial and operating performance, ability to service or refinance debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions, the financial health of our customers and suppliers and to financial, business and other factors, many of which are beyond our control. Furthermore, management believes that working capital is sufficient for our present requirements.
| | | Year ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Current assets | | $ | 362,477 | | | $ | 373,482 | | | $ | 366,592 | |
| Current liabilities | | | 316,101 | | | | 290,687 | | | | 128,481 | |
| Working capital | | $ | 46,376 | | | $ | 82,795 | | | $ | 238,111 | |
The significant decrease in working capital as at March 31, 2017 as compared to March 31, 2016, principally reflects payables relating to purchases of film rights.
Indebtedness
As of March 31, 2017, we had aggregate outstanding indebtedness of $271.5 million, and cash and cash equivalents of $112.3 million. At March 31, 2017, the total available facilities were comprised of (i) revolving credit facilities, secured and unsecured term loans, and vehicle loans of $190.9 million at Eros India and Eros Worldwide, (ii) secured overdraft and term loan amounting to $18.0 million at Eros International Limited. In addition, Eros International plc has debt of $62.7 million in relation to a retail bond offering for £50 million in October 2014 and unsecured term loan. As at March 31, 2017, there were undrawn amounts under our facilities of $2.2 million.
| | | As of
March 31, 2017 | |
| | | (in thousands) | |
| Eros India | | | | |
| Secured revolving credit facilities | | $ | 57,521 | |
| Secured term loans | | $ | 35,149 | |
| Vehicle loans | | $ | 325 | |
| Unsecured other loan | | $ | 7,033 | |
| Total | | $ | 100,028 | |
| Eros International plc | | | | |
| Retail Bond | | $ | 62,672 | |
| Total | | $ | 62,672 | |
| Eros International Limited, U.K. | | | | |
| Secured overdraft | | $ | 17,982 | |
| Total | | $ | 17,982 | |
| | | | | |
| Eros Worldwide | | | | |
| Revolving credit facility(1) | | $ | 85,000 | |
| Interest swap financing facility | | $ | 5,853 | |
| Total | | $ | 90,853 | |
| Total | | $ | 271,535 | |
_____________
(1) | Borrowers under the revolving credit facility are Eros International Plc, Eros Worldwide FZ LLC, Eros International Limited and Eros International USA Inc. |
Certain of our borrowings and loan agreements, including our new credit facility, contain customary covenants, including covenants that restrict our ability to incur additional indebtedness, create or permit liens on our assets or engage in mergers and acquisitions. Such agreements also contain various customary events of default with respect to the borrowings, including the failure to pay interest or principal when due and cross default provisions, and, under certain circumstances, lenders may be able to require repayment of loans to Eros India or Eros Films prior to their maturity. If an event of default occurs and is continuing, the principal amounts outstanding, together with all accrued unpaid interest and other amounts owed may be declared immediately due and payable by the lenders. If such an event were to occur, we would need to pursue new financing that may not be on as favorable terms as our current borrowings. We are currently in full compliance with all of our agreements governing indebtedness.
Borrowings under our term loan facilities, overdraft facility and revolving credit facilities at Eros India matures between 2017 and 2021 and bear interest at fluctuating interest rates pursuant to the relevant sanction letter governing such loans.
Borrowings under our revolving credit facility maturing in January 2017 bear interest at LIBOR, or in the case of future borrowings in Euros, EURIBOR, floating rates with margins between 1.9% and 2.9% plus mandatory cost.
Our revolving credit facility that previously matured in January 2017 was amended and the maturity date was extended up to March 31, 2017. Subsequently, on April 1, 2017 we entered into an amended credit agreement with a revolving credit facility bearing interest at a rate of 7.5% plus LIBOR, which is secured by certain of our assets and is payable in three installments by September 30, 2017.
Subsequently, in April 2017, retail bond were fully secured by certain group assets.
We expect to renew, replace or extend our borrowings as they reach maturity. As at March 31, 2017, we had net undrawn amounts of $2.2 million available.
Sources and uses of cash
| | | Year Ended March 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Net cash from operating activities | | $ | 98,993 | | | $ | 234,599 | | | $ | 117,955 | |
| Net cash used in investing activities | | $ | (175,191 | ) | | $ | (211,355 | ) | | $ | (279,240 | ) |
| Net cash from financing activities | | $ | 5,929 | | | $ | 7,597 | | | $ | 177,561 | |
Year ended March 31, 2017 Compared to Year Ended March 31, 2016
Net cash generated from operating activities in fiscal year 2017 was $99 million, compared to $234.6 million in fiscal year 2016, a decrease of $135.6 million, or 57.9%, primarily due to decrease working capital movement of $ 119,9 million attributable to increase in trade receivables to $91.9 million and decrease in trade payables by $27.3 million. The cash flow from operating activities has also decreased due to increase in interest paid in fiscal 2017 to $18.4 million compared to $12.5 million.
Net cash used in investing activities in fiscal year 2017 was $175.2 million, compared to $211.4 million in fiscal year 2016, a decrease of $36.2 million, or 17.1%, reflecting the change in mix of films released in fiscal year 2017 and our investment in upcoming film slate. The purchase of intangible film rights and content rights in fiscal year 2017 was $173.5 million, compared to $211.3 million in fiscal year 2016, a decrease of $37.8 million, or 17.9%.
Net cash generated from financing activities in fiscal year 2017 was $5.9 million, compared to $7.6 million in fiscal year 2016, a decrease of $1.7 million, or 22.4%, primarily due to repayment of debt of $118.3 million compared to $99.7 million in fiscal 2016 which is offset by proceeds from debt and equity of $92.8 million and $31.4 million respectively and $95.5 million and $11.8 million respectively in fiscal 2017 and fiscal 2016 ..
Year ended March 31, 2016 Compared to Year Ended March 31, 2015
Net cash from operating activities in fiscal year 2016 was $234.6 million, compared to $118.0 million in fiscal year 2015, an increase of $116.6 million, or 98.8%, primarily due to increase in cash flow from operations, reduction in trade receivables of $28.5 million, increase in trade payables of $31.5 million due to deferred revenue from presales and accrued overages from hit films. This also included an increase in interest paid of $5.6 million and a decrease in income taxes paid of $4.5 million, from fiscal year 2015. There was a decrease in working capital of $51.3 million in fiscal year 2016 mainly because the revolving credit facility of $123,750 million which was part of a long term liability in fiscal year 2015 was classified as a short term liability at the end of fiscal year 2016.
Net cash used in investing activities in fiscal year 2016 was $211.4 million, compared to $279.2 million in fiscal year 2015, a decrease of $67.8 million, or 24.3%, reflecting the change in mix of films released in fiscal year 2016 and our investment in film content in future years. Our investment in film content in fiscal year 2016 was $211.3 million, compared to $276.2 million in fiscal year 2015, a decrease of $64.9 million, or 23.5%. Fiscal year 2015 investment in content also contained a stepped one-off investment for Eros Now content with additional funds available from the proceeds from the UK retail bond.
Net cash from financing activities in fiscal year 2016 was $7.6 million, compared to $177.6 million in fiscal year 2015, a decrease of $170 million, or 95.7%, primarily because we didn’t access the capital markets in fiscal year 2016 as compared to fiscal year 2015 where we had capital proceeds of $92.3 million from our follow on equity offering in 2015 and proceeds of $77.9 million on account of issuing Retail Bond.
Capital expenditures
In fiscal year 2017, we invested $173.5 million in film content, and in fiscal 2018 we expect to invest approximately $180 to $200 million in film content.
C. Research and Development
Not applicable
D. Trend Information
New accounting pronouncements issued but not yet effective
Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for our accounting periods beginning on or after April 1, 2017 or later periods. Those which are considered to be relevant to Group’s operations are set out below.
IFRS 15 Revenue from Contracts with Customers
| i) | In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue. |
The five steps in the model under IFRS 15 are : (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
IFRS 15 replaces the following standards and interpretations:
| · | IAS 11 Construction Contracts |
| · | IFRIC 13 Customer Loyalty Programmes |
| · | IFRIC 15 Agreements for the Construction of Real Estate |
| · | IFRIC 18 Transfers of Assets from Customers |
| · | SIC-31 Revenue - Barter Transactions Involving Advertising Services |
When first applying IFRS 15, it should be applied in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows an option to either:
| · | apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or |
| · | retain prior period figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). |
IFRS 15 is effective for fiscal years beginning on or after January 1, 2018. Earlier application is permitted. The Group expects to apply this standard retrospectively with the cumulative effect of initially applying this standard recognized at April 1, 2018 (i.e. the date of initial application in accordance with this standard). The Group is currently evaluating the impact that this new standard will have on its consolidated financial statements.
IFRS 9 Financial Instruments:In July 2014, the IASB finalized and issued IFRS 9 – Financial Instruments. IFRS 9 replaces IAS 39 “Financial instruments: recognition and measurement, the previous Standard which dealt with the recognition and measurement of financial instruments in its entirety upon the former’s effective date.
The Key requirements of IFRS 9:
Replaces IAS 39’s measurement categories with the following three categories:
| · | fair value through profit or loss |
| · | fair value through other comprehensive income |
Eliminates the requirement for separation of embedded derivatives from hybrid financial assets, the classification requirements to be applied to the hybrid financial asset in its entirety.
Requires an entity to present the amount of change in fair value due to change in entity’s own credit risk in other comprehensive income.
Introduces new impairment model, under which the “expected” credit loss are required to be recognized as compared to the existing “incurred” credit loss model of IAS 39.
Fundamental changes in hedge accounting by introduction of new general hedge accounting model which:
| · | Increases the eligibility of hedged item and hedging instruments; |
| · | Introduces a more principles–based approach to assess hedge effectiveness. |
IFRS 9 is effective for annual periods beginning on or after January 1, 2018.
Earlier application is permitted provided that all the requirements in the Standard are applied at the same time with two exceptions:
| · | The requirement to present changes in the fair value of a liability due to changes in own credit risk may be applied early in isolation; |
| · | Entity may choose as its accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of new general hedge accounting model as provided in IFRS 9. |
The Group is currently evaluating the impact of this new standard on its consolidated financial statements.
IFRS 16 Leases: On January 13, 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related Interpretations. The Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e., the lessee and the lessor. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the statement of comprehensive income. The Standard also contains enhanced disclosure requirements for lessees. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, though early adoption is permitted for companies applying IFRS 15 Revenue from Contracts with Customers. The Group is yet to evaluate the requirements of IFRS 16 and the impact on the consolidated financial statements.
IFRIC 22, Foreign currency transactions and Advance consideration: On December 8, 2016, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 22, Foreign currency transactions and Advance consideration which clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, when an entity has received or paid advance consideration in a foreign currency. The effective date for adoption of IFRIC 22 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group is currently evaluating the effect of IFRIC 22 on the consolidated financial statements.
IFRIC 23, Uncertainty over Income Tax Treatments: In June 2017, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 23 — Uncertainty over Income Tax Treatments which is to be applied while performing the determination of taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. According to IFRIC 23, companies need to determine the probability of the relevant tax authority accepting each tax treatment, or group of tax treatments, that the companies have used or plan to use in their income tax filing which has to be considered to compute the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.
The standard permits two possible methods of transition:
| · | Full retrospective approach – Under this approach, IFRIC 23 will be applied retrospectively to each prior reporting period presented in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors |
| · | Retrospectively with cumulative effect of initially applying IFRIC 23 recognized by adjusting equity on initial application, without adjusting comparatives |
The effective date for adoption of IFRIC 23 is annual periods beginning on or after January 1, 2019, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.
Amendments to IAS 7, Statement of cash flows: In January 2016, the International Accounting Standards Board issued the amendments to IAS 7, requiring the entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, to meet the disclosure requirement. The effective date for adoption of the amendments to IAS 7 is annual reporting periods beginning on or after January 1, 2017, though early adoption is permitted. The Company is currently evaluating the effect of this amendment on its consolidated financial statements.
Amendments to IFRS 2, Share-based payment: In June 2016, the International Accounting Standards Board issued the amendments to IFRS 2, providing specific guidance for measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. It clarifies that the fair value of cash-settled awards is determined on a basis consistent with that used for equity-settled awards. Market-based performance conditions and non-vesting conditions are reflected in the ‘fair values’, but non-market performance conditions and service vesting conditions are reflected in the estimate of the number of awards expected to vest. Also, the amendment clarifies that if the terms and conditions of a cash-settled share-based payment transaction are modified with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as such from the date of the modification. Further, the amendment requires the award that includes a net settlement feature in respect of withholding taxes to be treated as equity-settled in its entirety. The cash payment to the tax authority is treated as if it was part of an equity settlement. The effective date for adoption of the amendments to IFRS 2 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.
Quarterly Financial Information
The table below presents our selected unaudited quarterly results of operations for the four quarters in the fiscal year ended March 31, 2017. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annualtransition report. The following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this transition report, particularly in “Part I—Item 3. Key Information—D. Risk Factors.”
Overview
We are an innovative global entertainment company that develops, produces and distributes premium content across a variety of platforms. We generate revenue from box office receipts and licensing and distribution arrangements for films, TV and other content. During the fiscal years ended September 30, 2017, 2018 and 2019, and the six months ended March 31, 2020, approximately 97%, 95%, 91% and 95%, respectively, of our revenue was generated from our films.
Our revenue increased from $201.4 million for the fiscal year ended September 30, 2017 to $448.8 million for the fiscal year ended September 30, 2018 and slightly decreased to $434.3 million for the fiscal year ended September 30, 2019. For the six months ended March 31, 2020, our revenue was $188.5 million, representing an 16% decrease compared to $224.1 million for the six months ended March 31, 2019.
We have prepared the unaudited financial dataincurred losses in each of our fiscal years since we commenced operations. As a result, we had loss from operations of $70.1 million, $173.5 million, $90.4 million and $29.0 million for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2020, respectively, and negative EBITDA of $68.8 million, $171.7 million, $113.2 million and $14.3 million, respectively, for the same periods. Free cash flow was negative $43.4 million, positive $41.9 million and negative $260.1 million for the years ended September 30, 2017, 2018 and 2019 and positive $7.8 million for the six months ended March 31, 2020, along with cash equivalents and restricted cash of $78.2 million, $168.8 million, $17.9 million and $25.7 million as of the end of such periods, respectively. For definitions of EBITDA and free cash flow, see “Part I—Item 5—Operating and Financial Review and Prospects—A. Operating Results—Non-GAAP Measures.”
Under US GAAP, STX was required to expense in the income statement marketing and distribution costs upon release but amortize production expenses to match the first cycle revenue window for each film. Accordingly, like other film studios that report in US GAAP, STX recorded greater expenses relative to projected future revenue as it was ramping its production and distribution. However, STX's operating cash flow and EBITDA have generally improved in the periods prior to the Merger as its content library scaled. The Company believes STX is now at a point of realizing the sustainable benefits of a well-established film library, while continuing to invest in long-lived content ownership and revenue growth. As such, the Company's previously disclosed guidance reflects expected ongoing improvement in these operating results.
Description of Major Components of our Results of Operations
Revenue
We generate revenue from both our film and TV and other operations. We generate revenue from direct distribution of our films in the United States, Canada, the United Kingdom and Ireland through (i) the remittance of a portion of gross box office receipts by theater operators, (ii) the recognition of advances paid by distributors as physical copies of our films on DVD and Blu-ray discs are sold, (iii) the remittance of a portion of receipts by digital platforms from the sale of digital copies of our films, and (iv) the receipt of license fees from pay TV networks, streaming platforms and free TV networks. We generate revenue from our films in the rest of the world through the receipt of license fees plus a portion of the gross receipts after the distributor recoups their license fee. During the fiscal years ended September 30, 2017, 2018, 2019 and the six months ended March 31, 2020, over 90% of our revenue was generated from our films. During the same periods, approximately 11%, 31%, 26% and 26%, respectively, of our revenue was from the theatrical release of our films in the United States and Canada.
We generate revenue from our TV and other content through the receipt of producer and license fees from cable and broadcast networks, streaming platforms and publishers and social media platforms. Revenue generation from our TV and other content is in an early stage compared to our film content and did not account for a significant portion of our revenue during the fiscal years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2020. However, as our TV and other business further develops we anticipate that it will account for an increasing portion of our revenue going forward.
The table below sets forth our revenue generated by each of these aspects of our business operations and such revenue as a percentage of total revenue.
| | | For the Year ended
September 30, | | For the Six Months Ended
March 31, |
| | | 2017 | | 2018 | | 2019 | | 2019 | | 2020 |
| | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| | | (dollars in thousands) |
| | | | | | | | | | | | | | | (unaudited) | | | | |
| Revenue | | | | | | | | | | | | | | | | | | | | |
| Film | | | | | | | | | | | | | | | | | | | | |
| Theatrical | | 20,339 | | 10.1 | | 136,474 | | 30.4 | | 109,716 | | 25.3 | | 58,619 | | 26.2 | | 49,162 | | 26.1 |
| Home Entertainment | | 94,457 | | 46.9 | | 102,971 | | 22.9 | | 118,716 | | 27.3 | | 71,382 | | 31.9 | | 53,405 | | 28.3 |
| TV/streaming | | 40,368 | | 20.0 | | 32,026 | | 7.1 | | 71,575 | | 16.5 | | 42,123 | | 18.8 | | 35,168 | | 18.7 |
| Other Post-Theatrical | | 2,772 | | 1.4 | | 1,245 | | 0.3 | | 4,988 | | 1.1 | | 1,506 | | 0.7 | | 2,649 | | 1.4 |
| International | | 37,836 | | 18.8 | | 154,915 | | 34.5 | | 88,633 | | 20.4 | | 46,876 | | 20.9 | | 38,198 | | 20.3 |
| Total Film | | 195,772 | | 97.2 | | 427,631 | | 95.2 | | 393,628 | | 90.6 | | 220,506 | | 98.5 | | 178,582 | | 94.8 |
| TV and Other | | 5,669 | | 2.8 | | 21,215 | | 4.8 | | 40,633 | | 9.4 | | 3,562 | | 1.5 | | 9,871 | | 5.2 |
| Total revenue | | 201,441 | | 100.0 | | 448,846 | | 100.0 | | 434,261 | | 100.0 | | 224,068 | | 100.0 | | 188,453 | | 100.0 |
Our theatrical revenue, which consists of our share of gross box office receipts from theater operators in the United States and sub-distributors in Canada, fluctuates largely based on the number of films that we release during the period and the success of those films in attracting moviegoers. We anticipate that our focus going forward will be on films that we develop or co-develop, produce or co-produce and for which we acquire or retain the domestic and/or international distribution rights (referred to as “produced and distributed films”).
Our post-theatrical revenue consists of (i) home entertainment, which is revenue generated in the United States and Canada from the remittance of sale proceeds by distributors from the sale of physical copies of our films on DVD and Blu-ray discs, (ii) TV/streaming, which is the remittance of a portion of receipts by digital platforms from the sale of digital copies of our films, the receipt of license fees from pay TV, streaming platforms and free TV and (iii) other post-theatrical revenue including revenue generated through the receipt of fees for exhibition of our films by non-cinematic organizations, such as airlines, hotels and others. Post-theatrical revenue is dependent largely upon the success of our films with home movie-watchers, which generally is related to the theatrical success of our films within the United States.
Our international revenue consists of the revenue generated from our films in markets other than the United States and Canada. In the United Kingdom and Ireland, we distribute our films directly. As in the U.S. market, theater operators in the United Kingdom and Ireland remit a portion of gross box office receipts to us. Other than in the United States, the United Kingdom and Ireland, we license distribution rights in the films we produce and/or distribute on a territory-by-territory basis to our distribution partners. In these territories, we generate revenue primarily through the receipt of minimum guaranteed license fees. We also have some upside potential under these agreements, which generally provide that we receive a portion of the gross receipts after the distributor recoups its minimum guaranteed license fee. Our international revenue varies based on the international appeal of our films, which is often linked to the theatrical success of our films within the United States. However, because international licensing revenue includes revenue from licensing for theatrical, home entertainment, TV and digital distribution of our films in foreign markets, it is not as susceptible to large variations caused by the success of a small number of films.
Operating Expenses
Operating expenses primarily include: (i) direct operating expenses, which include film amortization, participations and residuals, capitalized interest and allocated overhead, (ii) distribution and marketing expenses, which include advertising and marketing expenses and home video distribution expenses, (iii) general and administrative expenses, including wages, salaries, severance costs and fees paid to employees and consultants, including share based expenses, travel and entertainment expenses, facilities and office expenses, including lease payments, certain office supplies and office services and outside professional fees such as accountants, lawyers and other advisors, and (iv) depreciation and amortization. For the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2019 and 2020, our total operating expenses were $271.6 million, $622.4 million, $524.6 million, $249.0 million and $217.5 million, respectively.
The table below provides details as to our operating expenses during the periods indicated:
| | | For the Year ended September 30, | | For the Six Months Ended
March 31, |
| | | 2017 | | 2018 | | 2019 | | 2019 | | 2020 |
| | | (in thousands of dollars) |
| | | | | | | | | (unaudited) | | |
| | | | | | | | | | | |
| Direct operating expenses | | $139,769 | | $298,246 | | $260,673 | | $123,566 | | $92,752 |
| Distribution and marketing expenses | | 72,554 | | 230,336 | | 200,900 | | 87,865 | | 95,047 |
| General and administrative expenses | | 57,961 | | 91,999 | | 60,840 | | 36,433 | | 26,844 |
| Depreciation and amortization expenses | | 1,304 | | 1,814 | | 2,220 | | 1,096 | | 1,022 |
| Restructuring expenses | | — | | — | | — | | — | | 1,832 |
| Total operating expenses | | $271,588 | | $622,395 | | $524,633 | | $248,960 | | $217,497 |
For distribution-only films, other producers generally cover all the development, production, advertising and marketing costs, and we earn a distribution fee and other consideration while assuming minimal financial risk, other than the minimum guaranteed license fee we pay or co-financing investment in any such film or any portion of our distribution fee which is contingent on film performance.
Interest Expense
Interest expense primarily represents (i) interest on bank and other borrowings, and (ii) other finance costs, including facility fees in connection with our Prints and Advertising Facility, which was terminated and repaid in full in January 2020, and amortization of debt issuance costs. For the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2019 and 2020, our interest expense was $15.9 million, $18.9 million, $22.1 million, $11.6 million and $10.7 million, respectively.
Timing of Recognition of Costs and Revenues
Revenues
Revenues from a film are first realized following its theatrical release. (We refer to this release as the theatrical “window(s)” and subsequent releases on different media are each referred to as “windows.” We typically expect to realize revenue from our share of gross box office receipts within three months of a film’s release. Following the theatrical windows, the film is made available to consumers through home entertainment channels, for which we begin recognizing revenue approximately four months after theatrical release. We expect approximately 75% and 65% of the film’s ultimate packaged media and digital home entertainment revenue, respectively, will be recognized within approximately six months following release of the film on DVD/Blu-Ray disc and to digital platforms.
We begin recognizing revenue from the TV release of our films in the initial pay TV window, which typically begins approximately nine months after theatrical release and lasts approximately 18 months. The free TV and streaming windows open approximately 30 months following the initial theatrical release. For each TV license across pay TV, streaming and free TV platforms, revenue is typically recognized at the start of each respective license, while cash may be paid upfront or in installments over the license period.
Direct distribution in the United Kingdom and Ireland tends to follow a similar pattern for all revenues and costs as U.S. distribution of a film.
Costs
The production period (in which gross production costs are incurred) is typically six to 18 months leading up to a film’s release but may be longer for certain types of films, such as animated films. In addition, third-party co-financiers typically pay for their respective interest in a given project prior to release (either during the production period or directly before release of a film) and receive their respective share of proceeds as generated. Marketing costs typically begin six months to nine months prior to release, and we expect that approximately 65% to 75% of these costs will be spent during the quarter in which the film is released. Film costs, with the exception of marketing costs, are capitalized costs amortized over a film’s “”ultimate”“ period, or the first ten years following release. However, marketing costs are expensed as they are incurred.
Film accounting rules require marketing costs to be recognized before films begin generating revenues upon theatrical release. Hence, during the pre-release period, an individual film is expected to have negative profitability. Upon release, revenue from the theatrical window begins to be recognized and is followed in subsequent periods by revenue from the various downstream, post-theatrical windows. During these periods, for a successful and profitable film, revenue is expected to exceed costs, resulting in profitability.
The effect of this accounting treatment is that films that are ultimately profitable have periods of negative profitability from an accounting perspective, particularly within the first few quarters of a film’s lifecycle.
The following chart illustrates the key lifecycle stages of a film from development through distribution and the timing of recognition of revenue:
| | Pre-release | Post-release |
| Development period | Production period | Year 1 | | | Year 2 | | Years 3-10 |
| | H1 | H2 | H1 | | H2 | |
| | 55% of total revenue | 25% | 4% | | 1% | 15% |
| illustrative film on st timing | Development | | | | | | | |
| | Production | | | | | |
| | | Marketing | | | |
| | | | | Home entertainment distribution and other expenses |
| % of illustrative model film revenue | | | International licensing 15% of total revenue | | | | | | | |
| | Theatrical 30% | | | | | |
| | | | Packaged media and digital 35% |
| | | | | | Pay TV 10% | |
| | | | | | | | Free TV and SVOD 10% |
| | | | | | | | | | | | | | | | | |
Borrowings Against Future Revenues
As discussed in more detail in “Part I—Item 4—Information on the Company—STX Financing Structures—Film Project Financing—Loans,” we are typically able to borrow against the financing sources for our films, including future receipts from international pre-license sales, established tax incentives and co-financing commitments, before the film’s box office receipts are established. Before we begin production, we typically set the minimum guaranteed license fee amount from our international distribution partners based on the film’s budget. We also typically apply for and establish a tax incentive arrangement during development or just after the film begins production. Furthermore, we arrange for co-financing partners to commit to fund a portion of the budget not funded by international pre-licensing or tax incentives. Although we collect the majority of these receipts at or after the film’s release, we are able to use the receivable as collateral to borrow under the Senior Credit Facility in order to fund the majority of production costs. These loans are then repaid with the collection of the receipts.
As we approach the release of the film and through a few weeks after release, we spend the majority of the prints and advertising budget. We are able to borrow the majority of these amounts under the Senior Credit Facility. Once the film is released and we begin collecting receipts from the box office sales, we are able to establish our film ultimate, which is the expected earnings of the film over its first ten years. We are able to borrow against our ultimate film revenue as a large portion of it is contracted revenue that is correlated to box office receipts. We typically use this loan to repay any outstanding prints and advertising related debt that is not recovered by box office receipts.
As a result of these financing tools, we are able to minimize the actual cash flow impact of any individual film on our working capital needs.
Seasonality
Our business is subject to seasonal and cyclical variations. Our film revenue fluctuates due to the timing, nature and number of films released in movie theaters, on DVD/Blu-Ray disc and digital media and in the pay TV and free TV windows. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods. As a result, revenue tends to be seasonal, with increases experienced each year during the summer months and around the holiday season. TV revenue also fluctuates due to the timing of when our content is made available to networks.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements are in conformity with accounting principals generally accepted under GAAP and are presented on the sameaccrual basis of accounting. GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. The most significant estimates we make in the preparation of the financial statements relate to ultimate revenues and costs and impairment assessments for film and TV costs; returns reserves; fair value of equity-based compensation; and income taxes including the assessment of valuation allowances for deferred tax assets. The actual results could differ significantly from those estimates.
Set forth below are discussions of the accounting policies that we believe are of critical importance to us or involve the most significant estimates, assumptions and judgments used in the preparation of our financial statements. Our significant accounting policies, estimates, assumptions and judgments, which are important for understanding our financial condition and results of operations, are set forth in detail in Note 1 to the audited consolidated financial statements included elsewhere in this transition report.
Revenue recognition
The Company generates revenue principally from the licensing of content in domestic theatrical exhibition, home entertainment (e.g., digital media and physical sales), television, and international market places.
Revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services or goods. Revenues do not include taxes collected from customers on behalf of taxing authorities such as sales tax and value-added tax. Revenue from theatrical distribution of films is recognized on the dates of exhibition based on our participation in box office receipts.
Revenue from the sale of DVDs and Blu-ray discs in the retail market is recognized net of returns reserves, upon the home entertainment release of a title in the marketplace. The reserves for DVD/ Blu-ray returns are based on the previous returns experience, current economic trends, and projected future sales of the title to consumers based on the actual performance of similar titles on a title-by-title basis on DVD/Blu-ray. The estimates have been materially accurate in the past, however, due to the judgment involved in establishing reserves, we may have adjustments to the historical estimates in the future. The estimate of future returns affects reported revenue and income (loss) from operations. If future returns are underestimated in a particular period, then we may record less revenue or greater loss in later periods when returns exceed the estimated amounts. If future returns are overestimated in a particular period, then we may record additional revenue in later periods when returns are less than estimated. An incremental change of 1% in our estimated sales returns rate for home entertainment (i.e., provisions for returns divided by gross sales of DVD/Blu-Ray discs) would have had an impact of approximately $1 million, $0.8 million, $1 million and $0.4 million on our total revenue in the fiscal years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2020, respectively.
Revenue sharing arrangements, including digital and electronic sell-through arrangements, such as download-to-own, download-to-rent, VOD and subscription VOD, are recognized when we are entitled to receipts which may require the Company to estimate the applicable revenue. Revenues from television or digital licensing for fixed fees are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.”
Up-front or guaranteed payments for the licensing of titles in international territories are recognized as revenue when (i) an arrangement has been signed with a customer, (ii) the customer’s right to use or otherwise exploit the intellectual property has commenced and there is no requirement for significant continued performance by us, (iii) licensing fees are either fixed or determinable, and (iv) collectability of the fees is reasonably assured. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks (defined as contractual media release restrictions), the fee is allocated to the various media based on our assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on our assessment of the relative fair value of each title.
We earn fees for the distribution services of third-party films and recognize such amounts as revenue when we have completed our performance obligation.
Revenue from the production of scripted and unscripted television programs for third parties is recognized based on the delivery requirements in the contract.
Other revenue related to virtual reality and licensed music rights is recognized when reported by distributors.
We sometimes receive advance payments prior to all revenue recognition criteria being met. Advance payments are received from international and home entertainment distributors, TV and digital licensing, merchandising customers and for licensed music rights. We record these amounts as deferred revenue until the earnings process related to these revenues is completed.
Film and TV Costs
Film costs represent the costs of films produced and distributed by us, or for which we have acquired distribution-only rights. For films produced by us, capitalized costs include all direct production costs, production overhead, and capitalized interest. Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of films and excludes selling and marketing costs. The amount of interest capitalized is an allocation of interest cost incurred during the period required to complete the production, but not while the project is in development.
Film costs consist of four categories: (i) films in development, (ii) films in production, (iii) films completed and not released and (iv) released films. Films in development primarily include the costs of acquiring film rights to books or original screenplays and costs to adapt such projects, as well as costs of scripted development for original ideas. Such costs are capitalized and, upon commencement of production, will be transferred to films in production. Films in development that are no longer being developed are written off at the earlier of the date they are determined not to be recoverable or were abandoned, or three years from the date of initial investment if the production has not been greenlit. Films in production include the inventory cost associated with projects that have been selected for release and for which principal photography has commenced. Films are held as an asset in production until release, including completed but not released films, at which time the asset balance is transferred to released films. Capitalized film costs are subject to impairment testing when certain triggering events are identified. If the fair value of a film were to fall below its unamortized costs, an impairment would be recorded for the amount by which the unamortized capitalized costs exceed the film’s fair value. In determining the fair value of our films, we employ a discounted cash flows (“DCF”) methodology that includes cash flows estimates of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film or television program. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a “Level 3” measurement (see Note 1 to the audited consolidated financial statements included elsewhere in this transition report). An impairment is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film program. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of film costs may be required because of changes in our future revenue estimates.
Film costs and the related participations and residuals are amortized using the individual film forecast method based on the proportion that the current year’s revenue bears to our estimate of ultimate revenue that our management regularly reviews and revises when necessary. Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release of the film.
TV costs primarily represent the costs we have incurred to produce scripted and unscripted TV programs for third parties. The capitalized costs will be expensed to the statement of operations when the program is delivered to the third-party.
Income Taxes
We are treated as a corporation for income tax purposes. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are attributable to operating loss and tax credit carryforwards. The carrying amounts of deferred tax assets are reduced by a valuation allowance, if based on available evidence, if it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, the duration of statutory carryforward periods, and tax planning alternatives.
We have adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires management to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the tax amount recognized in the audited consolidated financial statements included herein is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority.
Impact of Recently Issued Accounting Standards
In March 2019, FASB issued ASU 2019-02, Entertainment—Films—Other Assets—Film Costs (“ASU 2019-02”). ASU 2019-02 aligns the cost capitalization requirements for episodic TV series with the guidance for films in ASC 926-20 and adds new disclosure requirements. Entities that predominantly monetize films or license agreements together with other films and/or license agreements will be required to test the “film group” for impairment rather than test each individual title. Entities that monetize content in a film group must reassess their estimate of the use of a film in the film group and account for any changes prospectively. The standard is effective for fiscal periods beginning after December 15, 2019 and can be early-adopted. We are currently evaluating the impact of the adoption of this standard on our financial statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that the entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard is effective for fiscal periods beginning after December 15, 2017, and allows for either full retrospective or modified retrospective adoption. The Company adopted ASU 2014-09 on October 1, 2018. The Company recorded a transition adjustment, using the modified retrospective method for all open contracts existing as of October 1, 2018, of $2.9 million as an increase to the opening balance of retained earnings.
In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-to-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The historical quarterly results presentedstandard is effective for fiscal periods beginning after December 15, 2018 and was adopted by the Company on October 1, 2019. As disclosed in Note 4 to the audited consolidated financial statements included in this transition report, we had future minimum lease payments under non-cancellable operating leases of $16.0 million as of March 31, 2020. Upon adoption of ASU 2016-02, the Company recognized $8.5 million as new right-of-use assets and $11.7 million of lease liabilities.
Results of Operations
The table below are not necessarily indicativesets forth our consolidated statements of operations for the results that mayperiods indicated. This information should be expected for any future quarters or periods.
| | | Three Months Ended | |
| | | June 30,
2016 | | | September 30,
2016 | | | December 31,
2016 | | | March 31,
2017 | |
| | | (dollars in thousands) | |
| Selected Quarterly Results of Operations | | | | | | | | | | | | |
| Revenue | | $ | 71,095 | | | $ | 71,876 | | | $ | 57,348 | | | $ | 52,675 | |
| Cost of sales | | | (48,010 | ) | | | (48,935 | ) | | | (35,029 | ) | | | (32,266 | ) |
| Gross profit | | | 23,085 | | | | 22,941 | | | | 22,319 | | | | 20,409 | |
| Administrative costs | | | (15,905 | ) | | | (17,447 | ) | | | (14,119 | ) | | | (15,839 | ) |
| Operating profit | | | 7,180 | | | | 5,494 | | | | 8,200 | | | | 4,570 | |
| Net finance costs | | | (3,193 | ) | | | (4,374 | ) | | | (3,415 | ) | | | (6,174 | ) |
| Other gains/(losses) | | | 2,032 | | | | 1,534 | | | | 10,264 | | | | 376 | |
| (Loss)/profit before tax | | | 6,019 | | | | 2,654 | | | | 15,049 | | | | (1,228 | ) |
| Income tax expense | | | (2,580 | ) | | | (4,049 | ) | | | (3,565 | ) | | | (845 | ) |
| Net (loss)/income | | $ | 3,439 | | | $ | (1,395 | ) | | $ | 11,484 | | | $ | (2,073 | ) |
| | | | | | | | | | | | | | | | | |
| OTHER NON-GAAP MEASURES | | | | | | | | | | | | | | | | |
| EBITDA(1) | | $ | 10,116 | | | $ | 7,287 | | | $ | 18,920 | | | $ | 6,226 | |
| Adjusted EBITDA(1) | | $ | 18,123 | | | $ | 13,691 | | | $ | 14,497 | | | $ | 9,354 | |
| | | | | | | | | | | | | | | | | |
| OPERATING DATA | | | | | | | | | | | | | | | | |
| High budget film releases(2) | | | 3 | | | | 2 | | | | — | | | | — | |
| Medium budget film releases(2) | | | 2 | | | | 4 | | | | 3 | | | | 1 | |
| Low budget film releases(2) | | | 9 | | | | 12 | | | | 5 | | | | 4 | |
| Total new film releases(2) | | | 14 | | | | 18 | | | | 8 | | | | 5 | |
(1) | We use EBITDA and Adjusted EBITDA as supplemental financial measures. EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization (excluding amortization of capitalized film content and debt issuance costs). Adjusted EBITDA is defined as EBITDA adjusted for impairments of available-for-sale financial assets, profit/loss on held for trading liabilities (including profit/loss on derivatives), transaction costs relating to equity transactions and share based payments. EBITDA, as used and defined by us, may not be comparable to similarly-titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures and working capital movement or tax position. However, our management team believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our results of operations because these measures: |
| · | are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; |
| · | help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and |
| · | are used by our management team for various other purposes in presentations to our board of directors as a basis for strategic planning and forecasting. |
There are significant limitations to using EBITDAread together with the consolidated financial statements and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability ofrelated notes included elsewhere in this transition report. The results of operations for our TV and other segment are not material to the trend of different companiesthe financials and therefore, the results of operations discussed below do not treat the results of our Film segment and our TV and other segment separately.
| | | For the Year ended September 30, | | | For the Six Months Ended
March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | (in thousands of dollars) | |
| | | | | | | | | | | | (unaudited) | | | | |
| | | | | | | | | | | | | | | | |
| Revenue | | $ | 201,441 | | | $ | 448,846 | | | $ | 434,261 | | | $ | 224,068 | | | $ | 188,453 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | | | | |
| Direct operating | | | 139,769 | | | | 298,246 | | | | 260,673 | | | | 123,566 | | | | 92,752 | |
| Distribution and marketing | | | 72,554 | | | | 230,336 | | | | 200,900 | | | | 87,865 | | | | 95,047 | |
| General and administrative | | | 57,961 | | | | 91,999 | | | | 60,840 | | | | 36,433 | | | | 26,844 | |
| Depreciation and amortization | | | 1,304 | | | | 1,814 | | | | 2,220 | | | | 1,096 | | | | 1,022 | |
| Restructuring expense | | | — | | | | — | | | | — | | | | — | | | | 1,832 | |
| Total operating expenses | | | 271,588 | | | | 622,395 | | | | 524,633 | | | | 248,960 | | | | 217,497 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loss from operations | | | (70,147 | ) | | | (173,549 | ) | | | (90,372 | ) | | | (24,892 | ) | | | (29,044 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | | | | |
| Shareholder exit (expense)/income | | | — | | | | — | | | | (25,000 | ) | | | (5,777 | ) | | | 13,767 | |
| Interest income | | | 116 | | | | 99 | | | | 213 | | | | 51 | | | | 43 | �� |
| Interest expense | | | (15,943 | ) | | | (18,934 | ) | | | (22,134 | ) | | | (11,629 | ) | | | (10,718 | ) |
| Loss before income taxes | | | (85,974 | ) | | | (192,384 | ) | | | (137,293 | ) | | | (42,247 | ) | | | (25,952 | ) |
| Income tax provision | | | 387 | | | | 811 | | | | 708 | | | | 359 | | | | 161 | |
| Net loss | | $ | (86,361 | ) | | $ | (193,195 | ) | | $ | (138,001 | ) | | $ | (42,606 | ) | | $ | (26,113 | ) |
Six Months Ended March 31, 2020 to Six Months Ended March 31, 2019
Revenue
Our revenue decreased by 16%, from $224.1 million for the six months ended March 31, 2019 to $188.5 million for the six months ended March 31, 2020. This decrease was the result of decreases in revenue from our film operations during these periods.
Our revenues from film decreased 19%, from $220.5 million for the six months ended March 31, 2019 to $178.6 million for the six months ended March 31, 2020. The decrease was due to the strong performance of titles released in 2019 and the different methodsposition of calculatingtitles in their post theatrical life cycle. The decrease was in all markets. The decrease in theatrical revenues from $58.6 million for the six months ended March 31, 2019 to $49.2 million for the six months ended March 31, 2020, was due largely to the success of Upside for the six months ended March 31, 2019. The average U.S. and Canadian box office for our films also decreased from $73.8 million for the six months ended March 31, 2019 to $20.9 million for the six months ended March 31, 2020. In addition, during the six months ended March 31, 2020, our post-theatrical revenue decreased to $91.2 million, from $115.0 million in the same period in fiscal 2019, largely due to the decreased demand for physical Home Entertainment. Our international revenues decreased from $46.9 million in the six months ended March 31, 2019 to $38.2 million for the six months ended March 31, 2020 due to theatrical releases being delayed in some territories due to COVID-19.
Our revenues from scripted and non-scripted TV increased by 175%, from $3.6 million for the six months ended March 31, 2019 to $9.9 million for the six months ended March 31, 2020. This increase was primarily due to an increase in the number of non-scripted TV shows being produced.
Direct operating expenses
Direct operating expenses decreased by 25%, from $123.6 million for the six months ended March 31, 2019 to $92.8 million for the six months ended March 31, 2020. The decrease was due to the decrease in revenue for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The direct operating expenses are a function of revenue as the individual film forecast method is used, which bases the proportion that the current year’s revenue bears to the estimate of the ultimate revenue.
Distribution and marketing expenses
Distribution and marketing expenses increased by 8%, from $87.9 million for the six months ended March 31, 2019 to $95.0 million for the six months ended March 31, 2020. The increase was due to was due to a higher volume of films being released and the corresponding marketing, distribution and releasing costs of these films.
General and administrative expenses
General and administrative expenses decreased by 26%, from $36.4 million for the six months ended March 31, 2019 to $26.8 million for the six months ended March 31, 2020. The decrease was largely due to the reduction in employee head count and the use of consultants.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased by 9%, from $1.1 million for the six months ended March 31, 2019 to $1.0 million for the six months ended March 31, 2020. The decrease was due to the increase in the number of fixed assets that have become fully depreciated.
Loss from operations
As a result of the foregoing, our loss from operations increased from $24.9 million for the six months ended March 31, 2019 to $29.0 million for the six months ended March 31, 2020.
Shareholder exit (expense)/income
The shareholder exit expense was decreased by $13.8 million from September 30, 2019 to March 31, 2020 due to the decrease in the fair value. The fair value is based on a number of assumptions, including the probability of conversion, the timing of the conversion and the Company’s cost of capital. The probability of conversion increased, resulting in the decrease of the fair value.
Interest income
Our interest income decreased by 16%, from $51 thousand for the six months ended March 31, 2019 to $43 thousand for the six months ended March 31, 2020. This decrease is primarily attributable to a decrease in our interest-bearing investment accounts.
Interest expense
Our interest expense decreased by 8%, from $11.6 million for the six months ended March 31, 2019 to $10.7 million for the six months ended March 31, 2020. This decrease was due to lower debt balances as a result of paying off and terminating the Prints and Advertising Facility as well as decreasing the revolving credit principal balance.
Loss before income taxes
As a result of the foregoing, our loss before income taxes increased by 38%, from $42.2 million for the six months ended March 31, 2019 to $26.0 million for the six months ended March 31, 2020.
Income tax provision
Our income tax provision decreased by 55%, from $359 thousand for the six months ended March 31, 2019 to $161 thousand for the six months ended March 31, 2020. This decrease was primarily due to lower foreign withholding taxes on our lower international sales.
Net loss
As a result of the above, our net loss for the period decreased by 39%, from $42.6 million for the six months ended March 31, 2019 to $26.1 million for the six months ended March 31, 2020.
Year Ended September 30, 2019 Compared to Year Ended September 30, 2018
Revenue
Our revenue decreased by 3%, from $448.8 million for the year ended September 30, 2018 to $434.3 million for the year ended September 30, 2019. This decrease was the result of decreases in the revenue from film operations during these periods. Our revenues from films decreased by 8.8%, from $427.6 million in fiscal 2018 to $393.6 million in fiscal 2019. This decrease was primarily due to a decrease in theatrical revenues from $136.5 million in fiscal 2018 to $109.7 million in fiscal 2019, due largely to the decrease in the number of films released in fiscal 2019 and an increase in the proportion of such films that were distributed versus produced by us. In addition, due largely to a decrease in the number of films released in fiscal 2019, our international revenues also decreased from $154.9 million in fiscal 2018 to $88.6 million in fiscal 2019. The decrease in theatrical and international revenues was partially offset by an increase in revenue from post-theatrical distribution from $136.2 million in fiscal 2018 to $195.3 million in fiscal 2019, largely due to the opening of pay television and free television windows.
Our revenue from scripted and non-scripted TV increased from $21.2 million in fiscal 2018 to $40.6 million in fiscal 2019. The increase was primarily due to an increase in revenue from non-scripted TV projects.
Direct operating expenses
Direct operating expenses decreased by 13%, from $298.2 million for the year ended September 30, 2018 to $260.7 million for the year ended September 30, 2019. The decrease was primarily due to the decrease in revenue for the fiscal year 2019 compared to the fiscal year 2020. The direct operating expenses are a function of revenue as the individual film forecast method is used, which bases the proportion that the current year’s revenue bears to the estimate of the ultimate revenue.
Distribution and marketing expenses
Distribution and marketing expenses decreased by 13%, from $230.3 million for the fiscal year ended September 30, 2018 to $200.9 million for the fiscal year ended September 30, 2019. The decrease was due to a lower volume of films being released and the corresponding marketing, distribution and releasing costs not being incurred.
General and administrative expenses
General and administrative expenses decreased by 34%, from $92.0 million for the year ended September 30, 2018 to $60.8 million for the year ended September 30, 2019. The decrease was due to a reduction in employee head count and the use of consultants and the fiscal year 2018 expenses related to an aborted public offering.
Depreciation and amortization expenses
Depreciation and amortization expenses increased by 22%, from $1.8 million for the year ended September 30, 2018 to $2.2 million for the year ended September 30, 2019. The increase was due to the cost of opening a new office and an investment in new fixed assets.
Loss from operations
As a result of the foregoing, our loss from operations decreased from $173.5 million in fiscal 2018 to $90.4 million in fiscal 2019.
Shareholder exit (expense)/income
The shareholder exit expense of $25.0 million for the year ended September 30, 2019 represents the fair value of an anticipated payment the Class D shareholders are entitled to receive upon the consummation of certain transactions. The fair value is based on a number of assumptions, including the probability of conversion, the timing of the conversion and the Company’s cost of capital.
Interest income
Our interest income increased by 115%, from $99 thousand for fiscal 2018 to $213 thousand for fiscal 2019. This increase is primarily attributable to an increase in our interest-bearing investment accounts.
Interest expense
Our interest expense increased by 17%, from $18.9 million for fiscal 2018 to $22.1 million for fiscal 2019. This increase was attributable to higher draws on our revolver loan and less paydowns throughout the year.
Loss before income taxes
As a result of the foregoing, our loss before income taxes decreased by 29%, from $192.4 million for fiscal 2018 to $137.3 million for fiscal 2019.
Income tax provision
Our income tax provision decreased by 13%, from $0.8 million in fiscal 2018 to $0.7 million in fiscal 2019. This decrease was attributable to lower foreign withholding taxes on our lower international sales.
Net loss
As a result of the foregoing, our net loss for the year decreased by 29%, from $193.2 million in fiscal 2019 to $138.0 million in fiscal 2019.
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
Revenue
Our revenue increased by 123%, from $201.4 million for the year ended September 30, 2017 to $448.8 million for the year ended September 30, 2018. This increase was the result of increases in revenue from our film as well as TV and other operations during these periods.
Our revenues from films increased by 118%, from $195.8 million in fiscal 2017 to $427.6 million in fiscal 2018. This increase was primarily due to an increase in theatrical revenues from $20.3 million in fiscal 2017 to $136.5 million in fiscal 2018, due largely to an increase in volume of films released and an increase in the proportion of such films that were produced and distributed by us. The average U.S. and Canadian box office for our films also increased from $11.7 million in fiscal 2017 to $39.1 million in fiscal 2018. In addition, due largely to the release of more films, our international revenues increased from $37.8 million in fiscal 2017 to $154.9 million in fiscal 2018. The increase in theatrical and international revenues was partially offset by a decrease in revenue from post-theatrical distribution from $137.6 million in fiscal 2017 to $136.2 million in fiscal 2018, largely due to the success of Bad Moms in post-theatrical windows in fiscal 2017 which was largely offset by our increased number of films in post-theatrical windows in fiscal 2018.
Our revenue from TV and other increased from $5.7 million in fiscal 2017 to $21.2 million in fiscal 2018. The increase was primarily due to the increase in the number of episodes of scripted TV specifically, delivery of six episodes of Valley of the Boom to the National Geographic channel.
Direct operating expenses
Direct operating expenses increased by 113.4%, from $139.8 million for the year ended September 30, 2017 to $298.2 million for the year ended September 30, 2018. The increase was primarily due to a higher volume of films being produced, with nine produced and distributed films released in fiscal 2018 compared to five in fiscal 2017. The direct operating expenses are a function of revenue as the individual film forecast method is used, which bases the proportion that the current year’s revenue bears to the estimate of the ultimate revenue.
Distribution and marketing expenses
Distribution and marketing expenses increased by 217%, from $72.6 million for the fiscal year ended September 30, 2017 to $230.3 million for the fiscal year ended September 30, 2018. The increase was due to a higher volume of films being released and the corresponding marketing, distribution and releasing costs of these films.
General and administrative expenses
General and administrative expenses increased by 59%, from $58.0 million for the year ended September 30, 2017 to $92.0 million for the year ended September 30, 2018. The increase was primarily due to expenses related to an aborted public offering and organizational restructuring costs. The increase was also due to an increase in headcount.
Depreciation and amortization expenses
Depreciation and amortization expenses increased by 38%, from $1.3 million for the year ended September 30, 2017 to $1.8 million for the year ended September 30, 2018. The increase was due to the purchase of approximately $2.5 million of fixed assets.
Loss from operations
As a result of the foregoing, our loss from operations increased from $70.1 million in fiscal 2017 to $173.5 million in fiscal 2018.
Interest income
Our interest income decreased by 15%, from $116 thousand for fiscal 2017 to $99 thousand for fiscal 2018. This decrease is primarily attributable to a decrease in our interest-bearing investment accounts.
Interest expense
Our interest expense increased by 19%, from $15.9 million for fiscal 2017 to $18.9 million for fiscal 2018. This increase was attributable to an increase in our term loans as well as borrowings under our revolving credit facility.
Loss before income taxes
As a result of the foregoing, our loss before income taxes increased by 124%, from $86.0 million for fiscal 2017 to $192.4 million for fiscal 2018.
Income tax provision
Our income tax provision increased by 100%, from $0.4 million in fiscal 2017 to $0.8 million in fiscal 2018. This increase was attributable to increased withholding taxes on our international sales.
Net loss
As a result of the foregoing, our net loss for the year increased by 124%, from $86.4 million in fiscal 2017 to $193.2 million in fiscal 2018.
Non-GAAP Measures
To supplement our consolidated financial statements, which are presented in accordance with GAAP, we also use EBITDA and Adjustedfree cash flow as additional financial measures, none of which is required by, or presented in accordance with, GAAP. We believe that EBITDA facilitates comparisons of operating performance from period to period and company to company by eliminating potential impacts of items that our management does not consider to be indicative of our operating performance. We believe that free cash flow is a meaningful indicator regarding our liquidity and the cash generated from (or used in) operating activities available for the execution of our business strategy. We believe that these measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as they help our management. However, our presentation of EBITDA and free cash flow may not be comparable to similarly titled measures presented by other companies. The use of these non-GAAP measures has limitations as an analytical tool, and you should not consider them in isolation from, or as substitute for analysis of, our results of operations or financial condition as reported under GAAP.
We define EBITDA as net loss, excluding income tax provision, interest expense, interest income, and depreciation and amortization. We define free cash flow as net cash used in operating activities, reduced by different companies.purchase of property and equipment, increased by term loan draw and revolving credit facilities draw and reduced by revolving credit facilities repayment. The tables below reconcile EBITDA to net loss and free cash flow to net cash used in operating activities, which in each case are the most directly comparable GAAP financial measures.
| | | For the Year ended September 30, | | | For the Six Months Ended
March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | (in thousands of dollars) | |
| | | | | | | | | | | | (unaudited) | | | | |
| Net loss | | $ | (86,361 | ) | | $ | (193,195 | ) | | $ | (138,001 | ) | | $ | (42,606 | ) | | $ | (26,113 | ) |
| Income tax provision | | | 387 | | | | 811 | | | | 708 | | | | 359 | | | | 161 | |
| Interest expense | | | 15,943 | | | | 18,934 | | | | 22,134 | | | | 11,629 | | | | 10,718 | |
| Interest income | | | (116 | ) | | | (99 | ) | | | (213 | ) | | | (51 | ) | | | (43 | ) |
| Depreciation and amortization | | | 1,304 | | | | 1,814 | | | | 2,220 | | | | 1,096 | | | | 1,022 | |
| EBITDA (unaudited) | | $ | (68,843 | ) | | $ | (171,735 | ) | | $ | (113,152 | ) | | $ | (29,573 | ) | | $ | (14,255 | ) |
| | | For the Year ended September 30, | | | For the Six Months Ended
March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | (in thousands of dollars) | |
| | | | | | | | | | | | (unaudited) | | | | |
| Net cash provided by (used in) operating activities | | $ | (123,429 | ) | | $ | (61,490 | ) | | $ | (213,278 | ) | | $ | (133,878 | ) | | $ | 10,342 | |
| Purchase of property and equipment | | | (1,713 | ) | | | (2,757 | ) | | | (354 | ) | | | (428 | ) | | | (475 | ) |
| Term loan draw | | | — | | | | 3,322 | | | | — | | | | — | | | | — | |
| Revolving credit facilities draw | | | 286,807 | | | | 465,012 | | | | 286,419 | | | | 201,496 | | | | 158,351 | |
| Revolving credit facilities repayment | | | (205,099 | ) | | | (362,177 | ) | | | (332,853 | ) | | | (209,595 | ) | | | (160,429 | ) |
| Free cash flow (unaudited) | | $ | (43,434 | ) | | $ | 41,910 | | | $ | (260,066 | ) | | $ | (142,405 | ) | | $ | 7,789 | |
Key Financial and Operating Metrics
The following table sets forth our key financial and operating metrics for the periods indicated:
| | | For the Year ended September 30, | | | For the
Six Months Ended
March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2020 | |
| | | (Content investment and prints and advertising
in millions of dollars) | |
| | | | | | | | | | | | | |
| Revenue growth(1) | | | 8.8 | % | | | 122.8 | % | | | (3.2 | )% | | | (15.9 | )% |
| Content investment(2) | | $ | 79.1 | | | $ | 191.7 | | | $ | 98.1 | | | $ | 9.5 | |
| Distribution and marketing(3) | | $ | 72.6 | | | $ | 230.3 | | | $ | 200.9 | | | $ | 95.0 | |
| Produced films(4) | | | 4 | | | | 9 | | | | 3 | | | | 4 | |
| Total film releases(5) | | | 9 | | | | 13 | | | | 6 | | | | 5 | |
| | | | | | | | | | | | | | | | | |
| (1) | Represents revenue growth over comparable period from prior year. |
| (2) | Capitalized film and TV costs, net of co-financing and government tax incentives. |
| (3) | Consists of distribution and marketing expenses on our films. |
| (4) | Includes theatrical releases of films we produced or negative pickups in the United States. |
| (5) | Includes all films we distributed. |
B. Liquidity and Capital Resources
We have historically funded our cash requirements principally from borrowings under our revolving credit facilities and borrowings under our term loan, and financing through issuance. We are generally able to repay our borrowings under the revolving credit facilities with proceeds generated from the release of our films and other licensing arrangements. Going forward, we believe that our liquidity requirements will be satisfied by using a combination of cash generated from operating activities and borrowings under our credit facilities.
The following table sets forth our cash flows for the periods indicated:
| | | For the Year ended
September 30, | | | For the
Six Months Ended
March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2020 | |
| | | (in thousands of dollars) | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | $ | (123,429 | ) | | $ | (61,490 | ) | | $ | (213,278 | ) | | $ | 10,342 | |
| Net cash (used in) investing activities | | | (1,713 | ) | | | (2,757 | ) | | | (354 | ) | | | (475 | ) |
| Net cash provided by (used in) financing activities | | | 114,754 | | | | 155,096 | | | | 62,855 | | | | (2,043 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | | (10,388 | ) | | | 90,849 | | | | (150,777 | ) | | | 7,824 | |
| Foreign exchange effects on cash | | | 164 | | | | (230 | ) | | | (193 | ) | | | 7 | |
| Cash, cash equivalents and restricted cash at beginning of year/period | | | 88,449 | | | | 78,225 | | | | 168,844 | | | | 17,874 | |
| Cash, cash equivalents and restricted cash at the end of the year/period | | $ | 78,225 | | | $ | 168,844 | | | $ | 17,874 | | | $ | 25,705 | |
Net Cash Flows Used in Operating Activities
Net cash used in operating activities primarily comprises our net loss for the period adjusted by depreciation and amortization, stock compensation expense, amortization and write-off of film costs, amortization of acquired contracts, amortization of debt discount and issuance costs, disposal of fixed assets, accrual of paid-in-kind interest and changes in operating assets and liabilities.
For the six months ended March 31, 2020, net cash provided by operating activities was $10.3 million, which was primarily based on our net loss during the period of $26.1 million, adjusted for amortization and impairment of film and TV costs of $52.4 million, due to that being a large non-cash expense. These were partially offset by an increase in prepaid expenses and other assets of $25.7 million and a decrease in accounts payable and accrued expenses of $18.6 million.
For the fiscal year ended September 30, 2019, net cash used in operating activities was $213.3 million, which was primarily based on our net loss during the year of $138.0 million, adjusted for an increase in film and TV costs of $105.8 million and an increase in accounts receivable of $76.7 million, both increases were largely driven by an increase in the number of films that we produced and distributed or to which we owned certain distribution-only rights. These were partially offset by amortization and impairment of film and TV costs of $120.1 million due to amortization of our film library, a decrease in accounts payable and accrued expenses of $64.3 million due to an increase in the volume of films produced and an increase in accrued participations and residuals of $22.5 million due to an increase in the size of our film library.
For the fiscal year ended September 30, 2018, net cash used in operating activities was $61.5 million, which was primarily based on our net loss during the year of $193.2 million, adjusted for an increase in film and TV costs of $193.1 million and an increase in accounts receivable of $48.0 million, both increases were largely driven by an increase in the number of films that we produced and distributed or to which we owned certain distribution-only rights. These were partially offset by amortization and impairment of film and TV costs of $140.2 million due to amortization of our film library, an increase in accounts payable and accrued expenses of $145.6 million due to an increase in the volume of films produced and an increase in accrued participations and residuals of $44.1 million due to an increase in the size of our film library.
For the fiscal year ended September 30, 2017, net cash used in operating activities was $123.4 million, which was primarily based on our net loss during the year of $86.4 million, adjusted for an increase in film and TV costs of $87.3 million, driven by an increase in the number of films that we either produced and distributed or owned certain distribution-only rights to, and an increase in prepaid and other assets of $37.8 million. These were partially offset by amortization and impairment of film and TV costs of $54.7 million, an increase in deferred revenue of $10.5 million primarily due to international minimum guarantees we received from unreleased films and an increase in accrued participations and residuals of $9.0 million relating to talent and equity participants in our films and residuals payable under union contracts.
Net Cash Flows Used in Investing Activities
Net cash used in investing activities consists of our purchase of property and equipment. During fiscal years 2017 and 2018 and 2019 and the six months ended March 31, 2020, we had net cash used investing activities of $1.7 million, $2.8 million, $0.4 million and $0.5 million respectively.
Net Cash Flows from Financing Activities
For the six months ended March 31, 2020, net cash used in financing activities was $2.0 million, which was primarily attributable to revolving credit facilities repayments, offset by revolving credit facilities draws.
For the fiscal year ended September 30, 2019, net cash provided by financing activities was $62.9 million, which was primarily attributable to revolving credit facilities draw of $286.4 million, offset by revolving credit facilities repayments of $332.9 million.
For the fiscal year ended September 30, 2018, net cash provided by financing activities was $155.1 million, which was primarily attributable to revolving credit facilities draw of $465.0 million, offset by revolving credit facilities repayments of $362.2 million.
For the fiscal year ended September 30, 2017, net cash provided by financing activities was $114.8 million, which was primarily attributable to revolving credit facilities draw of $286.8 million, offset by revolving credit facilities repayments of $205.1 million.
Financial Investment and Treasury Policy
Our cash on hand is short-term and maintained on deposit at our senior lender and other banks. It is used primarily for working capital purposes and to reduce financing costs by paying down revolving and term loans.
Indebtedness
Senior Credit Facility
On October 7, 2016, STX, as the parent entity of STX Financing, LLC (“Borrower”), entered into that certain Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement (the “Original Senior Credit Agreement”; as amended by each of the Senior Amendments (as defined below), the “Senior Credit Facility”) by and among STX, the Borrower, JPMorgan Chase Bank, N.A, as administrative agent and issuing bank (the “Senior Administrative Agent”), the lenders from time to time party thereto (the “Senior Lenders”) and the guarantors referred to therein (“Senior Guarantors”, together with the Borrower, the “Senior Credit Parties”). The Senior Credit Facility has been amended by that certain (i) Amendment No. 1 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of June 2, 2017 (the “First Senior Amendment”), (ii) Amendment No. 2 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of October 4, 2017 (the “Second Senior Amendment”), (iii) Waiver and Amendment No. 3 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of February 22, 2018 (the “Third Senior Amendment”), (iv) Waiver and Amendment No. 4 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of February 11, 2019 (the “Fourth Senior Amendment”), (v) Consent and Amendment No. 5 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of January 30, 2020 (the “Fifth Senior Amendment”), and (vi) Consent and Amendment No. 6 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of April 17, 2020 (the “Sixth Senior Amendment,” together with the First Senior Amendment, Second Senior Amendment, Third Senior Amendment, Fourth Senior Amendment, Fifth Senior Amendment and Sixth Senior Amendment, the “Senior Amendments”).
Pursuant to the Senior Credit Facility, the Borrower may borrow up to $350.0 million from the Senior Lenders on a revolving basis. All advances are subject to a borrowing base determined by a variety of the Credit Parties’ assets and secured by substantially all of the Credit Parties’ assets. The Borrower may borrow up to an additional $250.0 million, subject to certain conditions, as set forth in the Senior Credit Facility. The incremental amounts are issued on the same terms as the existing Senior Credit Facility.
Repayments of all outstanding balances and interest will be due on October 7, 2021. For LIBOR loans, the interest is equal to 3.00% plus the LIBOR rate. We are required to pay a commitment fee at an annual rate of 0.75% if credit exposure is less than 50.00% of total commitments and 0.50% if credit exposure is more than 50.00% of the undrawn amounts.
The Senior Credit Facility includes certain covenants, which we believe are in line with like transactions across the industry, including limitations on our ability to incur additional indebtedness, incur liens, provide guaranties, make certain investments, pay dividends or make other restricted payments, sell or discount receivables, enter into sale and leaseback or soft dollar transactions, make capital expenditures above an annual cap and enter into certain transactions with affiliates. See “Part I—Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry— Covenants in the instruments governing our and our subsidiaries’ existing indebtedness may limit our operational flexibility, including our ability to incur additional debt.” for a more detailed description of these covenants. The covenants contained in our credit facilities are consistent with market practice for comparable transactions for companies operating in the same industry as us. The covenants are sized in such a manner that they allow us to operate in a manner consistent with its historical practice as well as near-term expectations. To the extent we need to engage in any activity that is restricted under our covenants, we must seek approval from our lenders. We have done this on multiple occasions when, for example, we have needed incremental capacity to fund overhead. To date, we have been successful in obtaining such approvals when needed. At this time, we are in compliance with each covenant under our credit facilities.
As of March 31, 2020, $230.4 million has been drawn on the Senior Credit Facility, and the remaining $169.6 million of the $400 million facility was unutilized (limited by an asset-based borrowing base covenant). Pursuant to the Sixth Senior Amendment, the Senior Credit Facility was amended, which resulted in the decrease of the facility from $400 million to $350 million and an increase from $200 million to $250 million in the ability to increase the borrowings, subject to certain conditions, as set forth in the credit agreement. The unutilized capacity as of March 31, 2020 does not include the increase in commitments of up to $250 million that is currently permitted under the circumstances described above.
Mezzanine Facility
On October 7, 2016, STX, as the parent entity of Borrower, entered into that certain Second Amended and Restated Subordinated Credit, Security, Guaranty and Pledge Agreement (the “Original Subordinated Credit Agreement”; as amended by each of the Subordinated Amendments (as defined below), the “Mezzanine Facility”) by and among the STX, the Borrower, Red Fish Blue Fish, LLC, as administrative agent (the “Subordinated Administrative Agent”), the lenders from time to time party thereto (the “Subordinated Lenders”) and the guarantors referred to therein (the “Subordinated Guarantors”, together with the Borrower, the “Subordinated Credit Parties”). The Mezzanine Facility has been amended by that certain (i) Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of March 2, 2018 (the “First Subordinated Amendment”), (ii) Consent and Amendment No. 2 to Second Amended and Restated Subordinated Credit Agreement dated as of February 11, 2019 (the “Second Subordinated Amendment”) and (iii) Consent and Amendment No. 3 to Second Amended and Restated Credit Agreement dated as of April 17, 2020 (the “Third Subordinated Amendment”, together with the First Subordinated Amendment and Second Subordinated Amendment, the “Subordinated Amendments”).
Pursuant to the Mezzanine Facility, the Borrower borrowed a term loan in the amount of $35,210,000 (the “Subordinated Loans”) from the Subordinated Lenders. On or around June 30, 2020 Borrower prepaid the Obligations under and as defined in the Mezzanine Facility in an amount equal to $21.5 million. Pursuant to the terms of the Third Subordinated Amendment, STX has agreed to use its commercially reasonable efforts to cause the remainder of all of the amounts outstanding under the Mezzanine Facility to be fully repaid in cash concurrently with any subsequent renewal, refinancing, repayment, forgiveness, replacement or termination of the Senior Credit Facility.
The obligations under the Mezzanine Facility are secured by substantially all of the Credit Parties’ assets, but subordinated in right of payment and collateral to the obligations under the Senior Credit Agreement. There is no incremental capacity under the Mezzanine Facility.
The maturity date of the Mezzanine Facility is July 7, 2022. Amounts borrowed under the Mezzanine Facility accrue interest at an annual fixed rate of 11.0%. The interest rate applicable to the Subordinated Loans shall be payable on each Interest Payment Date (as defined in the Mezzanine Facility), on the maturity date of the Mezzanine Facility and on the date of any prepayment thereunder as follows: (i) in cash in an amount equal to 9.0% per annum; plus (ii) in kind in an amount equal to 2.0% per annum by adding an amount equal to such unpaid interest to the principal amount of the Subordinated Loans.
The Mezzanine Facility includes certain covenants, which are comparable to transactions involving companies operating in the Borrower’s industry, including limitations on our ability to incur additional indebtedness, incur liens, provide guaranties, make certain investments, pay dividends or make other restricted payments, sell or discount receivables, enter into sale and leaseback or soft dollar transactions, make capital expenditures above an annual cap and enter into certain transactions with affiliates. See “Part I—Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry— Covenants in the instruments governing our and our subsidiaries’ existing indebtedness may limit our operational flexibility, including our ability to incur additional debt.” for a more detailed description of these covenants.
As of March 31, 2020, $35.2 million remained outstanding under the Mezzanine Facility and there was no unused capacity. The Mezzanine Facility is set to mature on July 7, 2022.
The following table sets forth the reconciliationindebtedness described above and related discount and debt issuance costs as of the dates indicated:
| | | As of September 30, | | | As of March 31, | |
| | | 2017 | | | 2018 | | | 2019 | | | 2020 | |
| | (in thousands of dollars) | |
| Revolving credit facilities: | | | | | | | | | | | | | | | | |
| Senior credit facility | | $ | 152,725 | | | $ | 257,560 | | | $ | 222,448 | | | $ | 230,369 | |
| Prints and advertising facility(1) | | | 20,000 | | | | 18,000 | | | | 10,000 | | | | — | |
| Debt issuance costs | | | (11,487 | ) | | | (8,625 | ) | | | (6,046 | ) | | | (4,380 | ) |
| Revolving credit facilities | | | 161,238 | | | | 266,935 | | | | 226,402 | | | | 225,989 | |
| Term loans: | | | | | | | | | | | | | | | | |
| Term loans(2) | | | 35,210 | | | | 38,532 | | | | 35,210 | | | | 35,210 | |
| Interest paid in kind | | | 5,360 | | | | 6,175 | | | | 7,007 | | | | 7,430 | |
| Debt discount | | | (738 | ) | | | (582 | ) | | | (427 | ) | | | (349 | ) |
| Debt issuance costs | | | (421 | ) | | | (470 | ) | | | (244 | ) | | | (199 | ) |
| Term loans, net | | | 39,411 | | | | 43,655 | | | | 41,456 | | | | 42,092 | |
| Total debt | | $ | 200,649 | | | $ | 310,590 | | | $ | 267,948 | | | $ | 268,081 | |
(1) The Prints and Advertising Facility was terminated and repaid in full in January 2020.
(2) Includes the Mezzanine Facility and Aperture Term Loan, which was terminated and repaid in full in May 2019.
As of March 30, 2020, we have a total of $189.6 million in unutilized debt capacity ($169.6 million of which is subject to an asset-based borrowing base covenant under the Senior Credit Facility). This amount does not include the increase in commitments of up to $250 million that is permitted under the Senior Credit Facility under the circumstances described above.
Our secured bank loans are secured by substantially all of our net income to EBITDA and Adjusted EBITDA:
| | | Three Months Ended | |
| | | June 30,
2016 | | | September 30,
2016 | | | December 31,
2016 | | | March 31,
2017 | |
| | | (in thousands) | |
| Net (loss)/income | | $ | 3,439 | | | $ | (1,395 | ) | | $ | 11,484 | | | $ | (2,073 | ) |
| Income tax expense | | | 2,580 | | | | 4,049 | | | | 3,565 | | | | 845 | |
| Net finance costs | | | 3,193 | | | | 4,374 | | | | 3,415 | | | | 6,174 | |
| Depreciation | | | 210 | | | | 183 | | | | 197 | | | | 492 | |
| Amortization(a) | | | 694 | | | | 76 | | | | 259 | | | | 788 | |
| EBITDA (Non-GAAP) | | | 10,116 | | | | 7,287 | | | | 18,920 | | | | 6,226 | |
| Gain on saleof available-for-sale financial assets | | | (58 | ) | | | — | | | | — | | | | — | |
| Share based payments(b) | | | 6,021 | | | | 8,505 | | | | 4,119 | | | | 4,826 | |
| Net loss/(gain) on held for trading derivative instruments | | | 2,044 | | | | (2,101 | ) | | | (8,542 | ) | | | (1,698 | ) |
| Transaction costs relating to equity transactions | | | — | | | | — | | | | — | | | | — | |
| Adjusted EBITDA (Non-GAAP) | | $ | 18,123 | | | $ | 13,691 | | | $ | 14,497 | | | $ | 9,354 | |
| a) | Includes only amortization of intangible assets other than intangible content assets. |
| b) | Consists of compensation costs recognized with respect to all outstanding plans and all other equity settled instruments. |
2) | Includes films that were released by us directly and licensed by us for release. |
Our revenues and operating resultsassets. As of March 31, 2020, we are significantly affected by the timing, number and breadthnot in breach of our theatrical releases and their budgets, the timing of television syndication agreements, and our amortization policy for the first 12 months of commercial exploitation for a film. The timing of releases is determined based on several factors. A significant portionany of the films we distribute are delivered to Indian theaters at times when theater attendance has traditionally been highest, including school holidays, national holidays and the festivals. This timing of releases also takes into account competitor film release dates, major cricket events in India and film production schedules. Significant holidays and festivals, such as Diwali, Eid and Christmas, occur during July to December each year, and the Indian Premier League cricket season generally occurs during April and May of each year. The Tamil New Year, called Pongal, falls in January each year making the quarter ending March an important one for Tamil releases.
In the fiscal year 2017, revenue fluctuations primarily reflected the timing of major theatrical releases, with our highest quarterly revenues of $71.9 million in the three months ended September 30, 2016 as a resultcovenants of the two high budget theatrical releases of Dishoom (Hindi), Janata Garage (Telugu) and four medium budget theatrical releases of Baar Baar Dekho (Hindi), Banjo (Hindi), Happy Bhag Jayegi (Hindi) and White (Malayalam). The lowest quarterly revenues was of $52.7 million in the three months ended March 31, 2017. The fluctuations in other gains or losses reflect the changes in mark to market values of our interest derivative liabilities.
Our quarterly results can vary from one period to the next, and the results of one quarter are not necessarily indicative of results for the next or any future quarter. Our revenue and operating results are therefore seasonal in nature due to the impact on income of the timing of new releases as well as timing and quantum of catalogue revenues.
E. Off-Balance Sheet Arrangements
From time to time, to satisfy our filmed content purchase contracts, we obtain guarantees or other contractual arrangements, such as letters of credit, as support for our payment obligations.
loans.
As of March 31, 2017, the Group has provided certain stand-by letters2020, we had long-term borrowings of credit amounting to $80.6 million (2016: $96.0 million) which are in the nature of performance guarantees issued while entering into film co-production contracts and are valid until funding obligations under these contracts are met. These guarantees, issued in connection with outstanding content commitments, have varying maturity dates.$268.1 million.
In addition, the Group issued financial guarantees amounting to $2.2 million (2016: $2.4 million)Other than in the ordinary course of business having varyingas discussed under “Business—Our Business Model—Films—Film Project Financing—Loans,” and except as described above, since March 31, 2020, there has been no material change in our indebtedness.
Except as discussed above, and apart from normal trade and other payables in the ordinary course of business, we did not have any material mortgages, charges, debentures, loan capital, debt securities, loans, bank overdrafts or other similar indebtedness, finance lease or hire purchase commitments, liabilities under acceptances, acceptance credits, which are either guaranteed, unguaranteed, secured or unsecured, or guarantees or other contingent liabilities as of close of business on the latest practicable date.
The Senior Credit Facility matures on October 7, 2021. The maturity datesof the Senior Credit Facility now falls within the twelve-month period following the issuance of the March 31, 2020 STX financial statements for which STX is required to evaluate as part of its assessment its ability to continue as a going concern. Management believes that STX has adequate liquidity to fund its operations up until the maturity of the Senior Credit Facility. Management of the Company is optimistic that the revolving credit facility will be refinanced prior to the next 12 months. The Group is only called uponcredit facility maturity date. For additional information, see Note1 and Note 3 to satisfythe audited Consolidated Financial Statements included in this transition report.
C. Research and Development
Not applicable
D. Trend Information
We discuss in Item 5.A above and elsewhere in this transition report, trends, uncertainties, demands, commitments or events for the periods presented herein that we believe are reasonably likely to have a guarantee whenmaterial adverse effect on our revenues, income, profitability, liquidity or capital resources to cause the guaranteed party failsdisclosed financial information not to meet its obligations.be necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
The Group didAs of March 31, 2020, we have not earnentered into any fee to provide such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused.
off-balance sheet arrangements.
F. Contractual Obligations
We have commitments under certain firm contractual arrangements, or firm commitments, to make future payments. These firm commitments secure future rights to various assets and services to be used in the normal course of our operations. The following table summarizes our firm commitments as of March 31, 2017.
| | | As of March 31, 2017 | |
| | | Total | | | Less than
1 year | | | 1-3
years | | | 3-5
years | | | More than
5 years | |
| | | (in thousands) | |
| Recorded contractual obligations | | | | | | | | | | | | | | | | | | | | |
| Debt | | $ | 271,535 | | | $ | 180,722 | | | $ | 18,079 | | | $ | 71,881 | | | $ | 853 | |
| | | | | | | | | | | | | | | | | | | | | |
| Unrecorded contractual obligations | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 918 | | | | 645 | | | | 273 | | | | — | | | | — | |
| Film entertainment rights purchase obligations(1) | | | 250,997 | | | | 58,630 | | | | 100,942 | | | | 90,307 | | | | 1,118 | |
| Interest payments on debt(2) | | | 40,987 | | | | 22,019 | | | | 12,046 | | | | 6,922 | | | | — | |
| Total | | $ | 292,902 | | | $ | 81,294 | | | $ | 113,261 | | | $ | 97,229 | | | $ | 1,118 | |
_______________
| | | Payments Due by Period | |
| | | Total | | | Less than
1 year | | | 1 - 3 years | | | 3 - 5 years | | | More than
5 years | |
| | | (in thousands of dollars) | |
| As of March 31, 2020: | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 273,009 | | | $ | — | | | $ | 230,369 | | | $ | 42,640 | | | $ | — | |
| Accrued participations and residuals | | | 99,230 | | | | 28,314 | | | | 56,126 | | | | 14,790 | | | | — | |
| Office leases | | | 16,037 | | | | 2,776 | | | | 5,786 | | | | 5,472 | | | | 2,003 | |
| Other long-term liabilities(1) | | | 45,847 | | | | — | | | | 39,125 | | | | 4,794 | | | | 1,928 | |
| Total | | $ | 434,123 | | | $ | 31,090 | | | $ | 331,406 | | | $ | 67,696 | | | $ | 3,931 | |
| | | |
| (1) | The amounts disclosed as Film entertainment rights purchase obligations are mutually agreed termsOther long-term liabilities include: Earnings due to Europa/Amazon for Valerian and are presently disclosed on best estimate basis.Gringo, Series D Exit, and Long-term lease liability. |
| (2) | The amounts shown in the table include future interest payments on variable and fixed rate debt at current interest rates ranging from 1.8% to 13%. |
G. Safe Harbor
See “Special Note Regarding Forward-Looking Statements” at the beginning ofincluded elsewhere in this annualtransition report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Executive Officers
Our Boardboard of Directorsdirectors presently consists of eight directors.
The following table sets forth the name, age (as at June 30, 2017)October 23, 2020) and position of each of our directors and executive officers as at the date hereof.
| Name | | Age | | Position/s |
| Directors | | | | |
| Kishore Lulla | | 5559 | | Executive Co-Chairman |
| Robert B. Simonds, Jr. | | 57 | | Co-Chairman and Chief Executive Officer |
| Shailesh Rao(1)(2)(3) | | 48 | | Director |
| Rishika Lulla Singh | | 33 | | Director |
| Nicholas Stone(1)(2)(4) | | 42 | | Director, Executive Chairman of Audit Committee |
Jyoti Deshpande | | 46 | | Director, Group Chief Executive Officer, Managing Director |
Vijay Ahuja | | 60 | | Director, Vice Chairman |
Sunil Lulla | | 53 | | Director, Executive Vice Chairman |
Naresh ChandraDhirendra Swarup(1)(2)(3)(4)(5) | | —75 | | Director, Chairman of Remuneration Committee and Nomination Committee |
| Dilip Thakkar(1)(2)(3)(4) | | 8083 | | Director |
| John Zhao(3)(4) | | 57 | | Director, Chairman of AuditNomination Committee |
Rajeev Mishra(6) | | 55 | | Director |
David Maisel(1) | | 55 | | Director |
Rishika Lulla Singh | | 30 | | Director |
Shailendra Swarup(1)(2)(3)(4)(5) | | 72 | | Director |
| | | | | |
| Senior Management | | | | |
Prem ParameswaranAndrew Warren | | 4854 | | President of North America & Group Chief Financial Officer |
| Mark Carbeck | | 4548 | | Chief Corporate &and Strategy Officer |
Pranab KapadiaPradeep Dwivedi | | 4549 | | President of Europe and Africa OperationsChief Executive Officer, Eros India |
Surender SadhwaniAdam Fogelson | | 6153 | | President of Middle East OperationsChairman, STX Motion Picture Group |
Ken Naz(7)Noah Fogelson | | 5850 | | PresidentCo-President |
| Ali Hussein | | 40 | | Chief Executive Officer, Eros Now |
| Ridhima Lulla | | 28 | | Chief Content Officer, Eros Now |
| Rishika Lulla Singh | | 33 | | Co-President |
| Sunil Lulla | | 56 | | Chairman, Eros Motion Pictures Group |
| Prem Parameswaran | | 52 | | Head of US – Film DistributionsCorporate Strategy |
______________
| (1) | Independent Director |
| (2) | Member of the Audit Committee |
| (3) | Member of the Remuneration Committee |
| (4) | Member of the Nomination Committee |
(5) Following the sudden death of Mr. Naresh Chandra, he was no longer a Director as of July 09, 2017. Mr Shailendra Swarup was appointed as a Director with effect from 25 July 2017.
(6) Rajeev Mishra resigned from the company’s Board in November, 2016.
(7) Mr. Ken Naz has resigned from the employment of the Company with effect from May 27, 2017.
Summarized below is relevant biographical information covering at least the past five years for each of our directors and executive officers.
Directors
Mr. Kishore Lulla is a director and our Chairman.Executive Co-Chairman. Mr. Lulla received a bachelor’s degree in Artsarts from the Mumbai University. He has over 3036 years of experience in the media and film industry. He has served as a director since April 2006. He is a member of the British Academy of Film and Television Arts and Young Presidents’ Organization and is also a board member forof the School of Film at the University of California, Los Angeles. He has been honored at the Asian Business Awards 2007 and the Indian Film Academy Awards 2007 for his contribution in taking Indian cinema global. In 2010, Mr. Lulla was awarded the Entrepreneur“Entrepreneur of the YearYear” at the GG2 Leadership and Diversity Awards and Inin 2014, Forbes Asia featured Mr. Kishore Lulla onin the list of Best‘Best under a Billion.Billion’. He was also honored with the 2014 Global Citizenship Award by the American Jewish Committee, a leading global Jewish advocacy organization. Mr. Lulla also received the Entertainment Visionary award at the 2015 Annual Gala Dinner from the Asia Society Southern California. In 2015, he was further invited to attend the “billionaires’ summer camp” in Sun Valley, an annual gathering of the world’s most powerful entrepreneurs and business executives. As our Chairman, he has been instrumental in expanding our presence in the United Kingdom, the U.S., Dubai and Australia Fiji and other international markets. He served as our Chief Executive Officer from June 2011 until May 2012 and has served as a director since 2005.In 2018, he was featured in the Variety 500 list of “influential business leaders shaping the global $2 trillion entertainment industry”. Mr. Kishore Lulla is the father of Mrs. Rishika Lulla Singh and Ms. Ridhima Lulla, the brother of Mr. Sunil Lulla and a cousin of Mr. Vijay Ahuja and Mr. Surender Sadhwani.
Mr. Robert Bruce Simonds, Jr.
Ms. Jyoti Deshpande, is our Co-Chairman, executive Director and Chief Executive Officer. Prior to establishing STX Filmworks, Inc. in 2011, served as producer or executive producer of over 30 films released between 1990 and 2010. His movies generated over $6 billion in worldwide revenue. Mr. Simonds was a director of Nuverra Environmental Solutions, Inc., a Delaware corporation (“Nuverra”), from May 17, 2010 to August 7, 2017. Nuverra provided environmental solutions to companies focused on the development, exploration and our Group Chief Executive Officerongoing production of oil and Managing Director. She had worked with usnatural gas from 2001 until May 2011 when she resigned from our Board and served as a Consultant to the Company until November 2011 in connection with preparation for our initial public offeringshale formations in the U.S. She rejoined the Company in her former Group CEO/MD position on June 22, 2012. WithMr. Simonds holds a bachelor’s degree in Commerce and Economics and an MBAphilosophy from Mumbai University, Ms. Deshpande has over 24 years of experience in Indian media and entertainment across advertising, media consulting, television and film. Ms. Deshpande has been a key member of the Eros leadership team since 2001 and was instrumental in our initial public offering on AIM in 2006, Eros India’s listing on the Indian Stock Exchanges in 2010 and our initial public offering on the NYSE in November 2013. She has raised over $1 billion in debt and equity for the Company in the last 10 years. Ms. Deshpande was featured in the list of Most Powerful Women in Business by Fortune India and Business Today in 2015. She was a former member of J.Thompson, India and was part of the team that founded B4U Television network in U.K. She was a senior consultant with Mindshare, UK.Yale University.
Mr. Vijay AhujaShailesh Raois a director and our Vice Chairman. Mr. Ahuja received a bachelor’s degree in commerce from Mumbai University. Mr. Ahuja co-founded our United Kingdom business in 1988 and has since played an important role in implementing our key international strategies, helping expand our business to its present scale by making a significant contribution to our developmenttwo decades of experience in the South East Asian markets, suchtechnology sector, including involvement in the launch and early growth of significant consumer technology platforms and as Singapore, Malaysia, Indonesiainvestor and Hong Kong. Mr. Ahuja hasmentor to technology companies including Moglix, BigSpring, and Omaze. He previously served as a director since April 2005. Mr. Ahuja is a cousinPartner at TPG and Head of Mr. Kishore Lullathe Growth Fund and Mr. Sunil Lulla.
Mr. Sunil Lullais a directorRise Fund for India and is ExecutiveSoutheast Asia from 2017 to 2019, Vice ChairmanPresident for International Operations at Twitter from 2012 to 2016, and at Google as Vice President in charge of YouTube for Asia Pacific and Managing Director of Eros India. He received a bachelor’s degree in commerceGoogle India from Mumbai University. Mr. Lulla has over 25 years of experience in the media and entertainment industry. Mr. Lulla has valuable relationships with talent in the Indian film industry and has been instrumental in our expansion into distribution in India as well as home entertainment and music.2005 to 2012. He has served on the board of Jones Lang LaSalle Incorporated, a Fortune 500 global real estate services company, as a director since 2005Senior Advisor to McKinsey & Company, and led our growth within India for many years before being appointed Executive Vice Chairmana member of the CEO Council of Lighthouse Funds, a private equity firm. Mr. Rao holds an MBA from the Kellogg School of Management and Managing Directordual degrees from the University of Eros India on September 28, 2009. Mr. Sunil Lulla isPennsylvania, a B.S. in Economics from the brotherWharton School of Mr. Kishore Lulla, uncle of Business and a B.A. in History with Honors.
Mrs. Rishika Lulla Singh is an Executive Director and the cousinCo-President of Mr. Ahuja and Mr. Sadhwani.
Mrs. Rishika Lulla Singh is a director and the CEO of Eros Digital, which covers all of the digital initiatives for Eros including Eros Now.our Company. Mrs. Lulla Singh has been instrumental in spearheading the creation and development distribution of Eros Now within India and internationally. She graduated from the School Ofof Oriental and African Studies with a BAbachelor’s degree in arts in South Asian Studies and Management and completed a postgraduate study at the UCLA School of Theatre, Film and Television. With over five years of experience in over-the-topOTT platforms and content, Mrs. Lulla Singh has been a key contributor in driving the growth and penetration of Eros Now, both with technological developments and relationship management to stimulate platform penetration. She was recently named Youngas “Young Entrepreneur of the YearYear” by the 2016 Asian Business Awards. In 2018, she won the award for “Women Leadership in Industry” at the “Times National Awards for Marketing Excellence”, “40 Under 40 Business Leaders” by BW Business World and featured in “Top Women CEOs” by India Today. Mrs. Lulla Singh is the daughter of Mr. Kishore Lulla, the sister of Ms. Ridhima Lulla and the niece of Mr. Sunil Lulla. She has served as director since November 2014.
Mr. Shailendra SwarupNicholas Stone, is a Director.Partner at FS Investment Management, a private investment entity with long term capital and a range of investments across asset classes. He serves as a director of Bayside Communities, Kelvin Inc., FS Investment Management, Wilderness Holdings and Austex Oil Ltd. Mr. Stone previously served as a director of STX Filmworks, Inc. from March 2019 to July 2020. Prior to joining FS Investment Management, Mr. Stone served as Vice President for TPG Capital, one of the world’s largest private equity funds, from 2007 to 2011, and was an investment professional at Kohlberg Kravis Roberts & Co. from 2002 to 2005. Mr. Stone graduated cum laude from Harvard with an AB in 2000 and received his Masters of Business Administration from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar.
Mr. Dhirendra Swarup is an Independent Director in our Company. He is a government-certified accountant and a member of the Institute of Public Auditors of India, Mr. Swarup holds a postgraduate degree in humanities. A career bureaucrat, he retired as secretary of Ministry of Finance, Government of India in 2005. He possesses a vast experience of over 45 years in the finance sector and has also worked in UK, Turkey and Georgia. He served as the Chairman of Financial Sector Redress Agency Task Force appointed by Government of India, he is also on the board of directors of several listed companies besides acting as a member and the Chairman of several committees. In the past, he has held many key positions and responsibilities like being a member of the board of the SEBI, a member of the Permanent High-level Committee on Financial Markets, chairman of the Pension Funds Regulatory Authority, Chief of the Budget Bureau of the Government of India, a member secretary of the Financial Sector Reforms Commission, chairman of Public Debt Management Authority Task Force, Vice-Chairman of the International Network on Financial Education of OECD. Mr. Dhirendra Swarup is a practicing lawyer in India since 1965 and has over 50 years experience as corporate attorney in India. He is senior partnercousin of Mr. Shailendra Swarup Swarup (i.e. son of the law firm Swarup & Company, New Delhi, India. His vast experience includes advising Indian and foreign with respect to transborder transactions, acquisitions, joint ventures, technology transfers in diverse sectors and industry. He presently serves as an independent Director on the Board of 6 public companies and 4 private companies. He was oneyounger brother of the membersfather of Confederation of Indian Industry (“CII”) Task Force which formulated for the first time in India the Code for corporate governance.Mr. Shailendra Swarup). He was member of the Committee constituted by the Reserve Bank of India for governance of public sector banks and financial institutions in India. He advised National Council for Applied Economic Research on and reviewed the draft Bill of the New Electricity Act. He advised National Highways Authority of India and the Planning Commission of India on development of documentation for infrastructure Projects through build operate transfer model and public private partnership.has served as a director since July 2019.
Mr. Dilip Thakkaris a director.an Independent Director in our Company. Mr. Thakkar received bachelor’s a degree in Commercecommerce and Lawin law from Mumbai University. A practicing charteredpracticing-chartered accountant since 1961, Mr. Thakkar has significant financial experience. He is a senior partner of Jayantilal Thakkar & Co.Co, Chartered Accountants and a member of the Institute of Chartered Accountants in India. In 1986, he was appointed by the Reserve Bank of India as a member of the Indian Advisory Board for HSBC Bank and for the British Bank of the Middle East for a period of eight years. He is the former Presidentpresident of the Bombay Chartered Accountants’ Society and was then, Chairmanthe chairman of its International Taxation Committee. MrMr. Thakkar serves as an Independent Directorindependent director of sevensix public limited companies and eightfive private limited companies in India and twelvesixteen foreign companies. He has served as a director since April 2006.
Mr. David MaiselJohn Zhao is a director. Mr. Maisel has been an Advisor to Rovio, the owners of Angry Birds, since 2011, and, is the Executive Producer of the Angry Birds feature film which was released in May 2016. Mr. Maisel is also a Director at Gaiam, a NASDAQ listed company. Prior to this he served in senior executive positions with Marvel Entertainment from 2003 until 2010, where he conceivedChairman and spearheaded the creation of Marvel Studios, the launch of the “Iron Man” franchise, and Marvel’s 2010 sale to The Walt Disney Company. At Marvel, he was Chairman of Marvel Studios and also in the Office of the Chief Executive for its parent company, Marvel Entertainment. He was alsoOfficer of Hony Capital, a leading investment group in China he founded in 2003. Under his leadership, Hony Capital currently manages over $12 billion of assets and has invested in approximately 100 companies in China and abroad, including Hospital Corporation of China Limited, Best Food Holding Company Limited, Goldstream Investment Limited, Zoomlion Heavy Industry Science and Technology Co., Ltd, Suning, STX Entertainment, Linmon Pictures, and PCCW International OTT. Mr. Zhao holds an MBA degree from the Executive ProducerKellogg School of “Iron Man,” “The Incredible Hulk,” “Iron Man 2,” “Thor,”Management at Northwestern University, dual Master’s degrees in Electronic Engineering and “Captain America: The First Avenger.” Prior to Marvel, Mr. Maisel servedPhysics from Northern Illinois University, and a Bachelor’s degree in senior executive positions at Endeavor Talent Agency, The Walt Disney Company, Creative Artists Agency, Chello Broadband, and The Boston Consulting Group. He is a graduate of Harvard Business School and DukePhysics from Nanjing University. He has served as a director since November 2014
Senior Management
Mr. Andrew Warren is our Chief Financial Officer. Mr. Warren has served as our Chief Financial Officer of STX since March 2017 and is primarily responsible for all financial, operational and information technology activities and functions. Mr. Warren has over 14 years of experience in the media industry. During the period of March 2012 to March 2017, Mr. Warren was Senior Executive Vice President, Chief Financial Officer and a member of the executive committee of Discovery Communications, Inc. During the period from July 2007 to March 2012, Mr. Warren was the Chief Financial Officer of Liz Claiborne, Inc. During the period from July 1989 to July 2007, Mr. Warren worked at General Electric. Mr. Warren obtained his bachelor’s degree in business administration from James Madison University in 1989.
Mr. Mark Carbeck is our Chief Corporate & Strategy Officer. Mr. Carbeck was formerly a director in Citigroup’s Investment Banking division in London, where he joined its New York office in 1997. He has over 23 years of experience in the investment banking and corporate finance. Mr. Carbeck previously led the European media investment banking coverage efforts at Citigroup and has deep media industry knowledge and strong relationships with major global media companies. Mr. Carbeck graduated from the University of Chicago in 1994 with a bachelor’s degree in history. Mr. Carbeck joined us in April 2014.
Mr. Pradeep Dwivedi is Chief Executive Officer of Eros International Media Limited, our majority-controlled Indian operating subsidiary. He is an accomplished industry leader with over two decades of experience in the advertising, media, technology and telecom sectors, with established credentials in digital infotainment business as well as print media, news television channels and experiential events. He has a demonstrated track record in revenue growth, sales and marketing, value creation, joint ventures and partnerships, corporate investments, business operations and general management. In the past, he has been CEO of Sakal Media Group, Chief Corporate Sales & Marketing Officer of Dainik Bhaskar Group, and worked in leadership positions with organizations including Tata Teleservices, American Express, GE Capital, Standard Chartered Bank & Eicher Motors in India. He is an active participant in many media industry associations, such as Director of IAA (India Chapter) and a managing committee member of The Advertising Club of India. Mr. Dwivedi holds B. Sc and MBA degrees from Panjab University.
Mr. Prem ParameswaranAdam Fogelson has served as Chairman of the STX Motion Picture Group since 2014 and continues this role following the Merger. Mr. Fogelson is primarily responsible for overseeing film production, marketing, distribution and home entertainment strategy. Mr. Fogelson has over 30 years of experience in the film industry. During the period of 2009 to 2013, Mr. Fogelson served as Chairman of Universal Studios, where he oversaw worldwide operations of the group. As Universal Studios’ Chairman, Mr. Fogelson championed numerous features, including Ted, Bridesmaids, Dr. Seuss’ The Lorax, Snow White and the Huntsman, Identity Thief, Pitch Perfect, The Purge, Les Mis´erables, Despicable Me 1 and 2 and Fast and Furious 5 and 6. Mr. Fogelson joined Universal Studios in 1998 as the Vice President for Creative Advertising, rising to president of marketing and distribution in 2007. Mr. Fogelson graduated in 1989 from Stanford University where he obtained his bachelor of arts in communication. Mr. Fogelson is the brother of Mr. Noah Fogelson, our Co-President.
Mr. Noah Fogelson is our Co-President and previously served as the Executive Vice President for Corporate Strategy of STX since 2013. Mr. Fogelson is primarily responsible for overseeing all of our legal and strategic matters. Mr. Fogelson has over 25 years of experience in the legal and entertainment industries. Prior to joining the Company and during the period from 2007 to 2012, Mr. Fogelson was the Chief Executive Officer of Crest Animation Productions, producing CGI animation for film, television and video productions across all platforms in partnership with Universal, Lions Gate Entertainment and Sony. Mr. Fogelson joined DIC Entertainment, a children’s television and brands management company, as General Counsel in 2002, and was promoted to serve as Executive Vice President and General Manager until 2006. Before that, Mr. Fogelson was an attorney at Greenberg Glusker Fields Claman & Machtinger LLP from 2000 to 2002. Mr. Fogelson obtained his bachelor of arts degree in June 1992 with distinction from Stanford University with a double major in Political Science and History. Mr. Fogelson obtained his Juris Doctor degree from U.C. Berkeley School of Law in 1995. Mr. Fogelson was admitted to practice law in California in 1995. Mr. Fogelson is the brother of Mr. Adam Fogelson, our Chairman of the STX Motion Picture Group.
Mr. Ali Hussein is Chief Executive Officer of Eros Now, the premier Indian OTT platform controlled by Eros. Mr. Hussein has over 18 years of experience in the media, entertainment and digital space. Mr. Hussein has previously been a Board Advisor to Discovery Networks and other start-ups in the media and technology domain. Prior to that, He has worked with Google/YouTube where Mr. Hussein ran the charter for content and product partnerships in South Asia. Mr. Hussein was an early employee of the Joint Venture between Network 18 and Viacom (Viacom 18), where he was responsible for the digital media strategy for all consumer facing media brands like Colors, MTV and others and prior to that with Hungama Digital Media where he managed the portfolio of global content acquisition and distribution. Mr. Hussein joined us in January 2018.
Ms Ridhima Lulla is our Group Chief FinancialContent Officer, with a core focus on the creative expression for Eros Now, the premier Indian OTT platform controlled by Eros International Plc. She has previously worked for STX Entertainment, Credit Suisse and Presidentwas integral to several Eros film projects including Ra.One and Dr. Cabbie representing different roles. Ridhima has been strengthening the original content strategy for Eros Now, the leading cutting edge rapidly growing OTT platform of Eros International’s North America operations.Digital. Ms Lulla has degrees in Film Production from University of California, a bachelor’s degree in Business Management, Liberal Arts and Sciences from Regent’s University London. She also did several Diplomas in Digital Film-Making from New York Film Academy. Ms. Lulla is the daughter of Mr. Kishore Lulla, the sister of Mrs. Rishika Lulla Singh and the niece of Mr. Sunil Lulla
Mr. Sunil Lulla is Chairman of Eros Motion Pictures. He received a bachelor’s degree in commerce from the Mumbai University. Mr. Lulla has over 25 years of experience in the media and entertainment industry. Mr. Lulla has valuable relationships with talent in the Indian film industry and has been instrumental in our expansion into distribution in India as well as into home entertainment and music. He has served as a director since April 2006 and led to our growth within India for many years before being appointed as the Executive Vice Chairman and Managing Director of Eros India on September 28, 2009. Mr. Sunil Lulla is the brother of Mr. Kishore Lulla, uncle of Mrs. Rishika Lulla Singh and the cousin of Mr. Ahuja and Mr. Surender Sadhwani.
Mr. Prem Parameswaran is our Head of Corporate Strategy. Mr. Parameswaran joined us in June 2015 and was appointed to our Board of Directors in December 2018. Mr. Parameswaran has close to 30 years of experience in the Media, Entertainment and Technology sectors. Prior to joining Eros, withMr. Parameswaran had over 23 years of experience in investment banking, advising clients in the global telecommunications, media and technology sector, including on mergers and acquisitions and public, private equity and debt financings. Mr. Parameswaran most recentlypreviously served as the Global Head of Media and Telecommunications Investment Banking at Jefferies LLC. Prior to Jefferies, he was the Americas Head of Media & Telecom at Deutsche Bank and also previously worked at both Goldman Sachs and Salomon Brothers. Throughout his career, he has executed over 300 transactions. Mr. Parameswaran graduated from Columbia University with a bachelor’s degree in arts and received an MBAa master’s degree in business administration from Columbia Business School. Mr. Parameswaran joined us in June 2015. Mr. Parameswaran also serves on the Boardsboards of the Columbia University Alumni Trustee Nominating Committee and the Program for Financial Studies at Columbia Business School. In 2018 Mr. Parameswaran was named one of the “10 most Dynamic CFOs to watch” by Insights Success magazine. In January 2020, Mr. Parameswaran was nominated by President Donald J. Trump as a member of the Presidential Advisory Commission for Asian Americans and Pacific Islanders. He was officially sworn in as a Commissioner on January 27, 2020 and is the only Indian American on the 13 member Commission.
Mr. Mark Carbeck isour Chief Corporate & Strategy Officer, with management responsibility for Investor Relations, Group M&A, and Corporate Finance. Mr. Carbeck was formerly a Director in Citigroup’s Investment Banking Division in London, having joined the firm in New York in 1997. He has over 18 years of experience. Most recently Mr. Carbeck led the European Media investment banking coverage efforts at Citigroup and has deep media industry knowledge and strong relationships with major United Kingdom and international media companies. Mr. Carbeck graduated from the University of Chicago in 1994 with a Bachelor’s degree in History. Mr. Carbeck joined us in April 2014.112
Mr. Pranab Kapadia isPresident Marketing & Distribution of our UK, Europe and Africa Operations. Mr. Kapadia received a Master’s degree in Management Studies (MMS) from Bombay University, majoring in Finance. He has over 22 years of experience in the Indian TV & Film Industry, previously having served with Zee Network for 10 years as Head of Operations & Programming (Europe) and later as Business Head of Adlabs Films (U.K.) Limited for one year. Mr. Kapadia brings with him significant insight and a strong understanding of the entertainment needs of South Asians internationally. He joined us in 2007.
Mr. Surender Sadhwani is our President of Middle East Operations. Mr. Sadhwani received a post graduate degree in commerce from University of Madras in 1980. He has 22 years of experience in the banking industry through his work with Andhra Bank in Chennai. In addition, Mr. Sadhwani spent several years in finance and account management for Hartmann Electronics in their Dubai office. He joined our Middle East operations in April 2004 and was promoted to President of Middle East Operations in April 2006. Mr. Sadhwani is a cousin of Mr. Kishore Lulla and Mr. Sunil Lulla.
B. Compensation
Compensation of senior executive officers and directors is determined byInformation regarding the Remuneration Committee of our Board of Directors. The Remuneration Committee reviews the performance of our directors and eachcompensation of our executive officers and sets the scale and structure of their compensation. Where required, the Remuneration Committee engages the services of external companiesdirectors for the purposes of benchmarking of executive remuneration or such other remuneration related matter. As part of its role of overseeing the scale and structure of the compensation paid to our executive officers, the Remuneration Committee approves their service agreements with our subsidiaries and any bonus paid by our subsidiaries to such officers. The current members of the Remuneration Committee are twoyear ended March 31, 2020 is included in Item 6.B of our non-executive directors, Shailendra Swarup and Dilip Thakkar.
In determining the scale and structure of the compensation for executive directors and senior executives, the Remuneration Committee takes into account the need to offer a competitive compensation structure to attract and maintain a skilled and experienced management team. The Remuneration Committee creates competitive compensation programs by reviewing market data and setting compensation at levels comparable to those at our competitors. We believe that a compensation program with a strong performance based element is a prerequisite to obtaining our performance and growth objectives.
The main components of the compensation for our executive officers are a base salary, share awards, annual bonus and stock options.
The Remuneration Committee reviews these three compensation components in light of individual performance of the executive officers, external market data and reports provided by outside experts or advisors. For information about service contracts entered into by us, or our subsidiaries, and certain of our executives, see “Part I — Item 6. Directors, Senior Management and Employees — C. Board Practices.”
The compensation of our non-executive directors is set by our board of directors as a whole, after consulting with outside experts or advisors.
The following tables and footnotes show the remuneration of each of our directors for fiscal 2017:
| | | Year ended March 31, |
| | | 2017
Salary | | 2017
Director Fees | | 2017
Benefits(1) | | 2017
Total | | 2016
Total |
| | | (in thousands) |
| Kishore Lulla | | $ | 1,306 | | | $ | — | | | $ | — | | | $ | 1,306 | | | $ | 1,048 | |
| Jyoti Deshpande | | | 958 | | | | — | | | | — | | | | 958 | | | | 776 | |
| Vijay Ahuja | | | 347 | | | | — | | | | 31 | | | | 378 | | | | 373 | |
| Sunil Lulla(2) | | | 674 | | | | — | | | | 19 | | | | 693 | | | | 879 | |
| Naresh Chandra | | | — | | | | 180 | | | | — | | | | 180 | | | | 198 | |
| Dilip Thakkar | | | — | | | | 77 | | | | — | | | | 77 | | | | 90 | |
| David Maisel | | | — | | | | 91 | | | | — | | | | 91 | | | | 90 | |
| Rishika Lulla Singh | | | 320 | | | | — | | | | — | | | | 320 | | | | 282 | |
| Total | | $ | 3,605 | | | $ | 348 | | | $ | 50 | | | $ | 4,003 | | | $ | 3,736 | |
(1) | Health insurance, except for Sunil Lulla (see Note (2) below). |
(2) | (1) Sunil Lulla’s fiscal 2017 compensation consisted of the following (Indian Rupees translated to U.S. dollars at a rate of INR 66.9 per $1.00) |
| Particulars for Mr Sunil Lulla | | INR | | | USD | |
| Basic salary | | | 14,520,000 | | | $ | 216,895 | |
| Incentive compensation | | | 64,42,040 | | | | 96,229 | |
| Reimbursements car/entertainment etc. | | | 24,39,600 | | | | 36,442 | |
| Medical reimbursement | | | 15,000 | | | | 224 | |
| Special pay | | | 19,317,240 | | | | 288,555 | |
| Company rent accommodation | | | 3,600,000 | | | | 53,775 | |
| Total India | | | 46,333,880 | | | $ | 692,120 | |
The total compensation paid to our executive officers in fiscal 2017 was $16.5 million (2016: $17.0 million).
The following table and footnotes show the cost recognized in fiscal 2017 in respect to all outstanding plans and by grant of shares, which are all equity settled instruments, to our directors is as follows:
| | | September 18,
2013 | | | Option
2014 | | | JSOP | | | June 09,
2015 | | | June 09,
2016 | | | Total | |
| Kishore Lulla | | $ | — | | | $ | — | | | $ | — | | | $ | 1,169 | | | $ | 1,357 | | | $ | 2,526 | |
| Jyoti Deshpande | | | 1,047 | | | | — | | | | — | | | $ | 935 | | | | 1,085 | | | $ | 3,067 | |
| Sunil Lulla | | | — | | | | — | | | | — | | | $ | 935 | | | | 1,085 | | | $ | 2,020 | |
| Dilip Thakkar | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Naresh Chandra | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| David Maisel | | | — | | | | 694 | | | | — | | | | — | | | | — | | | $ | 694 | |
| Rishika Lulla Singh | | | — | | | | — | | | | 360 | | | $ | 291 | | | | 678 | | | $ | 1,329 | |
| Rajeev Misra | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 1,047 | | | $ | 694 | | | $ | 360 | | | $ | 3,330 | | | $ | 4,205 | | | $ | 9,636 | |
Eros India Incentive Compensation
Pursuant to a resolution of its board of directors dated November 11, 2011 and a resolution of its shareholders dated December 29, 2011, Eros India approved payment of an incentive bonus to Kishore Lulla and Sunil Lulla for services to Eros India of up to 1% of the net profits of Eros India in accordance with applicable India law. Any such incentive bonus shall be payable only as determined by the Board of Directors of Eros India from time to time. Kishore Lulla is eligible for this incentive bonus for a period of three years, until October 31, 2017. Sunil Lulla is eligible for this incentive bonus for the remainder of his tenure in office. The Remuneration Committee will take into account any of these incentive bonuses paid to Kishore Lulla or Sunil Lulla when making compensation determinations for each of them.
Share-Based Compensation Plans
The compensation cost recognized with respect to all outstanding plans and by grant of shares, which are all equity settled instruments, is as follows:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| IPO India Plan | | $ | 2,140 | | | $ | 1,736 | | | $ | 869 | |
| JSOP Plan | | | 3,622 | | | | 2,696 | | | | 1,603 | |
| Option award scheme 2012 | | | 699 | | | | 1,610 | | | | 1,824 | |
| 2014 Share Plan | | | 1,427 | | | | 2,361 | | | | 264 | |
| 2015 Share Plan | | | 328 | | | | 932 | | | | 60 | |
| Other share option awards | | | 4,405 | | | | 894 | | | | 554 | |
| Management scheme (staff share grant) | | | 10,850 | | | | 20,763 | | | | 16,741 | |
| | | $ | 23,471 | | | $ | 30,992 | | | $ | 21,915 | |
Joint Stock Ownership Plan (JSOP)
In April 2012, the Company established a controlled trust called the Eros International Plc Employee Benefit Trust (“JSOP Trust”). The JSOP Trust purchased 2,000,164 shares of the Company out of funds borrowed from the Company and repayableAnnual Report on demand. The Company’s Board, Nomination and Remuneration Committee recommendsForm 20-F, submitted to the JSOP Trust certain employees, officers and key management personnel, to whom the JSOP Trust will be required to grant shares from its holdings at nominal price. Such shares are then held by the JSOP Trust and the scheme is referred to as the “JSOP Plan.” The shares held by the JSOP Trust are reported as a reduction in stockholders’ equity and termed as ‘JSOP reserves’.
On August 4, 2015, the Company’s Employee Benefit Trust entered into a Joint ownership deed (the “2015 JSOP deed”) with certain employees in respect of 380,000’A’ ordinary shares. These options were issued at a strike price of $24.00 and fair market value of $15.66. Subject to continued employment and market conditions set out in the 2015 JSOP deed, these options vest in May 2017.
The movement in the shares held by the JSOP Trust is given below:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| Shares held at the beginning of the period | | | 1,239,497 | | | | 1,723,657 | | | | 2,000,164 | |
| Shares granted | | | — | | | | 380,000 | | | | 242,033 | |
| Shares exercised | | | (92,530 | ) | | | (573,260 | ) | | | (80,704 | ) |
| Shares forfeiture/lapsed | | | — | | | | (290,900 | ) | | | (437,836 | ) |
| Shares held at the end of the period | | | 1,146,967 | | | | 1,239,497 | | | | 1,723,657 | |
| Unallocated shares held by trust | | | 106,701 | | | | 106,701 | | | | 195,803 | |
| | | | 1,253,668 | | | | 1,346,198 | | | | 1,919,460 | |
Employee Stock Option Plans
A summary of the general terms of the grants under stock option plans and stock awards are as follows:
| | Range of
exercise prices |
IPO India Plan | | INR10 – 175 |
IPO Plan – June 2006 | | GBP 5.28 |
JSOP Plan | | $11.00 – 24.00 |
Option award scheme 2012 | | $11.00 |
2014 Share Plan | | $14.97– 18.50 |
2015 Share Plan | | $7.40 – 33.12 |
Other share option plans | | $18– $18.88 |
Employees covered under the stock option plans are granted an option to purchase shares of the Company at the respective exercise prices, subject to fulfilment of vesting conditions (generally service conditions). These options generally vest in tranches over a period of one to five years from the date of grant. Upon vesting, the employees can acquire one share for every option. The maximum contractual term for these stock option plans ranges between two to ten years.
The activity in these stock option plans is summarized below:
| | | | | Year ended March 31 |
| | | | | 2017 | | 2016 | | 2015 |
| | | Name of Plan | | Number
of
shares | | Weighted
average
exercise
price | | Number
of
shares | | Weighted
average
exercise
price | | Number
of
shares | | Weighted
average
exercise
price |
| Outstanding at the beginning of the year | | IPO India Plan | | 2,196,215 | | INR | 35.17 | | 1,437,400 | | INR | 52 | | 1,397,682 | | INR | 120 |
| Granted | | | | 269,381 | | | 10 | | 966,009 | | | 10 | | 691,961 | | | 10 |
| Exercised | | | | (269,553) | | | 10 | | (180,920) | | | 39 | | (534,084) | | | 153 |
| Forfeited and lapsed | | | | (87,980) | | | 10 | | (26,274) | | | 10 | | (118,159) | | | 147 |
| Outstanding at the end of the year | | | | 2,108,063 | | | 34.96 | | 2,196,215 | | | 35.17 | | 1,437,400 | | | 52 |
| Exercisable at the end of the year | | | | 911,854 | | INR | 63.75 | | 632,566 | | INR | 78.00 | | 413,337 | | INR | 82 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | IPO Plan June 2006 | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| Granted | | | | — | | | — | | — | | | — | | — | | | — |
| Exercised | | | | (62,438) | | | 5.28 | | —- | | | — | | — | | | — |
| Forfeited and lapsed | | | | —- | | | | | —- | | | — | | — | | | — |
| Outstanding at the end of the year | | | | — | | GBP | — | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| Exercisable at the end of the year | | | | — | | GBP | — | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | JSOP Plan | | 1,239,486 | | $ | 14.98 | | 1,723,657 | | $ | 11.60 | | 2,000,164 | | $ | 11.00 |
| Granted | | | | — | | | — | | 380,000 | | | 24.00 | | 242,035 | | | 15.34 |
| Exercised | | | | (92,530) | | | 11 | | (573,262) | | | 11.00 | | (80,704) | | | 11.00 |
| Forfeited and lapsed | | | | — | | | — | | (290,900) | | | 11.00 | | (437,838) | | | 11.00 |
| Outstanding at the end of the year | | | | 1,146,956 | | $ | 14.98 | | 1,239,495 | | $ | 14.98 | | 1,723,657 | | $ | 11.60 |
| Exercisable at the end of the year | | | | 728,736 | | $ | 11 | | 617,450 | | $ | 11.00 | | 196,642 | | $ | 11.00 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | Option award scheme 2012 | | 674,045 | | | 11 | | 674,045 | | | 11.00 | | — | | | — |
| Granted | | | | — | | $ | — | | — | | $ | — | | 807,648 | | $ | 11.00 |
| Exercised | | | | — | | | — | | — | | | — | | (133,603) | | | 11.00 |
| Forfeited and lapsed | | | | — | | | — | | — | | | — | | — | | | — |
| Outstanding at the end of the year | | | | 674,045 | | $ | 11 | | 674,045 | | $ | 11.00 | | 674,045 | | $ | 11.00 |
| Exercisable at the end of the year | | | | 449,363 | | | 11 | | 224,682 | | | 11.00 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | 2014 Share Plan | | 773,749 | | | 17.86 | | 230,000 | | | 16.27 | | — | | | — |
| Granted | | | | — | | $ | — | | 600,000 | | $ | 18.40 | | 230,000 | | $ | 16.27 |
| Exercised | | | | — | | | — | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (50,000) | | | 14.97 | | (56,251) | | | 17.13 | | — | | | — |
| Outstanding at the end of the year | | | | 723,749 | | $ | 18.06 | | 773,749 | | $ | 17.86 | | 230,000 | | $ | 16.27 |
| Exercisable at the end of the year | | | | 288,333 | | | 17.80 | | 96,664 | | | 15.99 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | 2015 Share Plan | | 282,500 | | | 16.68 | | 200,000 | | | 17.46 | | — | | | — |
| Granted | | | | — | | $ | | | 105,000 | | $ | 15.35 | | 200,000 | | $ | 17.46 |
| Exercised | | | | (8,750) | | | 8.84 | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (61,667) | | | 18.68 | | (22,500) | | | 19.17 | | — | | | — |
| Outstanding at the end of the year | | | | 212,083 | | $ | 16.23 | | 282,500 | | $ | 16.68 | | 200,000 | | $ | 17.46 |
| Exercisable at the end of the year | | | | 127,604 | | | 17.46 | | 72,708 | | | 16.90 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | Other share option plans | | 1,000,000 | | | 18.88 | | 500,000 | | | 18.88 | | — | | | — |
| Granted | | | | — | | | — | | 500,000 | | | 18.00 | | 500,000 | | | 18.88 |
| Exercised | | | | — | | | — | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (500,000) | | | 18 | | — | | | — | | — | | | — |
| Outstanding at the end of the year | | | | 500,000 | | $ | 18.88 | | 1,000,000 | | $ | 18.44 | | 500,000 | | $ | 18.88 |
| Exercisable at the end of the year | | | | 200,000 | | | 18.88 | | 100,000 | | | 18.88 | | — | | | — |
The following table summarizes information about outstanding stock options:
| | | | Year ended March 31 | |
| | | | 2017 | | | 2016 | | | 2015 | |
| Name of Plan | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | |
| IPO India Plan | | | | | | INR* | | | | 4.10 | | | INR | 35.0 | | | 2.90 | | | INR | 52 | |
| IPO Plan June 2006 | | | — | | | GBP** | — | | | 0.25 | | | GBP | 5.28 | | | 1.00 | | | GBP | 5.28 | |
| JSOP Plan | | | 4.93 | | | $ | 16.19 | | | 5.93 | | | $ | 14.98 | | | 7.30 | | | $ | 11.60 | |
| Option award scheme 2012 | | | 4.83 | | | $ | 11.00 | | | 5.83 | | | $ | 11.00 | | | 5.50 | | | $ | 11.00 | |
| 2014 Share Plan | | | 7.11 | | | $ | 18.06 | | | 6.88 | | | $ | 17.86 | | | 6.47 | | | $ | 16.27 | |
| 2015 Share Plan | | | 6.08 | | | $ | 16.23 | | | 5.91 | | | $ | 16.68 | | | 6.49 | | | $ | 17.46 | |
| Other share option plans | | | 4.75 | | | $ | 18.88 | | | 5.75 | | | $ | 18.44 | | | 6.00 | | | $ | 18.88 | |
* INR - Indian Rupees
**GBP - Great Britain Pound
The following table summarizes information about inputs to the fair valuation model for options granted during the year:
| | IPO
India Plan | | JSOP(4) | | 2014
Share plan | | 2015
Share plan |
| Expected volatility(1)(2) | 35% - 75% | | 42% | | 40% | | 40% - 60% |
| Option life (Years) | 1.91 - 7.00 | | 10.00 | | 4.50 - 5.25 | | 10.00 |
| Dividend yield | 0% | | 0% | | 0% | | 0% |
| Risk free rate | 6.51% - 8.50% | | 0.43% - 2.82% | | 0.67% - 1.70% | | 0.24% - 1.46% |
| Range of fair value of the granted options at the grant date(3) | INR 179 – 380 | | $15.66 | | $6.9 – 8.44 | | $2.7 - 13.10 |
(1) | The expected volatility in respect of the IPO India Plan is based on Eros International Media Limited’s historic volatility. |
(2) | The expected volatility of all other options is based on the historic share price volatility of the Company over time periods comparable to the time from the grant date to the maturity dates of the options. |
(3) | The fair value of options under the JSOP Plan was measured using a Monte-Carlo simulation models. Fair value of options granted under all other schemes is measured using a Black Scholes model. |
(4) | Options under the JSOP Plan are subject to service and performance conditions as set out in the JSOP deed |
Management Scheme (staff share grant)
In June 2015, 300,000 ‘A’ ordinary shares awards were granted to the Group CFO with a fair market value of $21.34 per share. Subject to continued employment, these awards with nominal value exercise price vests annually in three tranches beginning June 9, 2016. As at March 31, 2017, these shares are yet to be issued.
On June 9, 2015, the Board of Directors approved a grant of 580,000 ‘A’ ordinary shares to certain executive directors with a fair market value of $21.34 per share. Subject to continued employment, these awards with Nil exercise price, vest over a period of three years. In August 2016, 360,000 shares of 580,000 share awards were issued of which 180,000 shares were issued with restriction. Further, in October 2016, 60,000 shares out of the remaining 220,000 share awards were issued.
In June 2016, the Board of Directors approved 620,000 ‘A’ ordinary share awards to certain executive directors with a fair value of $14.68 per share. Subject to continued employment these awards with Nil exercise price, vest over a period of three years.
On September 18, 2013, 1,676,645 ‘A’ ordinary shares were issued to CEO and Managing Director at $4.02 per share based on the closing market price on such date. In September 2016 all restrictions were lifted.
On February 17, 2017, the Board of Directors approved, 50,000 ‘A’ ordinary share awards to an employee with a fair market value of $12.5 per share. Subject to continued employment, these awards wth Nil exercise price, vest over a period of three years.
500,000 'A' ordinary share options were granted to a non-executive director with a fair market value of $8.44 per option. Subject to continued employment, these options with $18.00 exercise price, vest annually in five equal tranches beginning June 9, 2016 which lapsed on non-reappointment of the non-executive director on December 1, 2016.
None of the above grants have been forfeited during the period. The charge for these grants have been accrued under ‘Management scheme’ (Staff share grant).
Subsequently, in May 2017, the Company entered into an employment exit agreement with an employee pursuant to which the Board approved a grant of 90,000 A ordinary share awards with Nil exercise price and a fair market value of $10 per share. These shares were issuedSEC on July 28, 2017.
JOINT STOCK OWNERSHIP PLAN RESERVE (JSOP Reserve)
| | | (in thousands) | |
| Balance at April 1, 2015 | | $ | (24,474 | ) |
| Issue out of treasury shares | | | 7,307 | |
| Balance at April 1, 2016 | | $ | (17,167 | ) |
| Issue out of treasury shares | | | 1,182 | |
| Balance at March 31, 2017 | | $ | (15,985 | ) |
The JSOP reserve represents the cost of shares issued30, 2020 and incorporated by Eros International Plc and held by the JSOP Trust to satisfy the requirements of the JSOP Plan (Refer Note 28). On June 5, 2014, the Board approved discretionary vesting of 20% of the applicable JSOP shares. In the current year 92,530 (2016: 573,262) ‘A’ ordinary shares held by the JSOP Trust were issued to eligible employees.
The number of shares held by the JSOP Trust at March 31, 2017 was 1,253,657 ‘A’ ordinary shares (2016: 1,346,198 Ordinary ‘A’ shares).reference herein.
C. Board Practices
All directors hold office until the expiration of their term of office, their resignation or removal from office for gross negligence or criminal conduct by a resolution of our shareholders or until they cease to be directors by virtue of any provision of law or they are disqualified by law from being directors or they become bankrupt or make any arrangement or composition with their creditors generally or they become of unsound mind. The term of office of the directors is divided into three classes:
| · | Class A,I, whose term will expire at the annual general meeting to be held in fiscal year 2018;2021; |
| · | Class B,II, whose term will expire at the annual general meeting to be held in fiscal year 2019;2022; and |
| · | Class C,III, whose term will expire at the annual general meeting to be held in fiscal year 2020.2023. |
Our directors for fiscal year 20172020 are classified as follows:
| · | Class I: Kishore Lulla, Naresh Chandra (expired on July 9, 2017)Dilip Thakkar and David Maisel;John Zhao; |
| · | Class II: Jyoti Deshpande, Vijay AhujaShailesh Rao, Nicholas Stone and Rajeev Misra (resigned in November 2016);Dhirendra Swarup; and |
| · | Class III: SunilKishore Lulla, Dilip Thakkar and Rishika Lulla Singh.Singh and Robert Bruce Simonds, Jr. |
FollowingAs more fully described below in “Part I—Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” pursuant to the sudden deathMerger, the Board will have nine directors, of Mr. Naresh Chandra, his office as a Director stands ceasedwhom four (the “Founders Group Directors”) were selected by the Founders Group, four (the “STX Directors”) were selected by certain of the STX Parties affiliated with effect from July 09, 2017. Mr Shailendra Swarup was appointed as a Director with effect from 25 July 2017.
Governance Standards
We are subject to NYSE listing standards. However, as a foreign private issuer, weHony, and the remaining one director will be exempt from complying with certain corporate governance requirementsjointly selected by the Founders Group and STX (the “Jointly Selected Director”). The Jointly Selected Director has not been selected as of the NYSE applicabledate of this Transition Report. The directors are divided into three classes, each of which will serve for staggered three-year terms. One Founders Group Director, one STX Director and the Jointly Selected Director will be allocated to a U.S. issuer. Under NYSE rules applicablethe class of directors initially holding office until the Company’s 2021 annual general meeting; one Founders Group Director and two STX Directors will be allocated to us, we only need to:
| · | establish an independent audit committee that has responsibilities set out in the NYSE rules; |
| · | provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules of the NYSE; |
| · | provide periodic (annual and interim) written affirmations to the NYSE with respect to our corporate governance practices; and |
| · | include in our annual reports a brief description of significant differences between our corporate governance practices and those followed by U.S. companies. |
We are currently in compliance with the current applicable NYSE corporate governance requirements for foreign private issuers.class of directors initially holding office until the Company’s 2022 annual general meeting; and two Founders Group Directors and one STX Director will be allocated to the class of directors initially holding office until the Company’s 2023 annual general meeting.
Indemnification Agreements
We have entered into indemnification agreements with our directors and our officers that require us to indemnify, to the extent permitted by law, our officers and directors against liabilities that may arise by reason of their status or service as officers and directors and to pay expenses incurred by them as a result of any proceeding against them as to which they could be indemnified. We believe that these provisions are necessary to attract and retain qualified persons as directors and executive officers.
Service Contracts and Letters of Appointment
Kishore Lulla has entered into a service agreement with Eros Network Limited to provide services to us and our subsidiaries. The service agreements is terminable by either party with 12 months’ written notice. Eros Network Limited may terminate the agreement immediately in certain circumstances, including upon certain types of misconduct or upon paying the executive an amount equivalent to his basic salary (inclusive of any bonus and benefits) for a twelve month period. The service agreements expire automatically upon the executive’s 65th birthday. The service agreements provide for private medical insurance and 25 paid vacation days per year. Upon termination, compensation will be paid for any accrued but untaken holiday. The executive receive a basic gross annual salary, reviewed annually, and is entitled to participate in any current share option schemes and bonus schemes applicable to their positions maintained by the employing company. The agreement contains a confidentiality provision and non-competition and non-solicitation provisions that restrict the executive for a period of six to twelve months after termination.
Kishore Lulla also executed a letter of appointment for service as one of our directors. Under the terms of the letter of appointment, Mr. Lulla received an annual fee of $93,750. In connection with our initial public offering, this letter of appointment was terminated, and forFor so long as Mr.Kishore Lulla is our executive officer, he will not receive compensation as a director.
On February 17, 2016,November 11, 2018, with effect from AprilNovember 1, 2016,2018, Kishore Lulla’s employment contract was transferred to Eros Digital FZ LLC at a gross annual salary of $1,133,000, which is rechargedamended and revised to group company and all other employments contracts were terminated.$1,359,600. All other conditions of the employment contracts remain the same. Kishore Lulla is also director on the board of Eros India.
Sunil Lulla, our director, has entered into an employment agreement with Eros India pursuant to which he serves as Executive Vice Chairman and Managing Director of Eros India. Sunil Lulla is entitled to receive a basic gross annual salary, as well as medical insurance and certain other benefits and perquisites. Eros India may terminate the agreement upon thirty days’ notice if certain events occur, including a material breach of the agreement by Mr.Sunil Lulla. The agreement contains a confidentiality provision that restricts Mr.Sunil Lulla during the term of his employment and for a period of two years following termination and a non-competitionnon- competition provision that restricts him during the term of his employment.
Jyoti Deshpande, our director, has entered into an employment contract with us pursuant to which she serves as Chief Executive Officer and Managing Director and Mr. Sunil Lulla is also entitled to receive a gross base annual salary private medical insuranceof GBP 60,000 (w.e.f April 2019) and other standard benefits and is eligible to participate in any share option scheme and/or bonus scheme maintained from time to time and applicable to her position. In addition, Ms. Deshpande was issued 1,676,645 “A” ordinary shares on September 18, 2013, of which an equal percentage of shares are restricted for one, two and three years from the date of issuance. In addition, on November 18, 2013, Ms. Deshpande received 181,8181,191,000 A ordinary shares as part of a contractual arrangement valued at $2.0 million based onawards in total, which will vest annually over the $11.00 initial public offering. The employment agreement is for an initial period ofnext three years commencing September 1, 2013 and will continue thereafter until terminated by either party upon not less than 12 months’ prior written notice. We may, however, terminate the agreement immediately in certain circumstances, including upon certain types of misconduct or upon paying Ms. Deshpande an amount equal to her base salary for a 12 month period or remaining term of her employment, whichever is greater.years.
There are certain conditions under which if the agreement is terminated before September 1, 2016, Ms. Deshpande may be required to surrender all or part of the shares issued to her under this agreement. The agreement expires automatically upon Ms. Deshpande’s 65th birthday. The agreement contains a confidentiality provision and non-competition and non-solicitation provisions that restrict Ms. Deshpande for a period of six to twelve months following termination. Ms. Deshpande, who is also a director on the board of Eros India, has a contract with Eros India that entitles her to a gross basic salary and Ms. Deshpande has options to purchase up to 571,160 shares of Eros India at $1.14 per share with a 3-year vesting period commencing from July 16, 2013.
Ms. Deshpande also owns 142,790 shares of Eros India that came from previously vested options that she exercised.
On February 17, 2016, with effect from April 1, 2016, it was agreed in a letter agreement between Eros International Plc, Eros Digital FZ LLC and Ms. Deshpande that she would receive a gross annual salary of $700,000 from Eros International Plc and $100,000 from Eros Digital FZ LLC. Ms. Deshpande’s service agreement with Eros International Limited would stand terminated as of April 1, 2016 and her ongoing agreement with Eros International Media Limited remains unchanged.
Vijay Ahuja, our director and Vice Chairman, entered into a service agreement with Eros International Pte Ltd to provide services to us and our subsidiaries. The service agreement is terminable by either party with twelve months’ written notice. Eros International Pte Ltd may terminate the agreement immediately in certain circumstances, including upon certain types of misconduct or upon paying the executive an amount equivalent to his basic salary for a twelve month period. The agreement shall automatically terminate on his 65th birthday. Mr. Ahuja receives a basic gross annual salary and is entitled to participate in any bonus scheme and/or option scheme applicable to his position. The agreement contains a confidentiality provision and non-competition and non-solicitation provisions that restrict Mr. Ahuja for a period of six months following termination.
Mrs. Rishika Lulla Singh, our director, has entered into a service agreement on July 3, 2015 with Eros Digital FZ LLC, pursuant to which she serves as the Chief Executive Officer and an executive director of Eros Digital FZ LLC which provides her with an annual salary of $148,456. The employment agreement is for a term of three years and is terminable by either party by giving 12 months written notice.LLC. On February 17, 2016November 11, 2018 with effect from AprilNovember 1, 2016, an2018, Mrs. Rishika Lulla Singh’s gross annual salary is amended and restated service agreement was executed with Msrevised to $480,000. Mrs. Rishika Lulla Singh by Eros Digital FZ LLCis also entitled to 1,238,000 A ordinary shares awards in total, which entitles her to a gross annual salary of $320,000.will vest annually over the next three years.
Our non-executive Director, Mr. Dilip Thakkar, has entered into letter of appointment with us that provide him with annual fees of $95,000$76,112 per annum.annum (equivalent to GBP 60,000, as per Board Meeting dated June 28, 2016). Mr. Shailendra Swarup has been appointed as non-executive Director with effect from July 25, 2017 and annual fees for his service has director for Eros International Plc is $53,000$50,741 (equivalent to GBP 40,000). Mr. Dhirendra Swarup has been appointed as non-executive Director with effect from July 31, 2019 and annual fees for his service as director for Eros International Plc is $34,626 (equivalent to GBP 26,667) The appointments are for an initial period of one year, and there after terminable by either the non-executive director or by us with three months’ written notice, or by us immediately in the case of fraud.
It was resolved at a board meeting held on June 28, 2016 that Dilip Thakkar and Naresh Chandra both be entitled to annual fees of $95,000 with retrospective effect from fiscal year 2017.
Mr. David Maisel, our director, has entered into a service agreement with us, pursuant to which he serves as a non-executive director, which provides him with an annual fee of $89,075. The service agreement is terminable by either party with 30 days written notice. The service agreement is for a term of five years and three months from November 2014. Mr. Maisel was granted options to purchase up to 500,000 A ordinary shares at $18.88 as part of his service agreement, such options vest in five equal tranches commencing in November 2015. There are certain conditions under which, if the agreement is terminated before the relevant vesting date, the unvested options lapse.
Mr. Prem Parameswaran, our Group Chief Financial Officer and President North America,Head of Corporate Strategy, has entered into aan amended employment agreement with us on May 26, 2015as of June 9, 2018, which provides him with an annual salary of $450,000. The employment agreement is for a term of three years and is terminable by either party by giving 12 months written notice. Mr. Parameswaran is also entitled to 300,0001,590,000 A ordinary shares at $0.45 per shareawards in total as part of his employment agreement, these shares are restricted, but will cease to be so inwhich have varying vesting periods over the next three equal tranches from May 2016. Mr Parameswaran was also granted options to purchase up to 300,000 A ordinary shares at $18.30 as part of his employment agreement, such options vest in three equal annual tranches commencing in June 2016.years.
MrMr. Mark Carbeck, our Chief Corporate and Strategy Officer and Mr. Pranab Kapadia, our President of Europe and Africa Operations, have bothhas entered into a service agreementsagreement with Eros International Limited to provide services to us and certain of our subsidiaries. The service agreements areagreement is terminable by either party with three months’ written notice. Eros International Ltd may terminate the agreement immediately in certain circumstances, including upon certain types of misconduct or upon paying the executive an amount equivalent to his basic salary for a three month period. Mr. Carbeck and Mr Kapadia receivereceives a basic gross annual salary and areis entitled to participate in any current bonus scheme applicable to their positions.his position. The agreement contains a confidentiality provision and non-competition and non-solicitation provisions that restrict the executive for a period of twelve months following termination.
Board Committees
We currently have an Audit Committee, Remuneration Committee, Nomination Committee and NominationIndependent Committee, whose responsibilities are summarized below. We believe that the composition of these committees meet the criteria for independence under, and the functioning of these committees comply with the requirements of, the SOX Act, the rules of the NYSE and the SEC rules and regulations applicable to us.
Audit Committee
Our board of directors has adopted a written charter under which our Audit Committee operates. This charter sets forth the duties and responsibilities of our Audit Committee, which, among other things, include: (i) monitoring our and our subsidiaries’ accounting and financial reporting processes, including the audits of our financial statements and the integrity of the financial statements; (ii) monitoring our compliance with legal and regulatory requirements; (iii) assessing our external auditor’s qualifications and independence; and (iv) monitoring the performance of our internal audit function and our external auditor. A copy of our Audit Committee charter is available on our website at www.erosplc.com.erosstx.com. Information contained on our website is not a part of, and is not incorporated by reference into, this annualtransition report.
The current members of our Audit Committee are Mr. ThakkarShailesh Rao, Nicholas Stone (Chair), Dhirendra Swarup and Mr. Swarup. The Audit Committee met seven times during fiscal year 2017.Dilip Thakkar. Our board of directors has determined that each of the members of our Audit Committee are independent. The Audit Committee met eight times during the year ended March 31, 2020.
Remuneration Committee
Our board of directors has adopted a written charter under which our Remuneration Committee operates. This charter sets forth the duties and responsibilities of our Remuneration Committee, which, among other things, include assisting our Board of Directors in establishing remuneration policies and practices. A copy of our Remuneration Committee charter is available on our website at www.erosplc.com.erosstx.com. Information contained in our website is not a part of, and is not incorporated by reference into, this annualtransition report.
The current members of our Remuneration Committee are Mr. ShailendraDhirendra Swarup (Chair) and Mr. Dilip Thakkar. The Remuneration Committee met fourfive times during fiscalthe year 2017.ended March 31, 2020. Our board of directors has determined that each of the members of our Remuneration Committee is independent.
Nomination Committee
Our board of directors has adopted a written charter under which our Nomination Committee operates. This charter sets forth the duties and responsibilities of our Nomination Committee, which, among other things, include recommending to our Board of Directors candidates for election at the annual meeting of shareholders and performing a leadership role in shaping the Company’s corporate governance policies. A copy of our Nomination Committee charter is available on our website at www.erosplc.com.erosstx.com. Information contained in our website is not a part of, and is not incorporated by reference into, this annualtransition report.
The current members of our Nomination Committee are Mr. ShailendraNicholas Stone, Dhirendra Swarup, (Chair)Dilip Thakkar and Mr. Thakkar.John Zhao (Chair). The Nomination Committee is an ad hoc committee and met fourthree times during fiscalthe year 2017.ended March 31, 2020. Our board of directors has determined that each of the members of our Nomination Committee is independent.
Independent Committee
Our board of directors has established an Independent Committee. Pursuant to the Investors’ Rights Agreement and our articles of association, until the third anniversary of the Merger, we must receive the approval of the Independent Committee before taking certain actions. Additionally, until the third anniversary of the Merger, the Founders Group may not acquire more than 50% of our voting power without the prior approval of the Independent Committee.
The current members of our Independent Committee are Shailesh Rao, Nicholas Stone, Dhirendra Swarup and Dilip Thakkar (Chair).
The table below summarizes the composition of our committees during the year.
| | Audit
Committee | | Remuneration
Committee | | Nomination
Committee | Independent Committee |
| Shailesh Rao | | Member | | Member | | — | Member |
| Nicholas Stone | | Chair | | — | | Member | Member |
| Dhirendra Swarup | | Member | | Chair | | Member | Member |
| Dilip Thakkar | | Member | | Member | | Member | Chair |
| John Zhao | | — | | Member | | Chair | — |
D. Employees
As of March 31, 2017,October 23, 2020, we had 448502 employees, with 404331 employees based in India, 126 based on the U.S., and the remainder employed by our international subsidiaries. All are full time employees or contractors. Our employees are not unionized. We believe that our employee relations are good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as at June 30, 2017October 23, 2020 by each of our directors and all our directors and executive officers as a group. As used in this table, beneficial ownership means the sole or shared power to vote or direct the voting or to dispose of or direct the sale of any security. A person is deemed to be the beneficial owner of securities that can be acquired within 60 days upon the exercise of any option, warrant or right. Ordinary shares subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for computing the ownership percentage of the person holding the options, warrants or rights, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages as at June 30, 2017October 23, 2020 are based on an aggregate of 60,699,209207,018,261 ordinary shares issued and outstanding as at that date.
| | | Number of A Ordinary Shares
Beneficially Owned | | Number of B Ordinary Shares
Beneficially Owned |
| Directors | | Number of
Shares of
A | | Percent
of Class | | Number of
Shares of
B | | Percent
of Class |
| Kishore Lulla(1) | | 9,683,454 | | 20.7% | | 11,712,715 | | 84.39% |
| Jyoti Deshpande(2) | | 2,112,333 | | 4.5% | | — | | — |
| Vijay Ahuja(3) | | 3,100,000 | | 6.6% | | 2,166,667 | | 15.61% |
| Sunil Lulla | | * | | * | | — | | — |
| Dilip Thakkar | | * | | * | | — | | — |
| Naresh Chandra(4) | | * | | * | | — | | — |
| David Maisel | | — | | — | | — | | — |
| Rishika Lulla Singh | | * | | * | | — | | — |
| | | | | | | | | |
| Senior Management | | | | | | | | |
| Prem Paramsewaran | | — | | — | | — | | — |
| Mark Carbeck | | * | | * | | — | | — |
| Pranab Kapadia | | * | | * | | — | | — |
| Surender Sadhwani | | * | | * | | — | | — |
| All directors and senior management as a group | | 16,436,940 | | 35.1% | | 13,879,382 | | 100.0% |
| | | Number of A Ordinary Shares
Beneficially Owned | | Number of B Ordinary Shares
Beneficially Owned |
| | | Number of | | Percent | | Number of | | Percent |
| | | A Shares | | of Class | | B Shares | | of Class |
| Directors | | | | | | | | |
| Kishore Lulla(1) | | * | | * | | 17,723,085 | | 81.7% |
| Shailesh Rao | | * | | * | | * | | * |
| Robert B. Simonds | | * | | * | | * | | * |
| Rishika Lulla Singh | | * | | * | | 2,662,666 | | 12.3% |
| Nicholas Stone(2) | | 7,965,334 | | 4.3% | | 0 | | 0.0% |
| Dhirendra Swarup | | * | | * | | * | | * |
| Dilip Thakkar | | * | | * | | * | | * |
| John Zhao(3) | | 7,965,334 | | 4.3% | | 0 | | 0.0% |
| | | | | | | | | |
| Senior Management | | | | | | | | |
| Pradeep Dwivedi | | * | | * | | * | | * |
| Adam Fogelson | | * | | * | | * | | * |
| Noah Fogelson | | * | | * | | * | | * |
| Mark Carbeck | | * | | * | | * | | * |
| Ali Hussein | | * | | * | | * | | * |
| Ridhima Lulla | | * | | * | | 1,314,667 | | 6.1% |
| Rishika Lulla Singh | | * | | * | | 2,662,666 | | 12.3% |
| Sunil Lulla | | 3,062,000 | | 1.7% | | 0 | | 0.0% |
| Prem Parameswaran | | * | | * | | * | | * |
| Andrew Warren | | * | | * | | * | | * |
| All Directors and Senior Management | | 21,585,713 | | 11.3% | | 21,700,418 | | 100% |
| * | Represents less than 1%. |
| (1) | Kishore Lulla’sLulla's interest in certain of his shares is by virtue of (i) his holding ownership interests in, and being a potential beneficiary of, discretionary trusts that hold our shares and (ii) serving as trustee of the Lulla Foundation, a U.K. registered charity that holds our shares. |
| (2) | Mr. Stone’s interest in certain of his shares is by virtue of his holding ownership interests in certain entities affiliated with TPG Capital (“TPG”). Does not include 71,435,109 additional A ordinary shares estimated to be received by certain entities affiliated with TPG in connection with the settlement of CVRs on the Settlement Date; such estimate is based on the 10-day volume weighted average price (“VWAP”) of our A ordinary shares as of October 23, 2020 and will be finally determined based on the 10-day VWAP of our A ordinary shares as of the trading day immediately prior to the Settlement Date. |
| (3) | Mr. Zhao’s interest in certain of his shares is by virtue of his holding ownership interest in and being a potential beneficiary of discretionary trusts that hold our shares and serving as trustee of the Eros Foundation, a U.K. registered charity that holds our shares. |
(2) | Jyoti Deshpande’s interest in certain of her shares is by virtue of her prior existing shareholding vested options received as compensation and the 1,676,645 of our shares which she was issued on September 18, 2013 under her employment agreement. Ms Deshpande received 90,000, 160,000 and 160,000entities affiliated with Hony. Does not include 61,744,780 additional A ordinary shares respectively,estimated to be received by certain entities affiliated with Hony in eachconnection with the settlement of 2014, 2015CVRs on the Settlement Date; such estimate is based on the 10-day VWAP of our A ordinary shares as of October 23, 2020 and 2016will be finally determined based on the 10-day VWAP of our A ordinary shares as part of executive director share awards. |
(3) | Vijay Ahuja’s interests in shares are by virtue of being potential beneficiaries of discretionary trusts that hold our shares. Ganesh Holdings Limited is a wholly owned subsidiary of Ganesh Trust of which Vijay Ahuja and his family are beneficiaries.the trading day immediately prior to the Settlement Date. |
| (4) | DueDoes not include 2,274,194 additional A ordinary shares estimated to be received in connection with the settlement of CVRs on the Settlement Date; such estimate is based on the 10-day VWAP of our A ordinary shares as of October 23, 2020 and will be finally determined based on the 10-day VWAP of our A ordinary shares as of the trading day immediately prior to the sudden death of Mr. Naresh Chandra, he was no longer a Director as of July 09, 2017.Settlement Date.. |
The Founders Group, including Kishore Lulla and Vijay Ahuja,his direct descendants, by virtue of their holdings ofthe B ordinary shares they own, have different voting rights to the other Directors.from holders of A ordinary shares. Each A ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote, and each B ordinary share is entitled to ten votes. In order to vote at any meeting of shareholders, a holder of B ordinary shares will first be required to certify that it is a permitted holder as defined in our articles.articles of association. Following the adoption of the new Amended Articles of Association, Mr. Sunil Lulla, the brother of Kishore Lulla and the current Chairman and Managing Director of Eros International Media Limited and a member of the board of directors of Eros, and his descendants, will be within the scope of permitted holders.
Options to purchase A ordinary from the Company are granted from time to time to directors, officers and employees of the Company on terms and conditions acceptable to the Board of Directors.Board.
The following table provides the JSOP Plan details with respect to the directors and officers
| Name | | Number of
‘A’ ordinary
Shares Options | | Date of
Grant | | Exercise
Price
($USD) | | Expiration
Date |
| Rishika Lulla Singh | | | 242,034 | | | | August 2014 | | | $ | 15.34 | | | August 2024 |
| Pranab Kapadia | | | 132,013 | | | | April 2012 | | | $ | 11.00 | | | April 2018 |
| Surender Sadhwani | | | 130,000 | | | | August 2015 | | | $ | 24.00 | | | May 2017 |
The following table provides option details with respect to the directors and officers.officers as at October 23, 2020.
| Name | | Number of
‘A’ ordinary
Shares Options | | Date of
Grant | | Exercise
Price
($USD) | | Expiration
Date | | Number of
‘A’ ordinary
Shares
Options | | Date of
Grant | | Exercise
Price | | Expiration
Date |
| Prem Parameswaran | | | 300,000 | | | | June 2015 | | | $ | 18.3 | | | June 2018 | | 300,000 | | Sep-15 | | $ | 18.30 | | Jun-21 |
| Surender Sadhwani | | 674,045 | | | September 2014 | | | $ | 11.00 | | | June 2017 | |
| David Maisel | | 500,000 | | | February 2015 | | | $ | 18.88 | | | February 2020 | |
| Mark Carbeck | | 70,000 | | | February 2015 | | | $ | 14.97 | | | March 2025 | | 70,000 | | Feb-15 | | $ | 14.97 | | Mar-25 |
| Ridhima Lulla | | | 250,000 | | Sep-18 | | GBP | 0.30 | | Mar-25 |
(1) | | In addition Jyoti Deshpande also has 571,160 share options in Eros International Media Limited by virtue of the IPO India Plan. The options had a three year vesting period commencing July 16, 2013, with an exercise price of $1.14. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table and accompanying footnotes provide information regarding the beneficial ownership of our ordinary shares as of June 30, 2017October 23, 2020 with respect to each person or group who beneficially owned 5% or more of our issued ordinary shares.
Beneficial ownership, which is determined in accordance with the rules and regulations of the SEC, means the sole or shared power to vote or direct the voting or dispose or direct the disposition of our ordinary shares. The number of our ordinary shares beneficially owned by a person includes ordinary shares issuable with respect to options or similar convertible securities held by that person that are exercisable or convertible within 60 days of June 30, 2017.October 23, 2020.
The number of shares and percentage beneficial ownership of ordinary shares below is based on 46,819,827185,317,843 issued A ordinary shares and 13,879,38221,700,418 issued B ordinary shares as of June 30, 2017.October 23, 2020.
Except as otherwise indicated in the footnotes to the table, shares are owned directly or indirectly with sole voting and investment power, subject to applicable marital property laws.
| | | Number of A Ordinary Shares
Beneficially Owned | | Number of B Ordinary Shares
Beneficially Owned |
| Major shareholders | | Number of
A Shares | | Percent
of Class | | Number of
B Shares | | Percent
of Class |
| Kishore Lulla(1) | | | 9,683,454 | | | | 20.7% | | | | 11,712,715 | | | | 84.39% | |
| Beech Investments(3) | | | 210,505 | | | | 0.4% | | | | 11,546,048 | | | | 83.19% | |
| Vijay Ahuja(2) | | | 3,100,000 | | | | 6.6% | | | | 2,166,667 | | | | 15.61% | |
| Ganesh Holdings Ltd(4) | | | 3,100,000 | | | | 6.6% | | | | 2,000,000 | | | | 14.41% | |
| Capital Research Global Investors | | | 5,330,740 | | | | 11.4% | | | | — | | | | — | |
| Paradice Investment Management LLC | | | 4,577,734 | | | | 9.8% | | | | — | | | | — | |
| Temasek Holdings Pte | | | 4,025,030 | | | | 8.6% | | | | — | | | | — | |
| Eros Ventures Limited(5) | | | 3,500,000 | | | | 7.5% | | | | — | | | | — | |
| Jyoti Deshpande | | | 2,112,333 | | | | 4.5% | | | | — | | | | — | |
| Jupiter Asset Management LTD | | | 2,086,936 | | | | 4.5% | | | | — | | | | — | |
| New Jersey Division of Investment | | | 1,969,990 | | | | 4.2% | | | | — | | | | — | |
| | | Number of A Ordinary Shares
Beneficially Owned | | Number of B Ordinary Shares
Beneficially Owned |
| Major shareholders | | Number of | | Percent | | Number of | | Percent |
| | | A Shares | | of Class | | B Shares | | of Class |
| | | | | | | | | |
| Kishore Lulla(1) | | 1,041,404 | | 0.6% | | 17,723,085 | | 81.7% |
| Beech Investments Limited(2) | | 318,818 | | 0.2% | | 8,046,048 | | 37.1% |
| Entities affiliated with TPG Capital(3) | | 7,965,334 | | 4.3% | | — | | — |
| Entities affiliated with Hony Capital(4) | | 7,965,334 | | 4.3% | | — | | — |
| PCCW Media Limited(5) | | 2,705,207 | | 1.5% | | — | | — |
| (1) | Kishore Lulla’s interest in certain of his shares is by virtue of (i) his holding ownership interestinterests in, and being a potential beneficiary of, discretionary trusts that hold our shares and (ii) serving as trustee of the ErosLulla Foundation, a U.K. registered charity that holds our shares. |
| (2) | Vijay Ahuja’s interests in shares are by virtue of being potential beneficiaries of discretionary trusts that hold our shares. Ganesh Holdings Limited is a wholly owned subsidiary of Ganesh Trust of which Vijay Ahuja and his family are beneficiaries. |
(3) | Beech Investments Limited, c/o SG Kleinwort Hambros Trust Company (Channel Islands) Limited, PO Box 197, SG Hambros House, 18 Esplanade, St Helier, Jersey, JE4 8RT. Beech Investments, a company incorporated in the Isle of Man, is owned by discretionary trusts that include Eros director Kishore Lulla as a beneficiary. The shares currently held by Beech Investments Limited are being held as both A ordinary and B ordinary shares. The B ordinary shares but willwould convert into A ordinary shares (pursuant to Section 22.1 of the Articles of Association) upon being transferred to a person who is not a Permitted Holder (as defined in Section 22.1 of the Articles of Association). |
| (3) | Does not include 71,435,109 additional A ordinary shares estimated to be received by certain entities affiliated with TPG in connection with the settlement of CVRs on the Settlement Date; such estimate is based on the 10-day VWAP of our A ordinary shares as of October 23, 2020 and will be finally determined based on the 10-day VWAP of our A ordinary shares as of the trading day immediately prior to the Settlement Date. |
| (4) | Ganesh Holdings LimitedDoes not include 61,744,780 additional A ordinary shares estimated to be received by certain entities affiliated with Hony in connection with the settlement of CVRs on the Settlement Date; such estimate is a wholly owned subsidiarybased on the 10-day VWAP of Ganesh Trustour A ordinary shares as of which Vijay AhujaOctober 23, 2020 and his family are beneficiaries.will be finally determined based on the 10-day VWAP of our A ordinary shares as of the trading day immediately prior to the Settlement Date.. |
| (5) | Eros VenturesDoes not include 20,836,554 additional A ordinary shares estimated to be received by PCCW Media Limited c/o SG Kleinwort Hambros Trust Company Limited, Hambro House, St. Julians Avenue, St. Peter Port, Guernsey, GY1 3ED. Eros Ventures Limited, a company incorporated in connection with the British Virgin Islands,settlement of CVRs on the Settlement Date; such estimate is owned by discretionary trusts that include Mr. Kishore Lullabased on the 10-day VWAP of our A ordinary shares as beneficiary.of October 23, 2020 and will be finally determined based on the 10-day VWAP of our A ordinary shares as of the trading day immediately prior to the Settlement Date.. |
The following summarizes the significant changes in the percentage ownership held by our major shareholders during the past three years:
| · | Prior to our listing on the NYSE on November 18, 2013 the interests of all our major shareholders were in ordinary GBP 0.10 shares. |
| · | Kishore Lulla’s interest in certain of his shares is by virtue of his(i) his holding ownership interestinterests in, and being a potential beneficiary of, discretionary trusts that hold our shares and (ii) serving as trustee of the ErosLulla Foundation, a U.K. registered charity that holds our shares. Since fiscal year end 2016,July 30, 2019, Mr. Lulla’s aggregate ownership of our A and B ordinary shares, through both direct and indirect ownership, has increased by 7,608,3831,149,493 shares. The increasechange in Mr. Lulla’s ownership was driven by a combination of sharesseveral factors including, but not limited to: share grants received through executive compensation schemes, a decrease in holdings of Eros Ventures limited and the conversion of certain amounts of B ordinary shares into A ordinary shares. |
| · | Jyoti Deshpande’s interest in certain of her shares is by virtue of her prior existing shareholding vested options received as compensation andIn connection with the 1,676,645Merger, TPG Growth Oscars IV, L.P. acquired 7,965,334 of our shares which she was issued on September 18, 2013 under her employment agreement. Ms Deshpande received a further 181,818 A ordinary shares as part of a contractual arrangement and sold 300,000 shares in July 2014 as part of our follow-on equity offering. Ms Deshpande received 90,000, 160,000 and 160,000 A ordinary shares, respectively, in each of 2014, 2015 and 2016 as part of executive director share awards.shares. |
| · | Capital Research Global Investors reported its percentage ownershipIn connection with the Merger, Marco Alliance Limited acquired 7,965,334 of our A ordinary shares to be 15.0% (based on the then number of our ordinary shares reported as outstanding at that time) in a Schedule 13G/A filed with the Commission on December 30, 2016.shares. |
| · | Paradice Investment Management LLC reported its percentage ownershipIn connection with the Merger, PCCW Media Limited acquired 2,705,207 of our A ordinary shares to be 11.8% (based on the then number of our ordinary shares reported as outstanding at that time) in a Schedule 13G/A filed with the Commission on May 31, 2017.shares. |
| · | Temasek Holdings (Private) Limited reported its percentage ownership of our ordinary shares to be 11.3% (based on the then number of our ordinary shares reported as outstanding at that time) in a Schedule 13G/A filed with the Commission on January 24, 2017. |
| · | Jupiter Asset Management Ltd reported its percentage ownership of our ordinary shares to be 5.9% (based on the then number of our ordinary shares reported as outstanding at that time) in a Schedule 13G/A filed with Commission on December 31, 2016. |
| · | New Jersey Division of Investment reported its percentage ownership of our ordinary shares to be 5.6% (based on the then number of our ordinary shares reported as outstanding at that time) in a Schedule 13G/A filed with the Commission on December 31, 2016. |
Kishore Lulla, Vijay Ahuja and Beech Investments Limited,The Founders Group by virtue of their holdings ofthe B classordinary shares they own, have different voting rights to the other major shareholders.from holders of A ordinary shares. Each A ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote, and each B ordinary share is entitled to ten votes. In order to vote at any meeting of shareholders, a holder of B ordinary shares will first be required to certify that it is a permitted holder as defined in our articles.articles of association.
As of March 31, 2017,September 30, 2020, approximately 38,869,316165,939,824 of our A ordinary shares, representing 94.1%89.5% of our outstanding A ordinary shares as of March 31, 2017,October 23, 2020, were held by a total of 67 record holders with addresses in the United States. Computershare, N.A., the depositary, has advised us that, as of March 31, 2017, approximately 92.6% of our total outstanding ordinary shares in the form of 38,247,845 A ordinary shares, were held of record by DTC, the Depository Trust Company, under the nominee name of Cede & Co., on behalf of DTC participants.U.S. The number of beneficial owners of our A ordinary shares in the United StatesU.S. is likely to be much larger than the number of record holders of our A ordinary shares in the United States.U.S. No B ordinary shares are held by individuals with addresses in the U.S.
B. Related Party Transactions
The following isMerger Agreement
On April 17, 2020, Eros and STX entered the Merger Agreement and the Merger was consummated on July 30, 2020. For a description of transactions sincethe Merger Agreement and the related CVR Agreements (as defined below), including the contingent value rights to be issued pursuant thereto on the Settlement Date, see “Part I—Item 10. Additional Information—C. Material Contracts” below.
PIPE Subscription Agreement
On April 1, 201417, 2020, we entered into a Subscription Agreement (as amended, restated or otherwise modified from time to time, the “PIPE Subscription Agreement”) with the STX Parties, pursuant to which we have beenthe STX Parties agreed to purchase newly issued A Ordinary Shares from Eros for an aggregate purchase price of $75 million in a party, inprivate placement transaction (the “PIPE Financing”). Concurrently with its execution of the PIPE Subscription Agreement, each STX Party thereunder also executed a lock-up agreement (the “PIPE Lock-Up Agreements”) pursuant to which the amount involvedSTX Party agreed not to, without our prior written consent, directly or indirectly transfer the A Ordinary Shares issued to such STX Party in the transaction exceededPIPE Financing and the Merger for a period of 75 days following the Merger. On July 30, 2020, substantially concurrently with the Merger, we consummated the PIPE Financing. The purchase price for each A Ordinary Share purchased under the PIPE Subscription Agreement was $3.08, and Eros issued an aggregate of 24,350,641 A Ordinary Shares to the investors in the PIPE Financing. In connection with the consummation of the PIPE Financing and as contemplated by the Merger Agreement and the PIPE Subscription Agreement, substantially concurrently with the consummation of the Merger, the Founders Group and the investors under the PIPE Subscription Agreement entered into the Investors’ Rights Agreement and the 2020 Registration Rights Agreement (as defined below), and Eros filed an Amended Articles of Association with the Companies Registry of the Isle of Man. The Investors’ Rights Agreement and the 2020 Registration Rights Agreement are described in further detail below under “Investors’ Rights Agreement, 2020 Registration Rights Agreement, and Amended Articles of Association.”
2020 Registration Rights Agreement
In connection with the Merger, on July 30, 2020 we, the STX Parties and the Founders Group entered into a Registration Rights Agreement (the “2020 Registration Rights Agreement”). The terms of the 2020 Registration Rights Agreement require us to register for resale all A ordinary shares issued to the STX Parties (1) on the closing date of the Merger pursuant to the PIPE Subscription Agreement and (2) upon settlement of the CVRs on the Settlement Date. The STX Parties have the right to cause the Company to undertake underwritten offerings or will exceed $120,000, and in which anysales of our directors, executive officers or beneficial holdersthe registered A ordinary shares, subject to certain restrictions. In addition to the rights of more than 5% of our issued share capital had orthe STX Parties under the 2020 Registration Rights Agreement, the Founders Group will have the right, from time to time after October 30, 2020, to demand registration of A ordinary shares, subject to certain restrictions. Such demand registrations are subject to customary “piggyback” registration rights in favor of the STX Parties.
The foregoing is a direct or indirect material interest.summary of registration rights of the STX Parties and the Founders Group under the 2020 Registration Rights Agreement, which summary is not intended to be complete and is qualified in its entirety by the full text of the 2020 Registration Rights Agreement.
Investors’ Rights Agreement
In connection with the Merger, on July 30, 2020, we, the STX Parties and the Founders Group entered into an Investors’ Rights Agreement the Investors’ Rights Agreement.
Nomination Rights
The Investors’ Rights Agreement provides that, until July 30, 2023, (1) certain of the STX Parties affiliated with Hony have the right, for so long as Hony beneficially owns at least 50% of the number of A ordinary shares beneficially owned by it as of the closing of the Merger (giving effect to the A ordinary shares underlying the contingent value rights issued to Hony pursuant to the Merger Agreement), to nominate for election or appointment to the Board each successor to or replacement for an STX Director, and (2) the Founders Group has the right, for so long as the Founders Group continues to beneficially own at least 50% of the number of ordinary shares beneficially owned by the Founders Group as of the closing of the Merger (excluding for this purpose shares issued in respect of new equity awards granted at or immediately after the closing of the Merger), to nominate for election or appointment to the Board each successor to or replacement for a Founders Group Director.
For so long as the Founders Group has the foregoing Board nomination right, with respect to all other directorships to be elected in an election of directors to the Board, the Founders Group shall vote its shares proportionately to the vote of all holders of shares who are not members of the Founders Group (such proportional vote giving effect to the A ordinary shares underlying any unsettled contingent value rights issued in connection with the Merger). In addition, for so long as Hony has the foregoing Board nomination right, the hiring or termination of the chief executive officer, chief financial officer or president (including any co-president) of the Company will require the approval of a majority of the Board, including at least one director nominated by Hony.
For so long as the Founders Group has the right to nominate directors pursuant Investors’ Rights Agreement, the Remuneration Committee will consist of not more than four directors, of which two shall be directors nominated by the Founders Group and, for so long as Hony has the right to nominate directors pursuant to the Investors’ Rights Agreement, two out of four members of the Remuneration Committee shall be directors nominated by Hony.
Founders Protections
Until the earlier of the July 30, 2023 or the date that the Founders Group ceases to beneficially own at least 50% of the number of ordinary shares beneficially owned by the Founders Group as of the closing of the Merger (excluding for this purpose shares issued in respect of new equity awards granted at or immediately after the closing of the Merger), the following actions by the Company or any of its subsidiaries will require the approval of a majority of the Board, including at least one Founders Group Director that is not an independent director (the “Founders Group Protections”): (1) entering into a change of control transaction; (2) initiating a voluntary liquidation, dissolution, bankruptcy or other insolvency proceeding; or (3) making a material change in the nature of the business conducted by the combined company and its subsidiaries. Additionally, until July 30, 2023, the Founders Group may not engage in transactions that would result in the Founders Group owning more than 50% of the total voting power of the outstanding ordinary shares. After July 30, 2023, the Founders Group may acquire ordinary shares, and/or convert between A ordinary shares and B ordinary shares, without limitation.
Until the earlier of July 30, 2023, the first such time after the Settlement Date (as defined below) that Hony ceases to beneficially own 50% of our A Ordinary Shares, or the first such time that the Founders Group ceases to beneficially own 50% of our A Ordinary Shares and B Ordinary Shares owned by it immediately prior to the Merger, the approval of a two-thirds majority of the Board will be required to take any action: (1) hiring or terminating the chief executive officer, chief financial officer or president (including any co-president) of the combined company; (2) adopting the annual business plan (including operating budget) of the combined company and its subsidiaries; or (3) entering into any agreement increasing our available debt for borrowed money to an amount greater than the greater of (i) $552 million and (ii) an amount that would cause our net debt to be greater than five times our Adjusted EBITDA ( as defined in our Annual Report on Form 20-F for the fiscal year ended March 31, 2020, submitted to the SEC on July 30, 2020) for the most recent four consecutive fiscal quarters for which financial statements are available (giving pro forma effect to the borrowing and the use of proceeds of such borrowing).
Minority Protections
The Investors’ Rights Agreement provides for certain minority protections. Until July 30, 2023, the prior approval of holders of a majority of the outstanding A ordinary shares is required before the Company or any of its subsidiaries takes (or agrees or commits to take) any of the following actions: (1) amending, supplementing or otherwise modifying the Company’s Memorandum or Articles of Association in a manner that would affect the relative rights of the holders of B ordinary shares vis-à-vis the holders of A ordinary shares; (2) effecting any transaction or series of transactions providing for consideration to the holders of B ordinary shares that is in a different amount or form per share than the consideration provided to the holders of A ordinary shares in such transaction; (3) any action that would have the effect of increasing the relative voting power of the then outstanding B ordinary shares vis-à-vis the then outstanding A ordinary shares; (4) issuing additional B ordinary shares (other than upon conversion of A ordinary shares held by the Founders Group subject to certain limitations); or (5) entering into non arms’ length related party transactions between the combined company and the Founders Group; provided that the prior approval the Independent Committee is also required before the Company or any of its subsidiaries takes (or agrees or commits to take) any of the actions described in items (1), (2) and (5).
In addition until the Settlement Date of the contingent value rights issued in connection with the Merger, all of the actions described in the preceding paragraph, as well as any election or removal of directors by the holders of ordinary shares or any other action generally requiring the approval of holders of ordinary shares, will in addition require the consent of the holders of contingent value rights corresponding to a number of shares that, together with outstanding shares actually voted with respect to the action in question and assuming the conversion of all contingent value rights into the respective number of A ordinary shares issuable thereunder as of such date, would be required to approve such action pursuant to the organizational documents or otherwise pursuant to the minority protections described above.
The foregoing is a summary of rights and protections of the STX Parties and the Founders Group under the Investors’ Rights Agreement, which summary is not intended to be complete and is qualified in its entirety by the full text of the Investors’ Rights Agreement, as amended.
Employment Agreements and Indemnification Agreements
See “Part I—Item 6. Directors, Senior Management and Employees—C. Board Practices—Service Contracts and Letters of Appointment.”
Family Relationships
Mr. Kishore Lulla, our director and Chairman, is the brother of Mr. Sunil Lulla, and father of Mrs. Rishika Lulla Singh, each of whom are directors, and a cousin of Mr. Vijay Ahuja, our former director and Vice Chairman (up to December 20, 2018) and of Mr. Surender Sadhwani, our President of Middle East Operations. Mr. Sunil Lulla is the brother of Mr. Kishore Lulla, uncle to Mrs. Rishika Lulla Singh, and a cousin of Mr. Vijay Ahuja and Mr. Surender Sadhwani. Mr. Vijay Ahuja is a cousin of Mr. Kishore Lulla and Mr. Sunil Lulla.Lulla Mrs. Rishika Lulla Singh is the daughter of Mr. Kishore Lulla and niece of Mr. Sunil Lulla. Mr. Surender Sadhwani is a cousin of Mr. Kishore Lulla and Mr. Sunil Lulla. Mr. Arjan Lulla, our founder, iswas the father of Mr. Kishore Lulla and Mr. Sunil Lulla, grandfather of Mrs. Rishika Lulla Singh, uncle of Mr. Vijay Ahuja and Mr. Surender Sadhwani and an employee of Redbridge Group Ltd., ishe was the Honorary President of Eros and a director of our subsidiary Eros Worldwide. Mrs. Manjula Lulla, the wife of Mr. Kishore Lulla, respectively, is an employee of our subsidiary. Ms Ridhima Lulla, is the daughter of Mr. Kishore Lulla and an employee of our subsidiary. Mrs. Krishika Lulla is the wife of MrMr. Sunil Lulla and an employee of Eros India. Mr. Swaneet Singh is the husband of Mrs. Rishika Lulla Singh and son in law of Mr. Kishore Lulla.
Leases
Pursuant to a lease agreement that expired on March 31, 2017, the lease requires2020, Eros International Media Limited to pay $5,000 each month under this lease. Eros International Media LimitedIndia leases apartments for studio use at Kailash Plaza, 3rd Floor, Opp. Laxmi Industrial Estate, Andheri (W), Mumbai, from Manjula K. Lulla, the wife of Kishore Lulla.Lulla for $4,000 per month. The lease was renewed on April 1, 20172020 for a further period of one year on the same terms.
Pursuant to a lease agreement that expiredexpires on September 30, 2015, the lease requires2021, Eros International Media Limited to pay $5,000 each month under this lease. Eros International Media LimitedIndia leases property for use as executive accommodations, the property Aumkar Bungalow, Gandhi Gram Road, Juhu, Mumbai, from Sunil Lulla. The lease was renewed on October 1, 2015Lulla for a further period of three years on the same terms.$4,000 per month.
Pursuant to a lease agreement that expiresexpired on January 4, 2020, Eros International Media LimitedIndia leases office premiseoffices for studio use at Supreme Chambers, 5th Floor, Andheri (W), Mumbai from Kishore and Sunil Lulla. Beginning January 2015, the lease requires Eros International Media Limited to pay $60,000 each month under this lease.
Pursuant to a lease agreement that expires on April 1, 2020, the real estate property at 550 County Avenue, Secaucus, New Jersey, from 550 County Avenue Property Corp, a Delaware corporation owned by Beech Investments. The lease commenced on April 1, 2015, and required the Group to pay $11,000 each month.Lulla for $82,000 per month.. The lease was renewed on April 1, 2015with effect from January 5, 2020 for a further period of five years on the same terms. This is a non-cancellable lease
Pursuant to a lease agreement that expires in March 2018, including renewal periods, the Group leases for U.K. corporate offices, the real property at 13 Manchester Square, London from Linecross Limited, a U.K. company owned indirectly by a discretionary trust of which Kishore Lulla is a potential beneficiary. The current lease commenced on November 19, 2009 and requires the Group to pay $130,000 each quarter.
Honorary Appointment of Mr. Arjan Lulla
Pursuant to an agreement the Group entered into with Redbridge Group Ltd. on June 27, 2006, the Group agreed to pay an annual fee set each year of $ 260,000, $300,000 and $325,000 in the respective years ended March 31, 2017, 2016 and 2015, for the services of Arjan Lulla, the father of Kishore Lulla and Sunil Lulla, grandfather of Rishika Lulla Singh, uncle of Vijay Ahuja and Surender Sadhwani and an employee of Redbridge Group Ltd. The agreement makes Arjan Lulla honorary life president and provides for services including attendance at Board meetings, entrepreneurial leadership and assistance in setting the Group’s strategy. Redbridge Group Ltd. is an entity owned indirectly by a discretionary trust of which Kishore Lulla is a potential beneficiary.
Lulla Family Transactions
The Lulla family refers to Mr. Arjan Lulla, Mr. Kishore Lulla, Mr. Sunil Lulla, Mrs. Manjula Lulla, Mrs. Krishika Lulla, Mrs. Rishika Lulla Singh, and Ms. Riddhima Lulla.
Ridhima Lulla and Mr. Swaneet Singh.
The Group has engaged in transactions with NextGen Films Pvt. Ltd.,Private Limited, an entity owned by the husband of Puja Rajani, sister of Kishore Lulla and Sunil Lulla, eachand which ceased to be a related party as of whichSeptember 19, 2019. Each transaction involved the purchase and sale of film rights. In the year ended March 31, 2017,period from April 1, 2019 to September 19, 2019, NextGen Films Pvt. Ltd.Private Limited sold film rights $616,000 (2016: $2,728,000 2015: $23,550,000)of $393,000 to the Group, and purchased film rights, including production services, of $Nil (2016: Nil and 2015: $275,000). TheGroup. In the period from April 1, 2019 to September 19, 2019 the Group advanced $22,881,000 (2016: $5,400,000 2015: $29,438,000)$2,113,000 to NextGen Films Pvt. Ltd.Private Limited for film co-production and received refund of $5,075,000 (2016: $6,945,000, 2015: Nil) on abandonment of certain film projects.co-production.
The Group also engaged in transactions with Everest Entertainment Pvt. Ltd.LLP, an entity owned by the brother of Manjula K. Lulla, wife of Kishore Lulla, which is involved in the purchase and sale of film rights. In March 31, 2017,fiscal 2020, Everest Entertainment Pvt. Ltd.LLP sold film rights of $Nil (2016: Nil: $408,000)$18,000 to the Group.
Mrs. Manjula Lulla, the wife of Kishore Lulla, is an employee of Eros International Plc. and is entitled to a salary of $130,000$147,000 per annum (2016: $154,000 and 2015: $167,000).annum. Mrs. Krishika Lulla, the wife of Sunil Lulla, is an employee of Eros India and is entitled to a salary of $133,000$121,000 per annum (2016: $138,000, 2015: $116,000).annum. Ms. RiddhimaRidhima Lulla, the daughter of Kishore Lulla, is an employee of Eros Digital FZ LLC and is entitled to a salary of $51,000$300,000 per annum, (2016: $38,000, 2015: $10,000)which is borne by Eros Worldwide LLC (“Eros Worldwide”).
All of the amounts outstanding are unsecured and will be settled in cash.
As at March 31, 2017, theThe Group has provided performance guarantee toengaged in transactions with Xfinite Global Plc, a bank amounting to $19,500,000 (2016: $32,500,000) in connection with funding commitments. under film co-production agreements with NextGen Films Pvt. Ltd and having varying maturity dates up to the next 12 months.subsidiary of Eros Investment Limited on which it has significant influence. The Group did not earn any fee to providehas received $12,776 from such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused.
Intransactions during fiscal year 2017, the Group obtained unsecured short-term borrowings of $6417 from Eros Television India Pvt. Ltd. at 12% per anum.2020.
Relationship Agreement
Both we and our subsidiaries, including Eros India, acquire rights in movies. The 2009We are party to the Relationship Agreement, which was renewed with the execution of the 2016 Relationship Agreement between Eros India, Eros Worldwide and us (“Relationship Agreement”).in 2016. The Relationship Agreement,exclusively assigns to Eros Worldwide,certain intellectual property rights and all distribution rights for films, excluding certain Tamil films (and other than(including global digital distribution rights, which are retainedrights) for films (other than Tamil films), held by Eros Worldwide),India or any of its subsidiary or the “Eros India” group, in all territories other than India, Nepal, and Bhutan, that are held by between Eros India and certain of its subsidiaries (the “Eros India Group”).Bhutan. In return, Eros Worldwide provides a lump sum minimum guaranteed fee to the Eros India Group in a fixed payment equal to 40% of the production cost of such film (including all costs incurred in connection with the acquisition, pre-production, production or post-production of such film), plus an amount equal to 20% thereon as markup. We refer to these payments collectively as the Minimum Guaranteed Fee. Eros Worldwide is also required to reimburse the Eros India Group for pre-approved distribution expenses in connection with such film, plus an amount equal to 20% thereon as markup (“distribution expenses”). In addition, 15% of the gross proceeds received by the Eros International Group from monetization of such films, after certain amounts are retained by the Eros International Group, are payable over to the Eros India Group.
No share of gross proceeds from a film is payable by the Eros International Group to the Eros India Group until the Eros International Group has received and retained an amount equal to the Minimum Guaranteed Fee, a 20% fee on all gross proceeds and 100% of the distribution expenses incurred by the Eros International Group and the distribution expenses for which Eros Worldwide has provided reimbursement to the Eros India Group.
The initial term of the 2016 Relationship Agreement expires in April 2021. Upon expiration, the agreement provides that it will be automatically renewed for successive two year terms unless terminated by any party by 180 days written notice on or before commencement of any renewal term.
Eros Foundation
Prior toThere have been no other related party transactions since the beginning of our listinglast full fiscal year that began on April 1, 2020 through the NYSE in November 2013, we issued the equivalentdate of 282,949 A ordinary shares to the Eros Foundation, a U.K. registered charity, for no consideration. Such shares were granted by our Remuneration Committee to Mr. Kishore Lulla as compensation, each of whom directed the issuance of such shares to the Eros Foundation. Mr. Kishore Lulla and his wife, Mrs. Manjula K. Lulla, are trustees, but not beneficiaries, of the foundation. The Lulla Foundation sold 45,000 A ordinary shares between May 20, 2014 and March 7, 2017 and now currently has 252,949 A ordinary shares.this Transition Report.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Please see “Part III — III—Item 18. Financial Statements” for a list of the financial statements filed as part of this AnnualTransition Report on Form 20-F.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
The high and low last reported sale prices for ourOur A ordinary shares for the periods indicated are as shown below. We note that the periods are split between when Eros International was listedhave been trading on the Alternative Investment Market (“AIM”) and when it was listed on the New York Stock Exchange (“NYSE”) onNYSE since November 13, 2013. With respectOur A ordinary shares previously traded under the ticker “EROS.” On September 23, 2020, we changed our ticker to “ESGC” in connection with the trading pricesMerger and our subsequent corporate name change.
Our A ordinary shares previously traded on AIM, a market operated by the prices are adjustedLondon Stock Exchange plc, or AIM. We canceled the admission of our A ordinary shares to reflect the one-for-three reverse stock split, which occurred on November 18, 2013, and a translation from British Pound Sterling to U.S. dollars based on the prevailing exchange rate between the British Pound Sterling and the U.S. dollar at the time of the applicable trade. Amounts on the NYSE share price table below are for the period November 18, 2013 to May 31, 2017; and on the AIM share price table, for the period 1 April 2010 to November 18, 2013, only.
| | | Price per share on NYSE | |
| | | High | | | Low | |
| Fiscal year: | | | | | | | | |
| 2014 | | $ | 16.07 | | | $ | 8.94 | |
| 2015 | | $ | 22.44 | | | $ | 13.65 | |
| 2016 | | $ | 37.60 | | | $ | 6.81 | |
| 2017 | | $ | 19.23 | | | $ | 9.65 | |
| Fiscal Quarter: | | | | | | | | |
| First quarter 2017 | | $ | 16.27 | | | $ | 10.45 | |
| Second quarter 2017 | | $ | 19.23 | | | $ | 15.20 | |
| Third quarter 2017 | | $ | 18.75 | | | $ | 12.65 | |
| Fourth quarter 2017 | | $ | 13.10 | | | $ | 9.65 | |
| Month: | | | | | | | | |
| April 2016 | | $ | 13.38 | | | $ | 10.45 | |
| May 2016 | | $ | 15.30 | | | $ | 12.96 | |
| June 2016 | | $ | 16.27 | | | $ | 12.18 | |
| July 2016 | | $ | 18.68 | | | $ | 15.60 | |
| August 2016 | | $ | 19.23 | | | $ | 16.71 | |
| September 2016 | | $ | 16.95 | | | $ | 15.20 | |
| October 2016 | | $ | 17.75 | | | $ | 15.45 | |
| November 2016 | | $ | 18.75 | | | $ | 14.05 | |
| December 2016 | | $ | 15.60 | | | $ | 12.65 | |
| January 2017 | | $ | 12.75 | | | $ | 11.20 | |
| February 2017 | | $ | 13.10 | | | $ | 11.50 | |
| March 2017 | | $ | 12.00 | | | $ | 9.65 | |
| April 2017 | | $ | 10.15 | | | $ | 8.90 | |
| May 2017 | | $ | 11.85 | | | $ | 9.55 | |
| | | Price per share on AIM |
| | | High | | Low |
| Fiscal year: | | | | | | | | |
| 2011 | | $ | 13.37 | | | $ | 7.51 | |
| 2012 | | $ | 13.11 | | | $ | 9.54 | |
| 2013 | | $ | 15.02 | | | $ | 8.05 | |
| Fiscal Quarter: | | | | | | | | |
| First quarter 2013 | | $ | 15.02 | | | $ | 8.50 | |
| Second quarter 2013 | | $ | 11.53 | | | $ | 8.05 | |
| Third quarter 2013 | | $ | 11.81 | | | $ | 8.90 | |
| Fourth quarter 2013 | | $ | 12.16 | | | $ | 10.44 | |
| First quarter 2014 | | $ | 11.36 | | | $ | 8.79 | |
| Second quarter 2014 | | $ | 13.45 | | | $ | 9.06 | |
| Month: | | | | | | | | |
| October 2013 | | $ | 11.05 | | | $ | 10.27 | |
| November 2013 | | $ | 11.05 | | | $ | 10.27 | |
Our closing pricetrading on AIM on November 13, 2013, was $11.18.and our A ordinary shares are now traded exclusively on the NYSE.
B. Plan of Distribution
Not applicable.
C. Markets
Our shares are listed on the NYSE under the symbol “EROS.”
Not applicable.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Eros International Plc wasWe were incorporated in the Isle of Man as Eros International Plc on March 31, 2006 under the Isle of Man Companies Act 1931 Act (the “1931 Act”), as a public company limited by shares and effectiveshares. Effective as of September 29, 2011, waswe were de-registered under the 1931 Act and re-registered as a company limited by shares under the 2006 Act. The 2006 Act provides that such re-registration does not prejudice or affect in any way the continuity or legal validity of a company.
We maintain our registered office at Fort Anne,First Names House, Victoria Road, Douglas, Isle of Man IM1 5PD;IM2 4DF, British Isles; our principal executive office in the U.S. is at 550 County3900 West Alameda Avenue, Secaucus, New Jersey 07094.32nd Floor, Burbank, California 91505.
At March 31, 2017, Eros International plc has2020, we had authorized share capital of 63,953,951180,100,915 A ordinary shares at a par value of GBP 0.30 per share, of which 41,312,202 is127,116,702 was issued share capital, and authorized share capital of 19,379,38219,899,085 B ordinary shares at a par value of GBP 0.30 per share, of which 19,379,382 is19,899,085 were entirely issued and outstanding.
Our activities are regulated by our Memorandum and Articles of Association. We adopted revised Articles of Association by special resolution of our shareholders passed on April 24, 2012.June 29, 2020. The material provisions of our revised Articles of Association are described below. In addition to our Memorandum and Articles of Association, our activities are regulated by (among other relevant legislation) the 2006 Act. Our Memorandum of Association states our company name, that we are a company limited by shares, that our registered office is at Fort Anne, Douglas, Isleaddress and the name of Man IM1 5PD, that our registered agent, is Cains Fiduciaries Limitedin each case as at 28 September 2011 when the Memorandum of Association was last revised, and that neither the memorandum of association nor the articles of association may be amended except pursuant to a resolution approved by a majority of not less than three-fourths of such members as, being entitled so to do, vote in person or by proxy at the general meeting at which such resolution is proposed. Below is a summary of some of the provisions of our Articles of Association. It is not, nor does it purport to be, complete nor does it identify or purport to identify all of the rights and obligations of our shareholders.
The summary is qualified in its entirety by reference to our Articles of Association. See “Part III — III—Item 19. Exhibits — Exhibits—Exhibit 1.1” and “Part III — III—Item 19. Exhibits — Exhibits—Exhibit 1.2.”
The following is a description of the material provisions of our articles of association, ordinary shares and certain provisions of Isle of Man law. This summary does not purport to be complete and is qualified in its entirety by reference to our Articles of Association,Association. See “Part III -— Item 19.19”.
Board of Directors
Under our Articles of Association, the 2006 Act and the committee charters and governance policies adopted by our board of directors, our board of directors controls our business and actions. Our board of directors consists of between three and twelve directors and will beis divided into three staggered classes of directors of the same or nearly the same number. At each annual general meeting, a class of directors will beis elected for a three-year term to succeed the directors of the same class whose terms are then expiring. No director may participate in any approval of a transaction in which he or she is interested. The directors receive a fee determined by our board of directors for their services as directors and such fees are distinct from any salary, remuneration or other amounts that may be payable to the directors under our articles.
However, any director who is also one of our subsidiaries’ officers is not entitled to any such director fees but may be paid a salary and/or remuneration for holding any employment or executive office, in accordance with the articles. Our directors are entitled to be repaid all reasonable expenses incurred in the performance of their duties as directors. There is no mandatory retirement age for our directors.
Our articles provide that the quorum necessary for the transaction of business may be determined by our board of directors and, in the absence of such determination, is the majority of the members of our board of directors. Subject to the provisions of the 2006 Act, the directors may exercise all theour powers of the Company to borrow money, guarantee, indemnify and to mortgage or charge our assets.
Ordinary Shares
Dividends
Holders of our A ordinary shares and B ordinary shares whose names appear on theour register of members on the date on which a dividend is declared by our board of directors are entitled to such dividends according to the shareholders’ respective rights and interests in our profits and subject to the satisfaction of the solvency test contained in the 2006 Act.Act immediately after the payment of such dividends. Any such dividend is payable on the date declared by our board of directors, or on any other date specified by our board of directors. Under the 2006 Act, a company satisfies the solvency test if (a) it is able to pay its debts as they become due in the normal course of its business and (b) the value of its assets exceeds the value of its liabilities. UnderIn certain circumstances, if dividend paymentschecks, warrants or orders for dividends payable in respect of an ordinary share are returned to us undelivered or left uncashed, we will not be obligated to send further dividends or other payments with respect to such ordinary shares until thatthe relevant shareholder notifies us of an address to be used for the purpose. In the discretion of our board of directors, all dividends unclaimed for a period of twelve months may be invested or otherwise used by our board of directors for our benefit until claimed (and we are not a trustee of such unclaimed funds), and all dividends unclaimed for a period of twelve years after having become due for payment may be forfeited, andin which case they will revert to us.
Voting Rights
Each A ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote, and each B ordinary share is entitled to ten votes.
In orderaddition to vote at any meetingitems which require the approval of shareholders under applicable law, until the third anniversary of the effective date of the Merger, we and our subsidiaries must receive the prior approval of the holders of a holdermajority of B ordinaryour A Ordinary shares will first be required to certify that it is a permitted holder as defined in our articles.order to:
| · | amend, modify or supplement the provisions of Article 59 in our articles of association; |
| · | amend, supplement or otherwise modify (whether by merger or otherwise) our memorandum of association or articles of association in a manner that would affect the relative rights of the holders of our B Ordinary Shares vis-à-vis the holders of our A Ordinary Shares; |
| · | enter into any agreement or effect any transaction or series of related transactions providing for consideration to the holders of our B Ordinary Shares that is in a different amount or form per share than the consideration provided to the holders of our A Ordinary Shares in such transaction; |
| · | take any action that would have the effective of increasing the relative voting power of the B Ordinary Shares in issue vis-à-vis the A Ordinary Shares in issue; |
| · | issue additional B Ordinary Shares (other than upon conversion of A Ordinary Shares) to any permitted holder; |
| · | enter into any agreement or amend any existing agreement or effect any transaction or series of related transactions between us or our subsidiaries, on the one hand, and any permitted holder from time to time on the other hand, except for (i) awards of equity-based compensation approved by the Remuneration Committee and granted in the ordinary course of business to members of the permitted holders who are also members of our senior management, (ii) arms’ length transactions the material terms of which are approved in advance by an independent committee delegated the authority to make such determination by the Board and (iii) any agreements, transactions or arrangements existing on the date hereof the material terms of which are publicly disclosed prior to the date hereof in the documents publicly filed by us with the SEC; or |
| · | agree or otherwise commit (whether or not in writing) to take any of the foregoing actions. |
General Meetings
Unless unanimously approved by all shareholders entitled to attend and vote at the meeting, all general meetings for the approval of a resolution appointing a director may be convened by our board of directors with at least 21 days’ notice (excluding the date of notice and the date of the general meeting), and any other general meeting may be convened by our Boardboard of Directorsdirectors with at least 14 days’ notice (excluding the date of notice and the date of the general meeting). A quorum required for any general meeting consists of shareholders holding at least 30% of our issued share capital. The concept of “ordinary,” “special” and “extraordinary” resolutions is not recognized under the 2006 Act, and resolutions passed at a meeting of shareholders only require the approval of shareholders present in person or by proxy, holding in excess of 50% of the voting rights exercised in relation thereto. However, as permitted under the 2006 Act, our articles of association incorporate the concept of a “special resolution” (requiring the approval of shareholders present in person or by proxy holding 75% or more of the voting rights exercised in relation thereto) in relation to certain matters, such as directing the management of our business (subject to the provisions of the 2006 Act and our articles), sanctioning a transfer or sale of the whole or part of our business or property to another company (pursuant to the relevant section of the 1931 Act) and allocating any shares or other consideration among the shareholders in the event of a winding up.up
Rights to Share in Dividends
Our shareholders have the right to a proportionate share of any dividends we declare.
Limitations on Right to Hold Shares
Our board of directors may determine that any person owning shares (directly or beneficially) constitutes a “prohibited person” and is not qualified to own shares if such person is in breach of any law or requirement of any country and, as determined solely by our board of directors, such ownership would cause a pecuniary or tax disadvantage to us, another shareholder or any of our other securities. Our board of directors may direct the prohibited person to transfer the shares to another person who is not a prohibited person. Any such determination made or action taken by our board of directors is conclusive and binding on all persons concerned, although in the event of such a transfer, the net proceeds of the sale of the relevant shares, after payment of our costs of the sale, shall be paid by us to the previous registered holders of such shares or, if reasonable inquiries failed to disclose the location of such registered holders, into a trust account at a bank designated by us, the associated costs of which shall be borne by such trust account. A prohibited person would have the right to apply to the Isle of Man court if he or she felt that our board of directors had not complied with the relevant provisions of our articles of association.
Our articles also identify certain “permitted holders” of B ordinary shares. Any B ordinary shares transferred to a person other than a permitted holder will, immediately upon registration of such transfer, convert automatically into A ordinary shares. In addition, if, at any time,If the aggregate numbervoting power of the B ordinary shares in issue constitutesis at any time less than 10%2% of the aggregate numbervoting power of A ordinary shares and Ball ordinary shares in issue, allsuch B ordinary shares in issue will, convert automaticallyas soon as reasonably practicable, be converted into an equivalent number of fully paid A ordinary shares on a one-for-one basis.shares.
Untraceable Shareholders
UnderIn certain circumstances, if any payment with respect to any ordinary shares has not been cashed and we have not received any communications from the holder of such ordinary shares, we may sell such ordinary shares after giving notice in accordance with procedures set out by our articles of association to the holder of the ordinary shares and any relevant regulatory authority.
Action Required to Change Shareholder Rights or Amend Our Memorandum or Articles of Association
All or any of the rights attached to any class of our ordinary shares may, subject to the provisions of the 2006 Act, be amended either with the written consent of the holders of at least 75% of the issued shares of that class or by a special resolution passed at a general meeting of the holders of shares of that class. Furthermore, our memorandum and articles of association may be amended by a special resolution approved by a majority of not less than three-fourths of such members as, being entitled so to do, vote in person or by proxy at the holders of 75% of the issued shares.general meeting at which such resolution is proposed.
Liquidation Rights
On a return of capital on winding up, assets available for distribution among the holders of ordinary shares will be distributed among holders of our ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Minority Shareholder Protections
Under the 2006 Act, if a shareholder believes that the affairs of the company have been or are being conducted in a manner that is unfair to such shareholder or unfairly prejudicial or oppressive, the shareholder can seek a range of court remedies including winding up the company or setting aside decisions in breach of the 2006 Act or the company’s memorandum and articles of association. Further, if a company or a director of a company breaches or proposes to breach the 2006 Act or its memorandum or articles of association, then, in response to a shareholder’s application, the Isle of Man Court may issue an order requiring compliance with the 2006 Act or the memorandum or articles of association; alternatively, the Isle of Man Court may issue an order restraining certain action to prevent such a breach from occurring.
The 2006 Act also contains provisions that enable a shareholder to apply to the Isle of Man courtCourt for an order directing that an investigation be made of a company and any of its associated companies.
Anti-takeover Effects of Our Dual Class Structure
As a result of our dual class structure, the Founders Group and our executives and employees will have significant influence over all matters requiring shareholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that other shareholders may view as beneficial.
C. Material Contracts
We have notMerger Agreement and CVR Agreements
On April 17, 2020, Eros and STX entered into the Merger Agreement.
On the terms and subject to the conditions of the Merger Agreement, each share of STX preferred stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) was converted into the right to receive a number of CVRs, without interest, based on the liquidation value and, if applicable, the exit payment, of the respective share of STX preferred stock (the “Merger Consideration”), and such CVRs will in turn entitle the holder thereof to receive, on the Settlement Date, a number of A ordinary shares to be calculated in accordance with certain agreements governing the CVRs (the “CVR Agreements”). Each share of STX common stock and each STX stock option and restricted stock unit award issued and outstanding as of immediately prior to the Effective Time was cancelled at the Effective Time without consideration. The aggregate number of A ordinary shares to be issued to the former STX stockholders upon settlement of the CVRs (the “Aggregate Merger Consideration CVR Shares”) will be equal to, and will in no event exceed, the total number of ordinary shares of the Company outstanding as of immediately prior to the Effective Time on a fully diluted basis. The calculation of the fully diluted number of outstanding ordinary shares for this purpose includes (1) the aggregate number of ordinary shares subject to issuance pursuant to then outstanding in-the-money (based on the VWAP of A ordinary shares for the 20 days prior to the Effective Time) Company stock options and (2) the aggregate number of ordinary shares subject to issuance pursuant to then outstanding Company restricted stock unit awards.
Each CVR will entitle the holder thereof to receive, on the Settlement Date, a number of A ordinary shares allocated from the Aggregate Merger Consideration CVR Shares based on the respective classes of STX preferred stock in respect of which the applicable CVRs were issued. However, the total number of A ordinary shares issuable pursuant to all CVRs will not exceed, in the aggregate, the Aggregate Merger Consideration CVR Shares.
Each holder of a CVR (other than any such holder that is also a purchaser under the PIPE Subscription Agreement) was, as a condition to receiving any A ordinary shares issuable in respect of such CVRs on the Settlement Date, required to execute and deliver a lock-up agreement to the Company (the “CVR Lock-Up Agreements”). Pursuant to the CVR Lock-Up Agreements, each holder of a CVR will agree not to, without our prior written consent, directly or indirectly transfer the A ordinary shares issued to such holder on the Settlement Date for a period of 18 months from the Settlement Date.
For descriptions of our additional material contracts other thanentered into in connection with the Merger, including the PIPE Subscription Agreement, the 2020 Registration Rights Agreement and Investors’ Agreement, see “Part I—Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” above.
2017 Notes Offering
On December 6, 2017, we closed a registered direct offering (the “2017 Offering”) of $122,500,000 aggregate principal amount of the Company’s Senior Convertible Notes (collectively, the “Notes”) and a Warrant (collectively, the “Warrants”) to purchase up to 2,000,000 of our A ordinary shares, for an aggregate purchase price of $100,000,000. The Notes and Warrants were issued and sold pursuant to a Securities Purchase Agreement, dated as of December 4, 2017, by and among us and the buyers party thereto. The 2017 Offering was effected pursuant to a prospectus supplement dated December 1, 2017 under our Registration Statement on Form F-3 (Registration No. 333-219708), as amended (the “Registration Statement”). The Registration Statement was declared effective on October 2, 2017. The Warrants expired on June 30, 2018 without being exercised.
In connection with the issuance of the Notes, we entered into an indenture, dated as of December 6, 2017, between us and Wilmington Savings Fund Society, FSB, as trustee (the “Base Indenture”), as supplemented by a first supplemental indenture thereto, dated as of December 6, 2017 (the “Supplemental Indenture” and, the Base Indenture as supplemented by the Supplemental Indenture, the “Indenture”). The terms of the Notes included those provided in the ordinary courseIndenture and those made part of businessthe Indenture by reference to the Trust Indenture Act of 1939, as amended.
The Notes would have matured on December 6, 2020 unless earlier converted or redeemed, subject to the right of the holders to extend the date under certain circumstances. The Notes were issued with an original issue discount and other than those describedthe terms of the Notes provided that they would not bear interest except upon the occurrence of an event of default, in “Part I —Item 4.—Informationwhich case the Notes would bear interest at a rate of 6.0% per annum. The Notes were our senior obligations.
We made monthly payments consisting of an amortizing portion of the principal of each Note equal to $3,500,000 and accrued and unpaid interest and late charges on the Company”Note. Provided equity conditions referred to in the prospectus supplement were satisfied, we were permitted to make a monthly payment by converting such payment amount into A ordinary shares. Alternatively the we were permitted, at its option, to make monthly payments by redeeming such payment amount in cash, or elsewhereby any combination of conversion and redemption.
All amounts due under the Notes were convertible at any time, in whole or in part, at the holder’s option, into A ordinary shares at the initial conversion price of $14.6875. The conversion price was subject to adjustment for stock splits, combinations and similar events, and, in any such event, the number of A ordinary shares issuable upon the conversion of a Note would also be adjusted so that the aggregate conversion price would have been the same immediately before and immediately after any such adjustment. In addition, the conversion price was also subject to an anti-dilution adjustment if we issued or was deemed to have issued securities at a price lower than the then applicable conversion price. Further, if we sold or issued any securities with “floating” conversion prices based on the market price of the A ordinary shares, a holder of a Note would have the right thereafter to substitute the “floating” conversion price for the conversion price upon conversion of all or part the Note.
The Notes required “buy-in” payments to be made by us for failure to deliver any A ordinary shares issuable upon conversion.
On or after December 6, 2019, and subject to certain conditions, we had the right to redeem all, but not less than all, of the remaining principal amount of the Notes and all accrued and unpaid interest and late charges in cash at a price equal to 100% of the amount being redeemed, so long as the VWAP of the A ordinary shares exceeded $18.3594 (as adjusted for stock splits, stock dividends, recapitalizations and similar events) for at least 10 consecutive trading days. At any time prior to the date of the redemption, a holder had the right to convert its Note, in whole or in part, into A ordinary shares. We had no right to effect an optional redemption if any event of default had occurred and was continuing.
All amounts due under the Notes have been converted and no principal amount of the Notes remain outstanding.
2019 Notes Offering
On September 30, 2019, we closed a registered direct offering (the “2019 Offering”) of $27,500,000 aggregate principal amount of Senior Convertible Notes (collectively, the “New Notes”) for aggregate net proceeds of approximately $24,500,000. The New Notes were issued and sold pursuant to a Securities Purchase Agreement, dated as of September 26, 2019, by and among us and the buyers party thereto (the “New Notes SPA”). The 2019 Offering was effected pursuant to a prospectus supplement dated September 26, 2019 under the Registration Statement.
The New Notes SPA provided, as consideration for the securities purchase agreement and pursuant to the provisions of the Notes, for us to waive rights to make redemptions or repayments under the Notes in cash, and for the holder of the Notes (the “2017 Holder”) to waive certain specified rights and terms under the Notes, including certain rights to cash payment of any installment amounts then-due under the Notes, and provided for automatic election buys to pay each installment amount in our A ordinary shares. Additionally, with respect to an aggregate amount of $9 million of installment amounts as to which a conversion notice was delivered by the 2017 Holder but a conversion did not occur prior to September 26, 2019 as a result of the mutual agreement of the Company and the 2017 Holder, the conversion of such installment was deemed to have been voided by the 2017 Holder as of September 3, 2019, such that the installment conversion price was automatically adjusted in accordance with clause (A) of Section 8(b) of the Notes based on the VWAP of the A ordinary shares as of August 26, 2019.
The New Notes matured on September 30, 2020. The New Notes were issued with an original issue discount and do not bear interest except upon the occurrence of an event of default, in which case the New Notes shall bear interest at a rate of 6.0% per annum. The New Notes were senior obligations of the Company.
All amounts due under the New Notes were convertible at any time, in whole or in part, at the holder’s option into A ordinary shares at the initial conversion price of $3.59. The conversion price was subject to adjustment for stock splits, combinations and similar events, and, in any such event, the number of A ordinary shares issuable upon the conversion of a New Note would also have been adjusted so that the aggregate conversion price shall be the same immediately before and immediately after any such adjustment. In addition, the conversion price was also subject to an anti-dilution adjustment if we issued or were deemed to have issued securities at a price lower than the then applicable conversion price. Further, if we sold or issued any securities with “floating” conversion prices based on the market price of the A ordinary shares, a holder of a New Note will have the right thereafter to substitute the “floating” conversion price for the conversion price upon conversion of all or part the New Note.
The New Notes require “buy-in” payments to be made by the Company for failure to deliver any A ordinary shares issuable upon conversion. Holders of New Notes are entitled to receive any dividends paid or distributions made to the holders of A ordinary shares on an “as if converted” basis. If the Company issues options, convertible securities, warrants, shares or similar securities to holders of A ordinary shares, each New Note holder has the right to acquire the same as if the holder had converted its New Note.
The New Notes prohibit the Company from entering into specified fundamental transactions unless the successor entity assumes all of the Company’s obligations under the New Notes under a written agreement before the transaction is completed. Upon specified corporate events, a New Note holder will thereafter have the right to receive upon a conversion such shares, securities, cash, assets or any other property which the holder would have been entitled to receive upon the happening of the applicable corporate event had the New Note been converted immediately prior to the applicable corporate event. When there is a transaction involving specified changes of control, a New Note holder will have the right to force the Company to redeem all or any portion of the holder’s New Note for a purchase price in cash equal to the equal to the greater of (i) 105% of the amount being redeemed, (ii) the product of (A) the amount being redeemed multiplied by (B) the quotient of (1) the highest closing sale price of the A ordinary shares during the period beginning on the date immediately before the earlier to occur of (x) the completion of the change of control and (y) the public announcement of the change of control and ending on the date the holder delivers the redemption notice divided by (2) the conversion price then in effect, or (iii) the product of (A) the amount being redeemed multiplied by (B) the quotient of (1) the aggregate cash consideration and the aggregate cash value of any non-cash consideration per A ordinary share to be paid to the holders of A ordinary shares upon the completion of the change of control divided by (2) the conversion price then in effect.
All amounts due under the New Notes have been converted and no principal amount of the New Notes remain outstanding.
2020 Equity Offering
On January 27, 2020, we announced a registered direct offering (the “2020 Equity Offering”) of up to 13,888,889 of our A ordinary shares to be effected pursuant to a prospectus supplement under the Registration Statement. The A ordinary shares will be issued and sold from time to time pursuant to one or more subscription agreements entered into with the purchasers.
Subject to certain limitations set forth in the subscription agreement, each time we wish to sell A ordinary shares under the agreement, we will notify an investor of the number of shares to be sold and the minimum price below which the sale will not be made. The per share purchase price for sales will be an amount equal to 95% of the lowest daily VWAP of the A ordinary shares on the NYSE for each of the five successive trading days beginning on the first trading day following the date of our to the investor. However, if the VWAP on any trading day during this Annual Reportfive-day period is lower than any minimum price specified in the notice to the investor, then for each such trading day, the number of A ordinary shares to be sold under such notice will automatically be reduced by an amount equal to 20% and that trading day will not be included in the final determination of the per share purchase price.
We make certain customary representations and warranties in the agreement, including with respect to certain capitalization and securities law matters. The agreement also obligates the parties to indemnify each other for certain losses suffered or incurred by reason of the other party’s breach of the agreement.
As of October 23, 2020, we had sold an aggregate of 14,474,824 A ordinary shares, comprised of 13,859,440 A ordinary shares authorized under the 2020 Equity Offering and an additional 615,384 A ordinary shares allocated from those authorized under the 2019 Notes Offering. As of October 23, 2020 aggregate net proceeds pursuant to the 2020 Equity Offering $47,587,500, before deducting estimated expenses, which we intend to use to fund investment in new content, with a focus on digital, and for general corporate purposes. Such proceeds of the 2020 Equity Offering constitute the Additional Equity Financing (as defined in the Merger Agreement) and satisfy the related closing condition under the Merger Agreement, as described above under the heading “Merger Agreement.”
Reliance Registration Rights Agreement
We entered into a registration rights agreement with Reliance Industrial Investments and Holdings Limited, dated August 8, 2018 in connection with the purchase by Reliance Industries Limited, or Reliance, of A ordinary shares. The terms of the registration rights agreement required that the Company register the resale of the A ordinary shares held by Reliance as of the date of the registration rights agreement and also requires that we register the resale of any A ordinary shares subsequently acquired by Reliance. We filed a Registration Statement on Form 20-F.F-3 (File No. 333-227380) on September 17, 2018 as required by the registration rights agreement. The SEC declared the registration statement effective on October 9, 2018.
For descriptions of our additional material contracts entered into in connection with the Merger, including the PIPE Subscription Agreement, the 2020 Registration Rights Agreement and Investors’ Agreement, see “Part I.—Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” above
D. Exchange Controls
No foreign exchange control regulations are in existence in the Isle of Man in relation to the exchange or remittance of sterling or any other currency from the Isle of Man and no authorizations, approvals or consents will be required from any authority in the Isle of Man in relation to the exchange and remittance of sterling and any other currency whether awarded by reason of a judgment or otherwise falling due and having been paid in the Isle of Man.
E. Taxation
Summary of Material Indian Tax Considerations
The discussion contained herein is based on the applicable tax laws of India as in effect on the date hereof and is subject to possible changes in Indian law that may come into effect after such date. The information set forth below is intended to be a general discussion only. Prospective investors should consult their own tax advisers as to the consequences of purchasing the A ordinary shares, including, without limitation, the consequences of the receipt of dividend and the sale, transfer or disposition of the ordinary shares.
i) Direct Tax:
Indirect Transfer:
Based on the fact that we are considered for tax purposes as a company domiciled abroad, any dividend incomedistributed in respect of ordinary shares will not be subject to any withholding or deduction in respect ofunder the Indian income tax laws. Pursuant to amendments toAs per the provisions of the Indian Income Tax Act, 1961, income arising directly or indirectly through the saletransfer of a capital asset, including any share or interest in a company or entity registered or incorporated outside India, will be liable to tax in India, if such share or interest derives, directly or indirectly, its value substantially from assets located in India, whether or not the seller of such share or interest has a residence, place of business, business connection, or any other presence in India, if, on the specified date, the value of such assets located in India (i) represents at least 50% of the value of all assets owned by the company or entity, and (ii) exceeds the amount of 100 million rupees. However, the impact of the above indirect transfer provisions would need to be separately evaluated under the tax treaty scenario.scenario and for sellers holding not more than 5% voting power or share capital or interest in a company or entity registered or incorporated outside India that holds assets in India.
Dividend Distribution Tax:
Further, dividend payments to usDividend declared or distributed by ouran Indian subsidiaries arecompany until 31 March 2020, was subject to DDT in the hands of the Indian company at 20.56% and such dividend income was exempt from tax in the hands of the recipient shareholder.
As per the Finance Act 2020, DDT of 20.56% levied on the Indian companies declaring dividend has been abolished with effect from April 1, 2020. Consequently, dividend is taxable in the hands of recipient and there shall be withholding of dividend distributiontaxes on such dividends. The withholding tax in India, at an effective rate of 20.3%, including applicable cessunder local laws is 10% (excluding surcharge and surcharge.cess) for Indian residents and 20% (excluding surcharge and cess) for non-residents / foreign companies. Benefits are available under the relevant tax treaties.
Equalization Levy:
An equalization levy or EL in respect of certain e-commerce transactions has been introduced in India with effect from June 1, 2016. EL is to be deducted in respect of paymentspayment towards “specified services” (in excess of Indian RupeesINR 100,000). A “Specified service” means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified. Deduction of EL at the rate of six per cent (on a gross basis) is the responsibility of Indian residents / non-residents having a permanent establishment or PE in India on payments to non-residents (not having a PE in India). Consequently, if a non-resident (not having a PE in India) earns income towards a “specified service” which is chargeable to EL, then the same would be exempt in the hands of such non-resident.
Further, the Finance Act, 2020 has expanded the scope of EL by covering e-commerce transactions on which EL is to be charged at the rate of two percent (on a gross basis) with effect from 1 April 2020. E - commerce supply or services include online sale of goods, online provision of services or both owned or provided or facilitated by an E-commerce operator. However, EL shall not be charged in case sales, turnover or gross receipts of the E-commerce operator from sale of goods or services or facilitation thereof is less than INR 20 million.
Discharge of EL at the rate of two percent (on a gross basis) is the responsibility of E – commerce operator receiving consideration on the supply or services made to Indian residents, non-residents in “specified circumstances” or any other person using IP address located in India. However, any service or supply made by the E – commerce operator which is in connection to their PE in India will not be liable for EL. With effect from 1 April 2021, if a non-resident company.(not having a PE in India) earns income which is chargeable to EL, then the same would be exempt in the hands of such non-resident.
Tax on sale of films as ‘Royalty’
Until 31 March 2020, consideration for the sale, distribution or exhibition of cinematographic films was specifically excluded from the definition of Royalty under Indian Income Tax Act, 1961. However, as per Finance Act 2020, the definition of Royalty has been rationalized to include consideration for the sale, distribution or exhibition of cinematographic films (w.e.f. April 1, 2020).
Place of Effective Management:
The concept of Place of Effective Management or POEM is introduced for the purpose of determining the tax residence of overseas companies in India. The POEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity company as a whole are in substance made. This could have significant impact on the foreign companies holding board meeting(s) in India, having key managerial personnel located in India, having regional headquarters located in India, etc. In the event the POEM of a foreign company is considered to be situated in India, and consequently, it becomes tax resident in India, and consequently, its global income would be taxable in India (even if it is not earned in India).
Over the years, Indian Government has come up with various initiatives to accelerate economic growth, boost Indian markets and achieve transparency in the tax structures. GST is one such initiative which is expected to bring in all of these benefits and much more. It is estimated that GST will positively impact economic growth.
The Government of India has with effect from 1 July 2017 introduced a comprehensive national Goods and Services Tax (“GST”) regime that subsumes all existing indirect taxes such as Excise Duty, Service Tax, Countervailing Duty (CVD), Value Added Tax (VAT), Entertainment Tax at State level, Entry Tax etc. and only one tax i.e. GST is to be levied and collected on value additions at each stage of supply of goods and services at national level. GST is introduced in view of amendment made to the Constitution of India, by Constitution (101 One Hundred and First Amendment) Act 2016, which grants enabling powers to central and state government to make laws relating to GST. However, it is pertinent to note that under GST, the basic duty of customs and custom cesses would continue to be levied.
With the adoption of Indian Accounting Standards (Ind AS), India now has two financial reporting frameworks (i.e. Ind AS and Indian GAAP) that will co-exist and be applicable to mutually exclusive set of companies. The existence of two financial reporting frameworks has also necessitated a response from the tax authorities to ensure that there is horizontal equity from a taxation point of view, for companies, irrespective of the financial reporting framework they follow. To meet this objective, the Government of India has issued revised Income Computation and Disclosure Standards (“ICDS”) that will be applied in computing taxable income and payment of income taxes thereon, applicable with effect from the assessment period for the Fiscal Year 2017. ICDS shall apply to all taxpayers following an accrual system of accounting for the purpose of computation of income under the heads of “profits and gains of business or profession” and “income from other sources”. The provisions of ICDS will have to be incorporated while computing the tax liability of the Company.
ICDS did not cover the issue relating to computation of Minimum Alternate Tax (MAT), which is based on book profits, for companies transitioning to Ind AS. In response to this need, the Finance Act, 2017 amended the provisions of the Income Tax Act, 1961, in order to provide a mechanism for computation of book profits for Ind AS compliant companies for the purpose of levy of MAT.General Anti Avoidance Rules:
The General Anti Avoidance Rules (“GAAR”) will have come into effect from financial year 2017-18. The tax consequences of the GAAR provisions beingif applied to an arrangement could result in denial of tax benefit under the domestic tax laws and / or under a tax treaty, amongst other consequences. In the absence of any precedents on the subject, the application of these provisions is uncertain.
Multilateral Instrument:
The Organization of Economic Co-operation and Development (OECD) released the final package of all Action Plans of the Base Erosion and Profit Shifting (BEPS)BEPS project in October 2015. India is a member of G20 and active participant in the BEPS project. The BEPS project lead to a series of measures being developed across several actions such as the digital economy, treaty abuse, design of Controlled Foreign Company Rules, intangibles, country-by-country reporting, preventing artificial avoidance of PE status, improving dispute resolution, etc. Several of these measures required implementation through changes in domestic law. As regards thoseIn order to implement the measures which required implementation throughentailed changes to bilateral tax treaties, itMulti-lateral Instrument (MLI) was felt that a Multilateral Convention (MLI) that modifiedintroduced to modify the existing bilateral tax treaty network would be preferable as it wouldand ensure speed and consistency in implementation. Accordingly, MLI was introduced to incorporateinter-alia addresses following treaty related measures identified as part of the final BEPS measures in relation to:measures:
| − | Neutralising the effects of hybrid mismatch arrangements; |
| −• | Preventing the granting of treaty benefits in inappropriate circumstances; |
| −• | Preventing the artificial avoidance of Permanent Establishment status; |
| −• | Making dispute resolution mechanisms more effective. |
On June 07, 2017, India has signed the MLI to implement tax treaty related measures to prevent BEPS. On June 25, 2019, India deposited the instrument of ratification for MLI with OECD along with a list of reservations and notifications. As a result, MLI has entered into force for India on October 1, 2019 and its provisions have effect on India’s tax treaties from FY 2020-21 onwards where the other country has also deposited its instrument of ratification with OECD.
Significant Economic Presence:
Given the digital age, the need for physical presence in conducting business is steeply reducing giving way to interaction by way of technology. Having regard to the report of OECD on BEPS on 7 June 2017.Action Plan 1, an amendment was made vide Finance Act 2018 whereby concept of SEP was introduced under the domestic tax laws to cover within the tax ambit transactions in digitized business. SEP shall be constituted in cases where:
| • | Transactions in respect of any goods, services or property are carried out by a non-resident in India (including downloading of data or software); |
| • | Non-residents engage in systematic and continuous soliciting of business activities or engaging with users in India, through digital means; |
if the prescribed thresholds are breached.
Further, if SEP is constituted, attribution of profits for taxation in India shall be restricted to transactions and / or business activities / users in India. The MLIFinance Act 2020 has expanded the scope of attribution of income rules (applicable to SEP and other forms of taxable presence) to also include income from:
| (a) | advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India; |
| (b) | sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and |
| (c) | sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India |
The threshold of payments received and number of users (mentioned in the aforesaid conditions) shall be prescribed by the Central Board of Direct Taxes (CBDT) in due course, after which, one will operatebe able to modifygauge the impact of this expansion in the provision.
Further, unless corresponding modifications to PE rules are made in tax treaties, the existing treaty rules will apply to the extent that they are more beneficial than domestic law provisions. Accordingly, the above provisions would need to be separately evaluated under the tax treaties entered into between various countries. treaty scenario.
Additionally,However, as per Finance Act, 2020, it is pertinent to note that SEP provisions have been deferred by a year and shall be effective from April 1, 2021.
ii) Indirect Tax
Goods and Services Tax
As far as introduction of GST is concerned, it has been a little more than three years since its enactment. Most of the indirect taxes under earlier regime have been subsumed and only one tax i.e. GST is being levied at national level. In India, there is a dual GST model which grants power to central as well as state governments to levy GST on interstate (including import) and intrastate transactions. To a large extent GST has curtailed various exemptions and concessions which were prevalent in relationthe earlier tax regime. The benefits of GST such as, elimination of multiple taxes and levy of one tax has reduced the cascading effect and has consequently reduced the overall incidence of taxes.
Under GST regime, the sales tax on the transfer of exhibition rights and entertainment tax on entertainment & amusement which under earlier regime was levied by state governments in most of the states has been subsumed under GST. However, in certain states the local authorities have been given powers to transfer pricing, pursuantlevy and collect taxes on entertainment & amusement (including exhibition of cinematographs in theatre). This may be said to be a back door entry by state governments to levy taxes on entertainment.
On the other hand, the government through its GST Council meetings are also trying to resolve various issues that had surfaced under GST, thereby resolving ambiguity for the Media and Entertainment industry and avoiding the possibility of probable tax litigation. However, the impact of GST on the media and entertainment industry are both positive and negative. The industry stands to benefit considerably with the introduction of GST, due to single tax levy on licensing of copyright, fungibility of credit of goods and overall reduction of cascading effect of taxes having a positive effect on the cost of production and profitability. However, certain concern areas still remain open, for which the industry seek certain amendments in the law and clarifications from the government. The industry awaits a positive response from the government in reference to such concern areas. Industry is also facing Anti-profiteering investigations by the National Anti-profiteering Authority for alleged failure of the exhibitors to pass the benefit of reduction of rate of tax to the Finance Act, 2016, a three tiered transfer pricing documentation structure was introduced in India, consisting of a master file, a local file and a country-by-country report. Such a structure is in line with the recommendations contained in the action plan on the Base Erosion and Profit Shifting or BEPS project issued by the Organization of Economic Cooperation and Development or OECD in October 2015.patrons.
Summary of Material Isle of Man Tax Considerations
Tax residence in the Isle of Man
We are resident for taxation purposes in the Isle of Man by virtue of being incorporated in the Isle of Man.
Capital taxes in the Isle of Man
The Isle of Man has a regime for the taxation of income, but there are no taxes on capital gains, stamp taxes or inheritance taxes in the Isle of Man. No Isle of Man stamp duty or stamp duty reserve tax will be payable on the issue or transfer of, or any other dealing in, the A ordinary shares.
Zero rate of corporate income tax in the Isle of Man
The Isle of Man operates a zero rate of income tax for most corporate taxpayers, including the Company. Under the regime, the Company will technically be subject to Isle of Man taxation on its income, but the rate of tax will be zero; there will be no required withholding by the Company on account of Isle of Man tax in respect of dividends paid by the Company.
The Company will be required to pay an annual return fee, which is currently charged at the rate of £380 (US $495) per year.
Isle of Man probate
In the event of the death of a sole, individual holder of the A ordinary shares, an Isle of Man probate fee or administration may be required, in respect of which certain fees will be payable to the Isle of Man government, subject to the fee.Court. Currently the maximum fee, where the value of an estate exceeds £1,000,000 (US $1,300,000), is approximately £8,000£8,323.50 (US $10,400)$10,800).
Summary of Material United StatesU.S. Federal Income Tax Considerations
The following summary describes the material United StatesU.S. federal income tax consequences associated with the acquisition, ownership and disposition of our A ordinary shares as of the date hereof. The discussion set forth below is applicable only to U.S. Holders (as defined below) and does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to acquire the A ordinary shares.
Except where noted, this summary applies only to a U.S. Holder that holds A ordinary shares as capital assets for United StatesU.S. federal income tax purposes. As used herein, the term “U.S. Holder” means a beneficial owner of a share that is for United StatesU.S. federal income tax purposes:
| · | an individual citizen or resident of the United States;U.S.; |
| · | a corporation (or other entity treated as a corporation for United StatesU.S. federal income tax purposes) created or organized in or under the laws of the United States,U.S., any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to United StatesU.S. federal income taxation regardless of its source; or |
| · | a trust if it (1) is subject to the primary supervision of a court within the United StatesU.S. and one or more United StatesU.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United StatesU.S. Treasury regulations to be treated as a United StatesU.S. person. |
This summary does not describe all of the United StatesU.S. federal income tax consequences applicable to you if you are subject to special treatment under the United StatesU.S. federal income tax laws, including if you are a broker, a dealer or trader in securities or currencies, a financial institution, a regulated investment company, a real estate investment trust, a cooperative, an insurance company, a pension plan, a tax-exempt entity, a person holding our A ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale, a wash sale or a straddle, a person liable for alternative minimum tax, a person who owns directly, indirectly or is deemed to own 10%constructively, 5% or more, by voting power or value, of our voting stock, a person holding our A ordinary shares in connection with a trade or business conducted outside of the United States,U.S., a partnership or other pass-through entity for United StatesU.S. federal income tax purposes (and any investors in such partnership or other pass-through entity), a U.S. expatriate or a person whose “functional currency” for United StatesU.S. federal income tax purposes is not the United StatesU.S. dollar. The discussion below assumes that we will not be treated as a “surrogate foreign corporation” under section 7874 of the Code as a result of the STX Transaction. The discussion below is based upon the provisions of the United States Internal Revenue Code, of 1986, as amended (the “Code”), and regulations (including proposed regulations), rulings and judicial decisions thereunder as of the date hereof, and such authorities may be subject to differing interpretations or may be replaced, revoked or modified, possibly with retroactive effect, so as to result in United StatesU.S. federal income tax consequences different from those discussed below.
If a partnership (or other entity or arrangement treated as a partnership for United StatesU.S. federal income tax purposes) holds our A ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership holding our A ordinary shares or a partner of a partnership holding our A ordinary shares, you should consult your tax advisors as to the particular United StatesU.S. federal income tax consequences of acquiring, holding and disposing of the A ordinary shares.
This discussion does not contain a detailed description of all the United StatesU.S. federal income tax consequences to you in light of your particular circumstances and does not address estate and gift taxes or the effects of any state, local or non-United Statesnon-U.S. tax laws. If you are considering the purchase, ownership or disposition of our A ordinary shares, you should consult your own tax advisors concerning the United StatesU.S. federal income tax consequences to you in light of your particular situation as well as any other consequences to you arising under U.S. federal, state and local laws and the laws of any other applicable taxing jurisdiction in light of your particular circumstances.
Taxation of Distributions
Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of distributions on the A ordinary shares will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United StatesU.S. federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles) such excess will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s tax basis in the A ordinary shares and thereafter as capital gain recognized on a sale or exchange. Because we do not expect to keep track of earnings and profits in accordance with United StatesU.S. federal income tax principles, you should expect that a distribution in respect of the A ordinary shares will generally be treated and reported as a dividend to you. Such dividend income will be includable in your gross income as ordinary income on the day actually received by you or on the day received by your nominee or agent that holds the A ordinary shares on your behalf. Such dividends will not be eligible for the dividends received deduction allowed to corporations in respect of dividends received from other U.S. corporations under the Code.
With respect to non-corporate U.S. Holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares that are readily tradable on an established securities market in the United States.U.S. Our A ordinary shares are listed on the NYSE and we expect such shares to be considered readily tradable on an established securities market, although there can be no assurance in this regard nor can there be assurance, if our shares are considered to be readily tradable on an established securities market, that our A ordinary shares will continue to be readily tradable on an established securities market in later years. However, even if the A ordinary shares are readily tradable on an established securities market in the United States,U.S., we will not be treated as a qualified foreign corporation if we are a passive foreign investment company, or PFIC, for the taxable year in which we pay a dividend or were a passive foreign investment company, or PFIC, for the preceding taxable year.year or if we are treated as a “surrogate foreign corporation” within the meaning of Section 7874 of the Code. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from a risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) (B) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. For this purpose, the minimum holding period requirement will not be met if a share has been held by a holder for 60 days or less during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend, appropriately reduced by any period in which such holder is protected from risk of loss. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the availability of the reduced tax rate on dividends in light of your particular circumstances.
Subject to certain conditions and limitations imposed by United StatesU.S. federal income tax rules relating to the availability of the foreign tax credit, some of which vary depending upon the U.S. Holder’s circumstances, any foreign withholding taxes on dividends will be treated as foreign taxes eligible for credit against your United StatesU.S. federal income tax liability. The application of the rules governing foreign tax credits depends on the particular circumstances of each U.S. Holder. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For purposes of calculating the foreign tax credit, dividends paid on the A ordinary shares will be treated as income from sources outside the United StatesU.S. and will generally constitute “passive category income.” Further, in certain circumstances, you will not be allowed a foreign tax credit for foreign taxes imposed on certain dividends paid on the A ordinary shares if you:
| ·• | have held A ordinary shares for less than a specified minimum period during which you are not protected from risk of loss, or |
| ·• | are obligated to make certain payments related to the dividends. |
The rules governing the foreign tax credit are complex and involve the application of rules that depend on your particular circumstances. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Passive Foreign Investment Company
Based on the composition of our income and valuation of our assets, we do not believe we will be a PFIC for United StatesU.S. federal income tax purposes for the 20172020 taxable year, and we do not expect to become one in the future. However, because PFIC status is an annual factual determination that cannot be made until after the close of each taxable year and depends on the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for any taxable year.
In general, a non-United Statesnon-U.S. corporation will be treated as a PFIC for U.S. federal income tax purposes for any taxable year in which:
| ·• | at least 75% of its gross income is passive income, or |
| ·• | at least 50% of the value (determined based on a quarterly average) of its gross assets is attributable to assets that produce, or are held for the production of, passive income. |
For this purpose, passive income generally includes dividends, interest, royalties and rents (except for certain royalties and rents derived from the active conduct of a trade or business), certain gains from commodities and securities transactions and the excess of gains over losses from the disposition of assets which produce passive income.
If we own, directly or indirectly, at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests described above, as directly owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.
If we are a PFIC for any taxable year during which you hold our A ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of A ordinary shares, unless you make a “mark-to-market” election as discussed below.
Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the A ordinary shares (before the current taxable year) and gain realized on disposition of the A ordinary shares will be treated as excess distributions. Under these special tax rules:
| ·• | the excess distribution or gain will be allocated ratably over your holding period for your A ordinary shares, |
| ·• | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
| ·• | the amount allocated to each other year will be subject to tax at the highest applicable tax rate in effect for corporations or individuals, as appropriate, for that taxable year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of an “excess distribution,”distribution” (including a disposition) cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the A ordinary shares cannot be treated as capital and will be subject to the “excess distribution” regime described above, even if you hold the A ordinary shares as capital assets.
In addition, as explained above under “—Taxation of Distributions,” non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in our taxable year in which such dividends are paid or in the preceding taxable year.
If we are a PFIC for any taxable year during which you own our A ordinary shares, we will generally continue to be treated as a PFIC with respect to you for all succeeding years during which you own our A ordinary shares, even if we cease to meet the threshold requirements for PFIC status.
You will generally be required to file Internal Revenue Service Form 8621(a) annually if the aggregate value of all your directly owned PFIC shares on the last day of the taxable year is more than $25,000 ($50,000 on a joint return) or if you are deemed to own indirectly more than $5,000 in value of any PFIC shares owned by us; (b) you receive distributions on the A ordinary shares or realize any gain on the disposition of the A ordinary shares or (c) if you have made a mark-to market election (as described below). Other reporting requirements may apply. You are urged to consult your tax advisors regarding Form 8621 and other information reporting requirements if we are considered a PFIC in any taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder holds our A ordinary shares and any of our non-United Statesnon-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules.
Under these circumstances, a U.S. Holder would be subject to United StatesU.S. federal income tax on (i) a distribution on the shares of a lower-tier PFIC and (ii) a disposition of shares of a lower-tier PFIC, both as if such U.S. Holder directly held the shares of such lower-tier PFIC. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded in other than de minimis quantities for at least 15 days during each calendar quarter on a qualified exchange, as defined in applicable U.S. Treasury Regulations. Our A ordinary shares are listed on the NYSE and we expect such shares to be “regularly traded” for purposes of the mark-to-market election.election, though no assurances can be made in this regard, nor can there be assurance, if our shares are considered to be “readily tradable” for this purpose, that our A ordinary shares will continue to be “readily tradable”.
If you make an effective mark-to-market election, you will include in each year that we are a PFIC, as ordinary income the excess of the fair market value of your A ordinary shares at the end of the year over your adjusted tax basis in the A ordinary shares. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the A ordinary shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election, although no assurance can be given that a mark-to-market election will be available to U.S. Holders.
If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your A ordinary shares in a year in which we are a PFIC will be treated as ordinary income. Any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.
Your adjusted tax basis in the A ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the A ordinary shares are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election.
A mark-to-market election should be made by filing IRS Form 8621 in the first taxable year during which the U.S. Holder held the A ordinary shares and in which we are a PFIC. A mark-to-market election would not be available with respect to a subsidiary PFIC of ours that a U.S. Holder is deemed to own for the purposes of the PFIC rules; accordingly, a U.S. Holder would not be able to mitigate certain of the adverse U.S. “excess distribution” federal income tax consequences of its deemed ownership of stock in our subsidiary PFICs by making a mark-to-market election. You are urged to consult your tax advisor about the availability of the mark-to-market election and whether making the election would be advisable in your particular circumstances.
Alternatively, holders of PFIC shares can sometimes avoid the rules described above by electing to treat such PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements, or furnish you with the information, necessary to permit you to make this election.
You are urged to consult your tax advisors concerning the United StatesU.S. federal income tax consequences of holding A ordinary shares if we are considered a PFIC in any taxable year.
Sale or Other Disposition of A Ordinary Shares
For United StatesU.S. federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange or other taxable disposition of aan A ordinary share in an amount equal to the difference between the amount realized for the share and your tax basis in the A ordinary share, in each case as determined in United StatesU.S. dollars. Subject to the discussion above under “Passive Foreign Investment Company,” such gain or loss will be capital gain or loss. Capital gains of non-corporate U.S. Holders derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Any gain or loss recognized by you will generally be treated as United StatesU.S. source gain or loss for U.S. foreign tax credit purposes. You are encouraged to consult your tax advisor regarding the availability of the U.S. foreign tax credit in your particular circumstances.
Information Reporting and Backup Withholding
In general, information reporting will apply to distributions in respect of our A ordinary shares and the proceeds from the sale, exchange or redemption of our A ordinary shares that are paid to you within the United StatesU.S. or through certain U.S.-related financial intermediaries, unless you are an exempt recipient. Backup withholding may apply to such payments if you fail to (i) provide a correct taxpayer identification number or (ii) certify that you are not subject to backup withholding.withholding or (iii) otherwise comply with the backup withholding rules. U.S. Holders who are required to establish their exemption from backup withholding must timely provide us or ourthe applicable withholding agent such certification on a properly completed Internal Revenue Service Form W-9. U.S.
Holders should consult their tax advisors regarding the application of the United StatesU.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United StatesU.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
Certain U.S. Holders who hold “specified foreign financial assets,” including shares of a non-U.S. corporation that are not held in an account maintained by a U.S. “financial institution,” the aggregate value of which exceeds $50,000 (or other applicable amount) during the tax year, may be required to attach to their tax returns for the year IRS Form 8938 containing certain specified information. Significant penalties can apply if you are required to file this form and you fail to do so. You are urged to consult your tax advisors regarding this and other information reporting requirements relating to your ownership of the A ordinary shares.
Medicare Tax
Certain U.S. Holders that are individuals, estates or trusts will be subject to an additional 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their dividends and net gains from the disposition of A ordinary shares. Special rules apply to stock in a PFIC. If you are a U.S. Holder that is an individual, estate or trust, you should consult your tax advisors regarding the applicability of this tax to your income and gains in respect of your investment in the A ordinary shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Publicly filed documents concerning our company which are referred to in this annualtransition report may be inspected and copied at the public reference facilities maintained by the CommissionSEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials can also be obtained from the Public Reference Room at the Commission’sSEC’s principal office, 100 F Street, N.E., Washington D.C. 20549, after payment of fees at prescribed rates.rates
The CommissionSEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings through its Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. We have made all our filings with the CommissionSEC using the EDGAR system.
I. Subsidiary Information
For more information on our subsidiaries, please see “Part I — I—Item 4. Information on the Company — Company—C. Organizational Structure.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Merger was accounted for as a business combination using the acquisition method of accounting under the provisions of ASC 805, with STX selected as the accounting acquirer under this guidance. Consequently, our historical financial statements and the financial information discussed in this Item 11 are those of STX.
Prior to the Merger, STX’s fiscal year ends on September 30 of each year. For the purpose of this Item 11, unless the context otherwise requires, references to 2017, 2018 and 2019 refer to the fiscal years ended September 30 of such years. Unless the context otherwise requires, financial information described in this Item 11 is described on a consolidated basis.
We are exposed to a variety of financial risks, including credit risk,market risks (such as interest rate risk and foreign currency risk), credit risk and equity risk:
Credit Risk
Our credit risk is principally attributable to its trade receivables, advances, financial guarantees and cash balances. As a number of our trading activities require third parties to report revenues due to the Group this risk is not limited to the initial agreed sale or advance amounts. The amounts shown within the statements of financial position in respect of trade receivables and advances are net of allowances for doubtful debts based upon objective evidence that the Group will not be able to collect all amounts due.
Trading credit risk is managed on a country by country basis by the use of credit checks on new clients and individual credit limits, where appropriate, together with regular updates on any changes in the trading partner’s situation. In a number of cases trading partners will be required to make advance payments or minimum guarantee payments before delivery of any goods. The Group reviews reports received from third parties and in certain cases as a matter of course reserve the right within the contracts it enters into to request an independent third - party audit of the revenue reporting. Further, in many of the catalogues sales, the trading partners have extended payment terms of up to a year and often fall behind contractual payment terms. With respect to catalogue customers with a long trading history with the Group and who have contracted and paid significant amounts in the past without any prior history of bad debt, the Group closely monitors the same and secures post-dated bank instruments where possible and revised payment plans to assure collections. In case of new customer onboarding, the Group follows certain standard Know Your Client (KYC) procedure to ascertain financial stability of the counter party and follows internal policies to not make ongoing sales to such new customers who are not reasonably current with their payments.
The credit risk on cash balances and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.
The Group from time to time will have significant concentration of credit risk in relation to individual theatrical releases, television syndication deals or music licenses. This risk is mitigated by contractual terms which seek to stagger receipts and/or the release or airing of content. As at March 31, 2017, 25.1% (2016: 54.2%) of trade account receivables were represented by the top five debtors. The maximum exposure to credit risk is that shown within the statements of financial position. The maximum credit exposure on financial guarantees given by the Group for various financial facilities is described in Note 32.
As at March 31, 2017, the Group did not hold any material collateral or other credit enhancements to cover its credit risks associated with its financial assets.
liquidity risk.
Interest Rate Risk
Our exposure to the risk of changes in market interest rates relates primarily to our debt obligations with a floating interest rate.
We are exposedOur policy is to manage our interest cost using a mix of fixed and variable rate debts by analyzing our interest rate risk becauseexposure on a dynamic basis. Various scenarios are simulated, taking into consideration refinancing, renewal of existing positions and alternate financing. Based on these scenarios, we manage our subsidiaries borrow funds at bothmix of fixed and floatingvariable rate debts by taking advantage of the most favorable rates and expected cash flows. As of September 30, 2017, 2018 and 2019 and March 31, 2020, approximately 30%, 20%, 19% and 16%, respectively, of our interest-bearing loans bore interest at fixed rates.
The following table presents our financial instruments that are sensitive to changes in interest rates. The risk is managed by maintaining an appropriate mix between fixed, cappedtable also presents the cash flows of the principal amounts of the financial instruments with the current year weighted average interest rates and floating rate borrowings, and by the use of interest rate swap contracts and forward interest rate contracts. Hedging activities are evaluated to align with interest rate views to ensure the most cost effective hedging strategies are applied.
We entered into an interest rate swap contract in fiscal year 2012 related to our borrowings with an interest cap with a notionalfair value of $100the instruments as of March 31, 2020:
| | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Total | | | Fair Value
March 31,
2020 | |
| | | (in thousands of dollars) | |
| Variable Rates | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior Credit Facility(1) | | $ | — | | | $ | — | | | $ | 230,369 | | | $ | — | | | $ | 230,369 | | | $ | 230,369 | |
| Average Interest Rate | | | 5.53% | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rates | | | | | | | | | | | | | | | | | | | | | | | | |
| Mezzanine Facility(2) | | $ | — | | | $ | — | | | $ | — | | | $ | 42,640 | | | $ | 42,640 | | | $ | 44,817 | |
| Average Interest Rate | | | 12.50% | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | — | | | $ | — | | | $ | 230,369 | | | $ | 42,640 | | | $ | 273,009 | | | $ | 275,186 | |
_______________
(1) The Senior Credit Facility matures October 7, 2021 and bears interest at a rate equal to 3.00% plus LIBOR for LIBOR loans. The current capacity is $350 million which can be increased by up to $250 million. Two written floor contracts each with $100 million notional value were also entered intoWe are required to pay a commitment fee at an annual rate of 0.75% if the credit exposure is less than 50% of total commitments, and 0.50% if credit exposure is more than 50% of the undrawn amounts.
(2) The Mezzanine Facility matures on July 7, 2022. We are required to pay interest at an annual rate of 11.0% (9.0% in fiscal 2012. The effect of these instruments, which are still valid,cash and 2.0% in combination is that the maximum cash outflow is 6% although the written floors mean that should market rates fall below the floor rate, then the interest charged would be twice the floor rate, although never exceeding 6%kind).
UnderAssuming the interest swap contracts, we have agreed to exchangeSenior Credit Facility outstanding balance and the difference between fixed and floating rate interest amounts calculated on an agreed notional principal amount. Such contracts enable us to mitigate the riskapplicable LIBOR in effect as of changingSeptember 30, 2019, a quarter point change in interest rates on the cash flow of issued variable rate debt. The fair value ofwould result in a $0.6 million change in annual interest rate derivatives which comprise derivatives at fair value through profit and loss is determined at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.expense.
Foreign Currency Risk
We operate throughouthave transactional currency exposures. Such exposures arise from sales or purchases by operating units in currencies other than the world with significant operations in India, the British Isles, the United States and the United Arab Emirates. As a result, we face both translation and transaction currency risks which are principally mitigated by matching foreign currency revenues and costs wherever possible.
A majority of our revenues are denominated in U.S. dollars, Indian Rupees and British Pounds Sterling, which are matched where possible to our costs so that these act as an automatic hedge against foreign currency exchange movements.units’ functional currencies.
We began foreign operations in 2016. Our foreign operations did not have to date not entered into any currency hedging transactions, and we have managed foreign currency exposure to date by seeking to match foreign currency inflows and outflows tosales until the extent possible.
A uniform decreasefourth quarter of 10%2017. An immaterial amount of our sales were denominated in exchange rates against all foreign currencies in position asother than the functional currencies of March 31, 2017 would have decreased our net income by approximately $3.8 million. An equal and opposite impact would be experienced in the event of an increase by a similar percentage. Our sensitivity to foreign currency has increasedoperating units making the sales during the year ended March 31, 2016 as a resultSeptember 30, 2017. In the fiscal years ended September 30, 2017, 2018 and 2019, we recognized foreign currency translation loss of an increase$1 thousand and loss of $184 thousand and gain of $14 thousand, respectively.
As of September 30, 2019, the Company had the following outstanding forward foreign exchange contracts (with maturity less than six months):
| Foreign Currency | | Foreign
Currency Amount | | | | US Dollar Amount | | Weighted Average
Exchange Rate Per $1 USD |
| Canadian Dollar | | C$9,376 | | in exchange for | | $7,018 | | $1.33 |
The loss capitalized to productions and loss recognized in the percentageconsolidated statement of liabilities denominated inoperations for the fiscal year ended September 30, 2019 related to foreign currency over the comparative period. As of March 31, 2017, 57.5% of our borrowings are denominated in foreign currency.derivatives was immaterial.
In management’s opinion, the sensitivity analysis is not representative of the inherent foreign exchange risk because the exposure at the end of the reporting period does not reflect the exposure during the year.139
EquityLiquidity Risk
We are exposedmonitor our risk to market risk relatinga shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both our financial instruments and financial assets (e.g., trade receivables) and projected cash flows from operations. Our objective is to changes inmaintain a balance between continuity of funding and flexibility through the market valueuse of our investments, which we hold for purposesbank loans, and other than trading. We invest in equity instruments of private companies for operational and strategic business reasons. These securities may be subject to significant fluctuations in fair market value due to volatility in the industries in which they operate. As at March 31, 2017, the aggregate value of all such equity investments was $29.6 million. For further discussion of our investments see Note 17 to our audited Consolidated Financial Statements appearing elsewhere in this Annual Report.interest-bearing loans.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depository Shares
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, management has evaluated, with the participation of our Group Chief Executive Officer and Group Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure.Not applicable.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as at March 31, 2017, our disclosure controls and procedures were effective and provide a reasonable level of assurance.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting refers to a process designed by, or under the supervision of, our Group Chief Executive Officer and Group Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over financial reporting as at March 31, 2017, based on the criteria established in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the above criteria, and as a result of this assessment, management concluded that, as at March 31, 2017, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal controls over financial reporting because the Jumpstart Our Business Startups Act provides an exemption from such requirement as we qualify as an emerging growth company.
Changes in Internal Control over Financial Reporting
During the period covered by this report,no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act), have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Audit Committee members are Mr. Dilip ThakkarNicholas Stone (Chairman), Mr. Shailesh Rao, Mr. Dhirendra Swarup and Mr. Shailendra Swarup. Both Mr. Thakkar and SwarupDilip Thakkar. All the members are an independent directordirectors pursuant to the applicable rules of the Commission and the NYSE. See “Part I — I—Item 6. Directors, Senior Management and Employees — Employees—A. Directors and Executive Officers” for the experience and qualifications of the members of the Audit Committee. Our Board of Directors has determined that Mr. Stone and Mr. Thakkar qualifiesqualify as an “audit committee financial expert”experts” as defined in Item 16A of Form 20-F.
ITEM 16B. CODE OF ETHICS
We have adopted a written Code of Business EthicsConduct and ConductEthics that is applicable to all of our directors, senior management and employees. We have posted the code on our website atwww.erosplc.comwww.erossstx.com. Information contained on our website does not constitute a part of this annualtransition report. We will also make available a copy of the Code of Business EthicsConduct and ConductEthics to any person, without charge, if a written request is made to Investor Relations at our offices at 13 Manchester Square, London W1 U3PP, United Kingdom.3900 West Alameda Avenue, 32nd Floor, Burbank, California 91505.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
Grant Thornton India LLP has(“Grant Thornton”) served as ourthe independent registered public accountant for Eros prior to the fiscal years ended March 31, 2017, 2016 and 2015. The following table shows theMerger. Information regarding fees we paid or accrued for the audit and other services provided by Grant Thornton India LLP and associated entities for the years ended March 31, 2017, 20162020 and 2015.2019 and our Audit Committee’s pre-approval process is included in Item 16.C of our Annual Report on Form 20-F, submitted to the SEC on July 30, 2020 and incorporated by reference herein.
| | | Fiscal | |
| | | 2017 | | | 2016 | | | 2015 | |
| Audit fees | | $ | 933,000 | | | $ | 1,203,000 | | | $ | 709,000 | |
| Tax fees | | | 45,000 | | | | 45,000 | | | | 38,000 | |
Notes:
Audit fees. This category consists of fees billed for the audit of financial statements, quarterly review of financial statements and other audit services, which are normally provided by the independent auditors in connection with statutory and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements and include the group audit; comfort letters and consents; attest services; and assistance with and review of documents filed with the Commission.
Tax fees.This category includes fees billed for tax audits.
Audit Committee Pre-approval Process
Our Audit Committee reviews and pre-approves the scope and the cost of all audit and permissible non-audit services performed by our independent auditor. All of the services provided by Grant Thornton India LLP and associated entities during the last fiscal year have been pre-approved by our Audit Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
As permitted by the rules of the U.S. Securities and Exchange Commission, our audit committee is currently comprised of two non-executives. We believe that our reliance on this exemption from the listing standards for audit committees does not materially adversely affect the ability of our audit committee to act independently.Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither we, nor any affiliated purchaser, made any purchase of our equity securities in fiscal year 2017.2020.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
We have posted our Corporate Governance Guidelines on our website atwww.erosplc.comerosstx.com. Information contained on our website does not constitute a part of this annualtransition report.
141
The table below summarizes the composition of our committees during the year.
| | Audit
Committee | | Remuneration
Committee | | Nomination
Committee |
Shailendra Swarup | | Member | | Chairman | | Chairman |
Dilip Thakkar | | Chairman | | Member | | Member |
Both Mr. Shailendra Swarup and Mr. Thakkar satisfies the “independence” requirements of the NYSE listing standards and the “independence” requirements of Rule 10A-3 of the Exchange Act.
As our shares are listed on the NYSE, we are subject to the NYSE listing standards. However, as a foreign private issuer, we are exempt from complying with certain corporate governance requirements of the NYSE applicable to a U.S. issuer. Under NYSE rules applicable to us, we only need to:
| • | establish an independent audit committee that has responsibilities set out in the NYSE rules; |
| • | provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules of the NYSE; |
| • | provide periodic (annual and interim) written affirmations to the NYSE with respect to our corporate governance practices; and |
| • | include in our annual reports a brief description of significant differences between our corporate governance practices and those followed by U.S. companies. |
We are currently in compliance with the current applicable NYSE corporate governance requirements for foreign private issuers.
We believe that our corporate governance practices do not differ in any significant way from those required to be followed by issuers incorporated in the United StatesU.S. under the NYSE listing standards, except that the Dodd-Frank Wall Street Reform and Consumer Protection Act generally provides shareholders of United StatesU.S. public companies with the right to cast three types of votes: (i) an advisory vote to approve the compensation of the named executive officers, (ii) an advisory vote on the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation, and (iii) an advisory vote to approve certain payments made in connection with an acquisition, merger or other specified corporate transaction. We, as a foreign private issuer, are not subject to these requirements and we do not adopt any such voting practices.
As a foreign private issuer, we are exempt from the rules under the Exchange Act governing the furnishing and content of proxy statements, and our directors, senior management and principal shareholders are exempt from the reporting and “short-swing profit” recovery provisions contained in Section 16 of the Exchange Act.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
See “Part III — III—Item 18. Financial Statements” for a list of ourthe consolidated financial statements included elsewhere in this annualtransition report.
ITEM 18. FINANCIAL STATEMENTS
The following statements are filed as part of this annualtransition report, together with the report of the independent registered public accounting firm:
| · | Report of Independent Registered Public Accounting Firm Grant Thornton IndiaErnst & Young LLP |
| · | Consolidated Balance Sheets as of September 30, 2018 and 2019 and March 31, 2020 |
| · | Consolidated Statements of Financial Position as at March 31, 2017 and 2016 |
| |
· | Consolidated Statements of IncomeOperations for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2017, 20162019 (unaudited) and 20152020 |
| |
| · | Consolidated Statements of Comprehensive IncomeLoss for the years ended March 31,September 30, 2017, 20162018 and 2015 |
| |
· | Consolidated Statements of Changes in Equity for2019 and the yearssix months ended March 31, 2017, 20162019 (unaudited) and 20152020 |
| |
| · | Consolidated Statements of Cash Flows for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2019 (unaudited) and 2020 |
| · | Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders’ Deficit for the years ended September 30, 2017, 20162018 and 20152019 and the six months ended March 31, 2019 (unaudited) and 2020 |
| |
| · | Notes to the Audited Consolidated Financial Statements |
ITEM 19. EXHIBITS
The following exhibits are filed as part of this annualtransition report:
Exhibit
Number | Title | | |
| 1.1 | Memorandum of Association | | (c) |
| 1.2 | Articles of Association | | (c)(o) |
| 2.1 | Form of A Share Certificate | | (d) |
| 4.1 | Relationship Agreement, dated as of December 16, 2009, between Eros International Media Limited, the Company and Eros Worldwide FZ-LLC | | (b) |
| 4.2 | Shareholders’ Agreement, dated as of January 13,2007,13, 2007, between Eros Multimedia Private Limited and The Group and Big Screen Entertainment Private Limited | | (b) |
| 4.3 | Shareholders’ Agreement for Ayngaran International Limited, dated as of July 11,200711, 2007 | | (b) |
| 4.4 | Employment Agreement of Sunil Lulla as Executive Vice Chairman of Eros International Medial Limited, dated September 29, 2009 | | (b) |
| 4.5 | Service Agreement of Prem Parameswaran as Chief Financial Officer and President of North America and Group Chief Financial Officer, dated May 26, 2015 | | (f) |
| 4.6 | Service Agreement of Kishore Lulla, dated February 17, 2016 | | (g) |
| 4.7 | Service Agreement of Vijay Ahuja as Vice Chairman and President (International) dated June 27, 2006 | | (b) |
4.8 | Rules of the Eros International Plc Bonus Share Plan Unapproved Option Scheme 2006, dated May 17, 2006 | | (b) |
4.94.8 | Credit Facility, dated January 5, 2012, between Eros International Plc, Citibank, N.A., London Branch, Lloyds TSB Bank Plc and the Royal Bank of Scotland Plc, with Lloyds TSB Bank Plc as Facility Agent, in the original principal amount of $125 million | | (b) |
4.10 | Increase Confirmation, dated January 12, 2012, from UBS AG, Singapore Branch, to Lloyds TSB Bank Plc as Facility Agent and Eros International Plc | | (b) |
4.11 | IPO Plan Form of Option Agreement | | (d) |
4.124.9 | Eros International Media Pvt. Ltd. ESOP 2009 | | (c) |
4.134.10 | Form of Joint Share Ownership Deed Measured By Total Share Return | | (c) |
4.144.11 | Form of Joint Share Ownership Deed Measured By Super Total Share Return | | (c) |
4.15 | Form of Joint Share Ownership Deed Measured By Earnings Per Share | | (c) |
4.164.12 | Employee Benefit Trust Deed | | (c) |
4.174.13 | Form of Option Agreement for Option Awards Approved April 17, 2012 | | (d) |
4.184.14 | Service Agreement of Jyoti Deshpande as Group Chief Executive Officer and Managing Director of Eros International Plc, date September 5, 2013 | | (e) |
4.19 | Letter agreement for Employment between Eros International PLC, Eros Digital FZ LLC and Jyoti Deshpande dated February 17, 2016. | | (g) |
4.20 | Employment Agreement of Jyoti Deshpande as Executive Director of Eros International Media Limited, dated August 29, 2013 | | (d) |
4.21 | Service Agreement of Vijay Ahuja as Executive Director of Eros International Pte Ltd, dated April 1, 2013 | | (d) |
4.22 | Service Agreement of Pranab Kapadia as President – Europe & Africa of Eros International Ltd., dated December 1, 2007 | | (d) |
4.234.15 | Amended and RestatedService Agreement of Rishika Lulla Singh as Chief Executive Officer – Eros Digital FZ LLC, dated February 17, 2016 | | (g) |
4.244.16 | Service Agreement of Mark Carbeck as Chief Corporate and Strategy Officer, dated April 3, 2014 | | (g) |
Exhibit
Number4.17 | Title | | |
4.25 | Service Agreement of David Maisel as Non-Executive Director, dated February 13, 2015 | | (f) |
4.264.18 | Service Agreement of Rajeev Misra as Non-Executive Director, dated June 17, 2015 | | (f) |
4.27 | Form of 2014 Option Agreement for Option Awards | | (f) |
4.284.19 | Form of 2015 Option Agreement for Option Awards | | (f) |
4.294.20 | Trust Deed constituting the £50 million 6.50% Bonds due 2021, dated October 15, 2014 | | (f) |
4.304.21 | Amended Credit Agreement, between Eros International Plc, Citibank, N.A., London Branch, Lloyds TSB Bank Plc and the Royal Bank of Scotland Plc, dated February 12, 2015 | | (f) |
4.31 | Form of Increase Confirmation, dated July 31, 2013, from HSBC Bank Plc to Lloyds TSB Bank Plc as Facility agent and Eros International Plc | | (d) |
4.32 | Relationship Agreement dated as of September 20, 2016 between Eros International Media Limited and Eros Worldwide FZ LLC | | (a)(i) |
| 4.22 | Form of Indenture between the Company and Wilmington Savings Fund Society, FSB, as trustee | | (j) |
| 4.23 | Form of Supplementary Indenture between the Company and Wilmington Savings Fund Society, FSB, as trustee | | (j) |
| 4.24 | Form of Senior Convertible Note (included as Exhibit A to Exhibit 4.34 hereto) | | (j) |
| 4.25 | Form of Securities Purchase Agreement | | (j) |
| 4.26 | Registration Rights Agreement between Eros International Plc and Reliance Industrial Investments and Holdings Limited, dated August 8, 2018 | | (l) |
| 4.27 | Form of Securities Purchase Agreement | | (m) |
| 4.28 | Form of Senior Convertible Note | | (m) |
| 4.29 | Form of Subscription Agreement | | (n) |
| 4.30 | Agreement and Plan of Merger, dated as of April 17, 2020, among Eros International Plc, STX Filmworks, Inc., England Holdings 2, Inc. and England Merger 1 Corp. (f/k/a/ England Merger Corp.) | | (p) |
| 4.31 | Voting and Support Agreement, dated as of April 17, 2020, by and among STX Filmworks, Inc., Kishore Lulla, Rishika Lulla Singh, Beech Investments Limited and Eros Ventures Limited | | (p) |
| 4.32 | Subscription Agreement, dated as of April 17, 2020, by and among Eros International Plc and the purchasers thereto | | (p) |
| 4.33 | Amendment No. 1 to Subscription Agreement, dated as of July 21, 2020, by Eros International Plc | | |
| 4.34 | Form of Class E CVR Agreement | | (o) |
| 4.35 | Form of Class D CVR Agreement | | (o) |
| 4.36 | Form of Class C CVR Agreement | | (o) |
| 4.37 | Form of Class B CVR Agreement | | (o) |
| 4.38 | Form of Class A CVR Agreement | | (o) |
| 4.39 | Form of Investors’ Rights Agreement | | (o) |
| 4.40 | Form of Registration Rights Agreement | | (o) |
| 4.41 | Registration Rights Agreement, dated as of July 30, 2020, by and among Eros International Plc and the Holders party thereto | | (o) |
| 4.42 | Eros International Plc 2020 Long-Term Incentive Plan | | (o) |
| 4.43 | Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement (Corporate and Production Facility) dated as of October 7, 2016 by and among STX Financing, LLC, as Borrower, STX, as Parent, the Guarantors referred to therein, the Lenders referred to therein and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank | | (o) |
| 4.44 | Amendment No. 1 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of June 2, 2017 | | (o) |
| 4.45 | Amendment No. 2 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of October 4, 2017 | | (o) |
| 4.46 | Waiver and Amendment No. 3 to Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of February 22, 2018 | | (o) |
| 4.47 | Amendment No. 4 to Second Amended and Restated Credit, Security, Guaranty, and Pledge Agreement, dated as of February 11, 2019 | | (o) |
| 4.48 | Amendment No. 5 to Second Amended and Restated Credit, Security, Guaranty, and Pledge Agreement, dated as of January 30, 2020 | | (o) |
| 4.49 | Consent and Amendment No. 6 to Second Amended and Restated Credit, Security, Guaranty, and Pledge Agreement, dated as of April 17, 2020 | | (o) |
| 4.50 | Second Amended and Restated Subordinated Credit, Security, Guaranty and Pledge Agreement dated as of October 7, 2016, among STX Financing, LLC, as Borrower, STX Filmworks, Inc., as Parent, the Guarantors referred to therein, the Lenders referred to therein, and Red Fish Blue Fish, LLC, as Administrative Agent for the Lenders | | (o) |
| 4.51 | Amendment No. 1 to Second Amended and Restated Subordinated Credit, Security, Guaranty and Pledge Agreement, dated as of March 2, 2018 | | (o) |
| 4.52 | Consent and Amendment No. 2 to Second Amended and Restated Subordinated Credit, Security, Guaranty and Pledge Agreement, dated as of February 11, 2019 | | (o) |
| 4.53 | Consent and Amendment No. 3 to Second Amended and Restated Subordinated Credit, Security, Guaranty and Pledge Agreement, dated as of April 17, 2020 | | (o) |
| 8.1 | Subsidiaries of Eros International PlcSTX Global Corporation | | (a) |
| 12.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | | (a) |
| 12.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) | | (a) |
| 13.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 | | (a) |
| 13.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 | | (a) |
15.215.1 | Consent to Use of Federation of Indian Chambers of Commerce and Industry – KPMG Indian Media and Entertainment Industry ReportsErnst & Young LLP | | (a) |
| 101.INS | XBRL Instance Document | | (a) |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | (a) |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | (a) |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | (a) |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | (a) |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | (a) |
___________________
| (a) | Filed herewith |
| (b) | Previously filed on March 30, 2012 as an exhibit to the Company’s Registration Statement on Form F-1 (File No. 333-180469) and incorporated herein by reference. |
| (c) | Previously filed on April 24, 2012 as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form F-1 (File No. 333-180469) and incorporated herein by reference. |
| (d) | Previously filed on October 29, 2013 as an exhibit to Amendment No. 5 to the Company’s Registration Statement on Form F-1 (File No. 333-180469) and incorporated herein by reference. |
| (e) | Previously filed on November 5, 2013 as an exhibit to Amendment No. 6 to the Company’s Registration Statement on Form F-1 (File No. 333-180469) and incorporated herein by reference. |
| (f) | Previously filed on July 8, 2015 as an exhibit to the Company’s Annual Report on Form 20-F and incorporated herein by reference. |
| (g) | Previously filed on July 27, 2016 as an exhibit to the Company’s Annual Report on Form 20-F and incorporated herein by reference. |
| (h) | Previously filed on July 31, 2017 as an exhibit to the Company’s Annual Report on Form 20-F and incorporated herein by reference. |
| (i) | Previously filed on August 4, 2017 as an exhibit to the Company’s Registration Statement on Form F-3 (File No. 333-219708) and incorporated herein by reference. |
| (j) | Previously filed on December 4, 2017 as an exhibit to the Company’s Report of Foreign Private Issuer on Form 6-K and incorporated herein by reference. |
| (k) | Previously filed on March 14, 2018 as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-223643) and incorporated herein by reference. |
| (l) | Previously filed on September 17, 2018 as an exhibit to the Company’s Registration Statement on Form F-3 (File No. 333-227380) and incorporated herein by reference. |
| (m) | Previously filed on September 26, 2019 as an exhibit to the Company’s Current Report of Foreign Private Issuer on Form 6-K and incorporated herein by reference. |
| (n) | Previously filed on January 27, 2020 as an exhibit to the Company’s Current Report of Foreign Private Issuer on Form 6-K and incorporated herein by reference. |
| (o) | Previously filed on August 4, 2020 as an exhibit to the Company’s Current Report of Foreign Private Issuer on Form 6-K and incorporated herein by reference. |
| (p) | Previously filed on July 30, 2020 as an exhibit to the Company’s Annual Report on Form 20-F and incorporated herein by reference. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annualtransition report on its behalf.
Date: July 31, 2017October 30, 2020 | EROS INTERNATIONAL PLCSTX GLOBAL CORPORATION |
| | | |
| | By: | /s/ Jyoti DeshpandeAndrew Warren |
| | Name: | Jyoti DeshpandeAndrew Warren |
| | Title: | Group Chief Financial Officer |
| | |
| | |
| By: | /s/ Robert B. Simonds, Jr. |
| Name: Title: | Robert B. Simonds, Jr.
Chief Executive Officer |
STX FILMWORKS, INC.
EROS INTERNATIONAL PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm Grant Thornton India LLP | F-2 |
Consolidated Statements of Financial PositionBalance Sheets as of September 30, 2018 and 2019 and March 31, 2017 and 20162020 | F-3 |
Consolidated Statements of IncomeOperations for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2017, 20162019 (unaudited) and 20152020 | F-4 |
Consolidated Statements of Comprehensive IncomeLoss for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2017, 20162019 (unaudited) and 20152020 | F-5 |
| Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders' Deficit for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2019 (unaudited) and 2020 | F-6 |
Consolidated Statements of Cash Flows for the years ended March 31,September 30, 2017, 20162018 and 2015 | F-6 |
Consolidated Statements of Changes in Equity for2019 and the yearssix months ended March 31, 2017, 20162019 (unaudited) and 20152020 | F-7 |
Notes to theAudited Consolidated Financial Statements | F-10F-8 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Shareholdersof STX Filmworks, Inc.
Eros International PLCOpinion on the Financial Statements
We have audited the accompanying consolidated statementsbalance sheets of financial position of Eros International PLC and its subsidiariesSTX Filmworks, Inc. (the “Company”)Company) as of September 30, 2018 and 2019, and March 31, 2017 and 2016, and2020, the related consolidated statements of income,operations, comprehensive income, changes in equity,loss, stockholders' deficit and cash flows for each of the three years in the period ended September 30, 2019, and for the six months ended March 31, 2017. 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2018 and 2019, and March 31, 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, and for the six months ended March 31, 2020, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a revolving credit facility that matures within 12 months, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits. We are required to be independent with respect to the Company in accordance with the relevant ethical requirements relating to our audit.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engagedmisstatement, whether due to perform an audit of the Company’s internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
/s/ Ernst & Young LLP
We have served as the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eros International PLC and subsidiaries as of March 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board.Company’s auditor since 2015.
/s/ Grant Thornton India LLPLos Angeles, California
October 30, 2020
STX Filmworks, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
Mumbai, India
July 31, 2017
EROS INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT MARCH 31, 2017 AND 2016
| | | | | As at March 31 | |
| | | Note | | 2017 | | | 2016 | |
| | | | | | | | (Recasted)* | |
| | | | | (in thousands) | |
| ASSETS | | | | | | | | | | |
| Non-current assets | | | | | | | | | | |
| Property, plant and equipment | | 13 | | $ | 10,354 | | | $ | 10,686 | |
| Goodwill | | 14 | | | 4,992 | | | | 5,097 | |
| Intangible assets — trade name | | 14 | | | 14,000 | | | | 14,000 | |
| Intangible assets — content | | 15 | | | 904,628 | | | | 795,139 | |
| Intangible assets — others | | 16 | | | 4,360 | | | | 6,127 | |
| Available-for-sale financial assets | | 17 | | | 29,613 | | | | 30,147 | |
| Trade and other receivables | | 19 | | | 11,443 | | | | 9,521 | |
| Income tax receivable | | | | | 1,051 | | | | 2,645 | |
| Restricted deposits | | | | | 335 | | | | 867 | |
| Deferred income tax assets | | 11 | | | 112 | | | | 167 | |
| Total non-current assets | | | | $ | 980,888 | | | $ | 874,396 | |
| | | | | | | | | | | |
| Current assets | | | | | | | | | | |
| Inventories | | 18 | | $ | 214 | | | $ | 287 | |
| Trade and other receivables | | 19 | | | 242,762 | | | | 188,361 | |
| Current income tax receivable | | | | | 253 | | | | 238 | |
| Cash and cash equivalents | | 21 | | | 112,267 | | | | 182,774 | |
| Restricted deposits | | | | | 6,981 | | | | 1,822 | |
| Total current assets | | | | | 362,477 | | | | 373,482 | |
| | | | | | | | | | | |
| Total assets | | | | $ | 1,343,365 | | | $ | 1,247,878 | |
| | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | |
| Current liabilities | | | | | | | | | | |
| Trade and other payables | | 20 | | $ | 120,082 | | | $ | 65,178 | |
| Acceptances | | 24 | | | 8,935 | | | | 8,688 | |
| Short-term borrowings | | 23 | | | 180,029 | | | | 210,587 | |
| Current income tax payable | | | | | 7,055 | | | | 6,234 | |
| Total current liabilities | | | | $ | 316,101 | | | $ | 290,687 | |
| | | | | | | | | | | |
| Non-current liabilities | | | | | | | | | | |
| Long-term borrowings | | 23 | | $ | 89,841 | | | $ | 92,630 | |
| Other long - term liabilities | | 25 | | | 5,349 | | | | 536 | |
| Derivative financial instruments | | 26 | | | 12,553 | | | | 22,850 | |
| Deferred income tax liabilities | | 11 | | | 35,973 | | | | 32,081 | |
| Total non-current liabilities | | | | $ | 143,716 | | | $ | 148,097 | |
| | | | | | | | | | | |
| Total liabilities | | | | $ | 459,817 | | | $ | 438,784 | |
| | | | | | | | | | | |
| EQUITY | | | | | | | | | | |
| Share capital | | 27 | | $ | 31,877 | | | $ | 30,793 | |
| Share premium | | | | | 399,686 | | | | 356,865 | |
| Reserves | | | | | 436,997 | | | | 423,151 | |
| Other components of equity | | 30 | | | (48,118 | ) | | | (53,310 | ) |
| JSOP reserve | | 29 | | | (15,985 | ) | | | (17,167 | ) |
| Equity attributable to equity holders of Eros International Plc | | | | $ | 804,457 | | | $ | 740,332 | |
| | | | | | | | | | | |
| Non-controlling interest | | | | | 79,091 | | | | 68,762 | |
| Total equity | | | | $ | 883,548 | | | $ | 809,094 | |
| Total liabilities and shareholder’s equity | | | | $ | 1,343,365 | | | $ | 1,247,878 | |
*On completion of purchase price allocation, the carrying amounts of intangible assets- others, related deferred tax liabilities and goodwill are recasted to reflect fair value adjustments relating to acquisition of a subsidiary. Refer Note 4 Acquisition.
| | | September 30, | | | March 31, | |
| | | 2018 | | | 2019 | | | 2020 | |
| Assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 167,869 | | | $ | 17,874 | | | $ | 25,705 | |
| Accounts receivable, net | | | 72,129 | | | | 153,625 | | | | 102,430 | |
| Other current assets | | | 30,210 | | | | 15,824 | | | | 24,215 | |
| Total Current Assets | | | 270,208 | | | | 187,323 | | | | 152,350 | |
| | | | | | | | | | | | | |
| Film and TV costs, net | | | 157,805 | | | | 141,952 | | | | 97,308 | |
| Property and equipment, net of accumulated depreciation of $3,748, $5,730 and $6,744 at September 30, 2018, 2019 and March 31, 2020, respectively. | | | 5,909 | | | | 4,043 | | | | 3,496 | |
| Restricted cash | | | 975 | | | | — | | | | — | |
| Other assets | | | 16,488 | | | | 23,135 | | | | 39,608 | |
| Total assets | | $ | 451,385 | | | $ | 356,453 | | | $ | 292,762 | |
| | | | | | | | | | | | | |
| Liabilities and stockholders’ deficit | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 178,324 | | | $ | 114,020 | | | $ | 109,921 | |
| Accrued participations and residuals | | | 52,649 | | | | 38,214 | | | | 28,314 | |
| Deferred revenue, current | | | 43,795 | | | | 39,363 | | | | 29,142 | |
| Term loan - short term, net | | | 3,184 | | | | — | | | | — | |
| Total Current Liabilities | | | 277,952 | | | | 191,597 | | | | 167,377 | |
| | | | | | | | | | | | | |
| Revolving credit facilities, net | | | 266,935 | | | | 226,402 | | | | 225,989 | |
| Term loan due to related party, net | | | 40,471 | | | | 41,546 | | | | 42,092 | |
| Accrued participations and residuals | | | 29,992 | | | | 67,660 | | | | 70,916 | |
| Deferred Revenue | | | 19,522 | | | | 9,013 | | | | 12,986 | |
| Other liabilities | | | 3,361 | | | | 51,382 | | | | 45,847 | |
| Total liabilities | | | 638,233 | | | | 587,600 | | | | 565,207 | |
| | | | | | | | | | | | | |
| Commitments and contingencies | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Convertible redeemable preferred stock: | | | | | | | | | | | | |
| Stockholders’ deficit: | | | | | | | | | | | | |
| Class A convertible preferred stock, $0.01 par value, 10,207 shares authorized, issued, and outstanding at September 30, 2018, 2019 and March 31, 2020. | | | 16,585 | | | | 18,876 | | | | 20,031 | |
| Class B convertible preferred stock, $0.01 par value, 85,000 shares authorized, issued, and outstanding at September 30, 2018, 2019 and March 31, 2020. | | | 143,069 | | | | 160,238 | | | | 169,442 | |
| Class C convertible preferred stock, $0.01 par value, 214,588 shares authorized, 166,088 shares issued and outstanding at September 30, 2018, 2019 and March 31, 2020. | | | 196,195 | | | | 221,237 | | | | 219,095 | |
| Class D convertible preferred stock, $0.01 par value, 132,618 shares authorized, no shares issued and outstanding at September 30, 2018, 125,000 shares issued and outstanding at September 30, 2019, 125,104 shares issued and outstanding at March 31, 2020, respectively. | | | — | | | | 101,626 | | | | 111,433 | |
| | | | | | | | | | | | | |
| Stockholders deficit: | | | | | | | | | | | | |
| Common stock, $0.01 par value, 100,000,000 shares authorized, 11,572,291 shares issued and outstanding September 30, 2018, 2019 and March 31, 2020. | | | 116 | | | | 116 | | | | 116 | |
| Additional paid-in capital | | | — | | | | — | | | | — | |
| Other comprehensive income/(loss) | | | 51 | | | | (474 | ) | | | (400 | ) |
| Accumulated deficit | | | (542,864 | ) | | | (732,766 | ) | | | (792,162 | ) |
| Total stockholders’ deficit | | | (542,697 | ) | | | (733,124 | ) | | | (792,446 | ) |
| Total liabilities, convertible redeemable preferred stock and stockholders’ deficit | | $ | 451,385 | | | $ | 356,453 | | | $ | 292,762 | |
TheSee accompanying notes form an integral part of these consolidated financial statements.
STX Filmworks, Inc.
EROS INTERNATIONAL PLCConsolidated Statements of Operations
CONSOLIDATED STATEMENTS OF INCOME(in thousands)
FOR THE YEARS ENDED MARCH 31, 2017, 2016 AND 2015
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | (unaudited) | | | | |
| Revenue | | $ | 201,441 | | | $ | 448,846 | | | $ | 434,261 | | | $ | 224,068 | | | $ | 188,453 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | | | | | |
| Direct operating | | | 139,769 | | | | 298,246 | | | | 260,673 | | | | 123,566 | | | | 92,752 | |
| Distribution and marketing | | | 72,554 | | | | 230,336 | | | | 200,900 | | | | 87,865 | | | | 95,047 | |
| General and administrative | | | 57,961 | | | | 91,999 | | | | 60,840 | | | | 36,433 | | | | 26,844 | |
| Depreciation and amortization | | | 1,304 | | | | 1,814 | | | | 2,220 | | | | 1,096 | | | | 1,022 | |
| Restructuring expense | | | — | | | | — | | | | — | | | | — | | | | 1,832 | |
| Total operating expenses | | | 271,588 | | | | 622,395 | | | | 524,633 | | | | 248,960 | | | | 217,497 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loss from operations | | | (70,147 | ) | | | (173,549 | ) | | | (90,372 | ) | | | (24,892 | ) | | | (29,044 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 116 | | | | 99 | | | | 213 | | | | 51 | | | | 43 | |
| Interest expense | | | (15,943 | ) | | | (18,934 | ) | | | (22,134 | ) | | | (11,629 | ) | | | (10,718 | ) |
| Shareholder exit (expense)/income | | | — | | | | — | | | | (25,000 | ) | | | (5,777 | ) | | | 13,767 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loss before income taxes | | | (85,974 | ) | | | (192,384 | ) | | | (137,293 | ) | | | (42,247 | ) | | | (25,952 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Income tax provision | | | 387 | | | | 811 | | | | 708 | | | | 359 | | | | 161 | |
| Net loss | | $ | (86,361 | ) | | $ | (193,195 | ) | | $ | (138,001 | ) | | $ | (42,606 | ) | | $ | (26,113 | ) |
See accompanying notes
STX Filmworks, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | (unaudited) | | | | |
| | | | | | | | | | | | | | | | |
| Net loss | | $ | (86,361 | ) | | $ | (193,195 | ) | | $ | (138,001 | ) | | $ | (42,606 | ) | | $ | (26,113 | ) |
| Foreign currency translation (loss)/gain, net of tax | | | 145 | | | | (96 | ) | | | (525 | ) | | | 155 | | | | 74 | |
| Comprehensive loss | | $ | (86,216 | ) | | $ | (193,291 | ) | | $ | (138,526 | ) | | $ | (42,451 | ) | | $ | (26,039 | ) |
See accompanying notes
STX Filmworks, Inc.
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders’ Deficit
| | | | | Year ended March 31 | |
| | | Note | | 2017 | | | 2016 | | | 2015 | |
| | | | | (in thousands, except per share amounts) | |
| Revenue | | 5 | | $ | 252,994 | | | $ | 274,428 | | | $ | 284,175 | |
| Cost of sales | | 6 | | | (164,240 | ) | | | (172,764 | ) | | | (155,777 | ) |
| Gross profit | | | | | 88,754 | | | | 101,664 | | | | 128,398 | |
| Administrative costs | | 6 | | | (63,309 | ) | | | (64,019 | ) | | | (49,546 | ) |
| Operating profit | | | | | 25,445 | | | | 37,645 | | | | 78,852 | |
| Finance costs | | 8 | | | (19,521 | ) | | | (13,719 | ) | | | (10,791 | ) |
| Finance income | | 8 | | | 2,365 | | | | 5,709 | | | | 4,930 | |
| Net finance costs | | 8 | | | (17,156 | ) | | | (8,010 | ) | | | (5,861 | ) |
| Other gains/(losses) | | 9 | | | 14,205 | | | | (3,636 | ) | | | (10,483 | ) |
| Profit before tax | | | | | 22,494 | | | | 25,999 | | | | 62,508 | |
| Income tax expense | | 10 | | | (11,039 | ) | | | (12,711 | ) | | | (13,178 | ) |
| Profit for the year | | | | $ | 11,455 | | | $ | 13,288 | | | $ | 49,330 | |
| Attributable to: | | | | | | | | | | | | | | |
| Equity holders of Eros International Plc | | | | $ | 3,805 | | | $ | 3,797 | | | $ | 40,344 | |
| Non-controlling interest | | | | | 7,650 | | | | 9,491 | | | | 8,986 | |
| | | | | $ | 11,455 | | | $ | 13,288 | | | $ | 49,330 | |
| Earnings per share (cents) | | | | | | | | | | | | | | |
| Basic earnings per share | | 12 | | | 6.4 | | | | 6.6 | | | | 74.3 | |
| Diluted earnings per share | | 12 | | | 5.1 | | | | 5.2 | | | | 72.4 | |
(in thousands)
| | Convertible Redeemable Preferred Stock | | | | | | Additional | | Other | | | | | |
| | Class A | | Class B | | Class C | | Class D | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income | | Deficit | | Total | |
| Balance at September 30, 2016 | 10,207 | | $ | 12,427 | | 85,000 | | $ | 114,054 | | 77,088 | | $ | 75,027 | | — | | $ | — | | 10,853,279 | | $ | 109 | | $ | — | | $ | 2 | | $ | (203,909 | ) | | (203,798 | ) |
| Class C stock issuance | — | | | — | | — | | | — | | 40,000 | | | 40,600 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Class C issuance costs | — | | | — | | — | | | — | | — | | | (76 | ) | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Accretion of preferred stock | — | | | 1,929 | | — | | | 13,686 | | — | | | 11,669 | | — | | | — | | — | | | — | | | (680 | ) | | — | | | (26,605 | ) | | (27,285 | ) |
| Stock compensation expense | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 536 | | | — | | | — | | | 536 | |
| Stock options exercised | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 59,596 | | | 0.60 | | | 44 | | | — | | | — | | | 45 | |
| Shares issued in connection with debt amendment | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 26,525 | | | 0.27 | | | 100 | | | — | | | — | | | 100 | |
| Foreign currency translation | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 145 | | | — | | | 145 | |
| Net loss | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (86,361 | ) | | (86,361 | ) |
| Balance at September 30, 2017 | 10,207 | | | 14,356 | | 85,000 | | | 127,740 | | 117,088 | | | 127,220 | | — | | | — | | 10,939,400 | | | 110 | | | — | | | 147 | | | (316,875 | ) | | (316,618 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class C stock issuance | — | | | — | | — | | | — | | 49,000 | | | 49,000 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Class C issuance costs | — | | | — | | — | | | — | | — | | | (967 | ) | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Common stock issuance | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 100,000 | | | 1 | | | 4,165 | | | — | | | — | | | 4,166 | |
| Accretion of preferred stock | — | | | 2,229 | | — | | | 15,329 | | — | | | 20,942 | | — | | | — | | — | | | — | | | (5,705 | ) | | — | | | (32,794 | ) | | (38,499 | ) |
| Stock compensation expense | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | | | — | | | 447 | | | — | | | — | | | 447 | |
| Stock options exercised | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 532,891 | | | 5 | | | 1,093 | | | — | | | — | | | 1,098 | |
| Foreign currency translation | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (96 | ) | | — | | | (96 | ) |
| Net loss | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (193,195 | ) | | (193,195 | ) |
| Balance at September 30, 2018 | 10,207 | | | 16,585 | | 85,000 | | | 143,069 | | 166,088 | | | 196,195 | | — | | | — | | 11,572,291 | | | 116 | | | — | | | 51 | | | (542,864 | ) | | (542,697 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect of accounting changes | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 2,870 | | | 2,870 | |
| Class D stock issuance | — | | | — | | — | | | — | | — | | | — | | 125,000 | | | 125,000 | | — | | | — | | | — | | | — | | | — | | | — | |
| Class D issuance costs/discounts | — | | | — | | — | | | — | | — | | | | | — | | | (33,840 | ) | — | | | — | | | — | | | — | | | — | | | — | |
| Accretion of preferred stock | — | | | 2,291 | | — | | | 17,169 | | — | | | 25,042 | | — | | | 10,466 | | — | | | — | | | (195 | ) | | — | | | (54,771 | ) | | (54,966 | ) |
| Stock compensation expense | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | �� | | | 195 | | | — | | | — | | | 195 | |
| Foreign currency translation | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (525 | ) | | — | | | (525 | ) |
| Net loss | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (138,001 | ) | | (138,001 | ) |
| Balance at September 30, 2019 | 10,207 | | $ | 18,876 | | 85,000 | | $ | 160,238 | | 166,088 | | $ | 221,237 | | 125,000 | | $ | 101,626 | | 11,572,291 | | $ | 116 | | $ | — | | $ | (474 | ) | $ | (732,766 | ) | $ | (733,124 | ) |
| | Convertible Redeemable Preferred Stock | | | | | | Additional | | Other | | | | | |
| | Class A | | Class B | | Class C | | Class D | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income | | Deficit | | Total | |
| Balance at September 30, 2018 | 10,207 | | $ | 16,585 | | 85,000 | | $ | 143,069 | | 166,088 | | $ | 196,195 | | — | | $ | — | | 11,572,291 | | $ | 116 | | $ | — | | $ | 51 | | $ | (542,864 | ) | $ | (542,697 | ) |
| Cumulative effect of accounting change | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 2,870 | | | 2,870 | |
| Class D stock issuance | — | | | — | | — | | | — | | — | | | — | | 110,211 | | | 110,211 | | — | | | — | | | — | | | — | | | — | | | — | |
| Class D issuance costs/discounts | — | | | — | | — | | | — | | — | | | — | | — | | | (24,029 | ) | — | | | — | | | — | | | — | | | — | | | — | |
| Accretion of preferred stock | — | | | 1,160 | | — | | | 8,153 | | — | | | 12,258 | | — | | | 2,352 | | — | | | — | | | (99 | ) | | — | | | (23,825 | ) | | (23,924 | ) |
| Stock compensation expense | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 99 | | | — | | | — | | | 99 | |
| Foreign currency translation | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 155 | | | — | | | 155 | |
| Net loss | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (42,606 | ) | | (42,606 | ) |
| Balance at March 31, 2019, (unaudited) | 10,207 | | $ | 17,745 | | 85,000 | | $ | 151,222 | | 166,088 | | $ | 208,453 | | 110,211 | | $ | 88,534 | | 11,572,291 | | $ | 116 | | $ | — | | $ | 206 | | $ | (606,425 | ) | $ | (606,103 | ) |
| | Convertible Redeemable Preferred Stock | | | | | | Additional | | Other | | | | | |
| | Class A | | Class B | | Class C | | Class D | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income | | Deficit | | Total | |
| Balance at September 30, 2019 | 10,207 | | $ | 18,876 | | 85,000 | | $ | 160,238 | | 166,088 | | $ | 221,237 | | 125,000 | | $ | 101,626 | | 11,572,291 | | $ | 116 | | $ | — | | $ | (474 | ) | $ | (732,766 | ) | $ | (733,124 | ) |
| Class D stock issuance | — | | | — | | — | | | — | | — | | | — | | 104 | | | 104 | | — | | | — | | | — | | | — | | | — | | | — | |
| Class D discount | — | | | — | | — | | | — | | — | | | — | | — | | | (69 | ) | — | | | — | | | — | | | — | | | — | | | — | |
| Class D shareholder exit liability | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Accretion of preferred stock | — | | | 1,155 | | — | | | 9,204 | | — | | | 13,230 | | — | | | 9,772 | | — | | | — | | | (81 | ) | | — | | | (33,283 | ) | | (33,364 | ) |
| Non-consenting holder reclassification | — | | | — | | — | | | — | | — | | | (15,372 | ) | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 81 | | | — | | | — | | | 81 | |
| Foreign currency translation | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 74 | | | — | | | 74 | |
| Net loss | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (26,113 | ) | | (26,113 | ) |
| Balance at March 31, 2020 | 10,207 | | $ | 20,031 | | 85,000 | | $ | 169,442 | | 166,088 | | $ | 219,095 | | 125,104 | | $ | 111,433 | | 11,572,291 | | $ | 116 | | $ | — | | $ | (400 | ) | $ | (792,162 | ) | $ | (792,446 | ) |
TheSee accompanying notes form an integral part of these consolidated financial statements.
EROS INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2017, 2016 AND 2015
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands, except per share amounts) | |
| Profit for the year | | $ | 11,455 | | | $ | 13,288 | | | $ | 49,330 | |
| Other comprehensive income: | | | | | | | | | | | | |
| Items that will not be subsequently reclassified to profit or loss | | | | | | | | | | | | |
| Revaluation of property plant and equipment (net of tax) | | | — | | | | 328 | | | | — | |
| | | | | | | | | | | | | |
| Items that will be subsequently reclassified to profit or loss | | | | | | | | | | | | |
| Exchange differences on translating foreign operations | | | 6,591 | | | | (12,922 | ) | | | (7,247 | ) |
| Reclassification of cash flow hedge to consolidated statements of income | | | 804 | | | | 804 | | | | 804 | |
| Unrealized gain on available-for-sale financial assets | | | — | | | | — | | | | 820 | |
| Impairment loss on available-for-sale financial assets | | | (384 | ) | | | — | | | | — | |
| Total other comprehensive income/(loss) for the year | | $ | 7,011 | | | $ | (11,790 | ) | | $ | (5,623 | ) |
| Total comprehensive income for the year, net of tax | | $ | 18,466 | | | $ | 1,498 | | | $ | 43,707 | |
| | | | | | | | | | | | | |
| Attributable to | | | | | | | | | | | | |
| Equity holders of Eros International Plc | | | 8,997 | | | | (5,632 | ) | | | 35,778 | |
| Non-controlling interest | | | 9,469 | | | | 7,130 | | | | 7,929 | |
The accompanying notes form an integral part of these consolidated financial statements.
EROS INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2017, 2016 AND 2015
| | | | | Year ended March 31 | |
| | | Note | | 2017 | | | 2016 | | | 2015 | |
| | | | | (in thousands) | |
| Cash flow from operating activities | | | | | | | | | | | | | | |
| Profit before tax | | | | $ | 22,494 | | | $ | 25,999 | | | $ | 62,508 | |
| Adjustments for: | | | | | | | | | | | | | | |
| Depreciation | | 13 | | | 1,082 | | | | 1,154 | | | | 1,089 | |
| Share based payments | | 28 | | | 23,471 | | | | 30,992 | | | | 21,915 | |
| Amortization of intangible film and content rights | | 15 | | | 135,316 | | | | 128,303 | | | | 117,254 | |
| Amortization of other intangible assets | | 16 | | | 1,816 | | | | 1,131 | | | | 608 | |
| Other non-cash items | | 31 | | | (10,616 | ) | | | 4,562 | | | | 17,005 | |
| Net finance costs | | 8 | | | 17,156 | | | | 8,010 | | | | 5,861 | |
| Gain on sale of available-for-sale financial assets | | | | | (58 | ) | | | — | | | | — | |
| Movement in trade and other receivables | | | | | (72,247 | ) | | | 19,690 | | | | (93,975 | ) |
| Movement in inventories | | | | | (412 | ) | | | 189 | | | | 67 | |
| Movement in trade and other payables | | | | | 4,172 | | | | 31,433 | | | | 1,361 | |
| Loss/(gain) on sale of property, plant and equipment | | | | | 22 | | | | 21 | | | | (9 | ) |
| Cash generated from operations | | | | | 122,196 | | | | 251,484 | | | | 133,684 | |
| Interest paid | | | | | (18,390 | ) | | | (12,536 | ) | | | (6,929 | ) |
| Income taxes paid | | | | | (4,813 | ) | | | (4,349 | ) | | | (8,800 | ) |
| Net cash generated from operating activities | | | | $ | 98,993 | | | $ | 234,599 | | | $ | 117,955 | |
| | | | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | | | |
| Advance given to an undertaking | | 4 | | $ | — | | | $ | — | | | $ | (2,465 | ) |
| Purchase of available for sale investment | | | | | — | | | | (230 | ) | | | — | |
| Proceeds from sale of available-for-sale investment | | | | | 288 | | | | — | | | | — | |
| Purchase of property, plant and equipment | | | | | (678 | ) | | | (1,702 | ) | | | (529 | ) |
| Proceeds from disposal of property, plant and equipment | | | | | 2 | | | | 56 | | | | 29 | |
| Proceeds from/(investment in) restricted deposits held with banks | | | | | (4,018 | ) | | | 76 | | | | (2,935 | ) |
| Acquisition of cash and cash equivalent in subsidiary | | | | | — | | | | 263 | | | | — | |
| Purchase of intangible film rights and content rights | | | | | (173,481 | ) | | | (211,253 | ) | | | (276,216 | ) |
| Purchase of other intangible assets | | | | | — | | | | (1,500 | ) | | | (1,322 | ) |
| Interest received | | | | | 2,696 | | | | 2,935 | | | | 4,198 | |
| Net cash used in investing activities | | | | $ | (175,191 | ) | | $ | (211,355 | ) | | $ | (279,240 | ) |
| | | | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | | | |
| Proceeds from issue of share capital, net of transaction costs | | | | $ | 30,466 | | | $ | 5,414 | | | $ | 110,027 | |
| Proceeds from issue of shares by subsidiary | | | | | 40 | | | | 137 | | | | 1,477 | |
| Proceeds from issue out of treasury shares | | | | | 938 | | | | 6,294 | | | | 888 | |
| (Repayment of)/ proceeds from/ short term debt with maturity less than three months (net) | | | | | (39,493 | ) | | | 1,918 | | | | (2,983 | ) |
| Proceeds from short term debt | | | | | 76,310 | | | | 79,695 | | | | 69,815 | |
| Repayment of short term debt | | | | | (66,404 | ) | | | (72,746 | ) | | | (65,296 | ) |
| Proceeds from long term debt, net of transaction costs of $384 (2016: $139, 2015: $1,909) | | | | | 16,522 | | | | 13,847 | | | | 91,206 | |
| Repayment of long term debt | | | | | (12,450 | ) | | | (26,962 | ) | | | (27,573 | ) |
| Net cash generated from financing activities | | | | $ | 5,929 | | | $ | 7,597 | | | $ | 177,561 | |
| | | | | | | | | | | | | | | |
| Net (decrease)/increase in cash and cash equivalents | | | | | (70,269 | ) | | | 30,841 | | | | 16,276 | |
| | | | | | | | | | | | | | | |
| Effects of exchange rate changes on cash and cash equivalents | | | | | (238 | ) | | | (1,731 | ) | | | (8,061 | ) |
| Cash and cash equivalents at beginning of year | | | | | 182,774 | | | | 153,664 | | | | 145,449 | |
| Cash and cash equivalents at the end of year | | | | $ | 112,267 | | | $ | 182,774 | | | $ | 153,664 | |
During the year ended March 31, 2016, the Company's subsidiary, Eros International Media Limited, issued 900,970 equity shares as consideration for the acquisition of Universal Power Systems Private Limited (“Techzone”).
The cash outflow towards intangible film rights and content right includes, interest paid and capitalized $7,176 (2016: $9,204 and 2015: $10,890).
The accompanying notes form an integral part of these consolidated financial statements.
STX Filmworks, Inc.
EROS INTERNATIONAL PLCConsolidated Statements of Cash Flows
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED MARCH 31, 2017(in thousands)
| | | | | | Other components of equity | | Reserves | | | | | | | | | |
| | Share
capital | | Share
premium
account | | Currency
translation
reserve | | Available
for sale
fair value reserves | | Revaluation
reserve | | Hedging
reserve | | Reverse
acquisition
reserve | | Merger
reserve | | Retained
earnings | | JSOP
reserve | | Equity
Attributable to
Shareholders
of EROS
International
PLC | | Non-
controlling
interest | | Total
equity | |
| | (in thousands) | |
| Balance as at April 1, 2016 | $ | 30,793 | | $ | 356,865 | | $ | (60,609 | ) | $ | 6,622 | | $ | 1,856 | | $ | (1,179 | ) | $ | (22,752 | ) | $ | 69,586 | | $ | 376,317 | | $ | (17,167 | ) | $ | 740,332 | | $ | 68,762 | | $ | 809,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Profit for the year | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,805 | | | — | | | 3,805 | | | 7.650 | | | 11,455 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income/(loss) for the year | | — | | | — | | | 4,799 | | | (384 | ) | | (27 | ) | | 804 | | | — | | | — | | | — | | | — | | | 5,192 | | | 1,819 | | | 7011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income/(loss) for the year | | — | | | — | | | 4,799 | | | (384 | ) | | (27 | ) | | 804 | | | — | | | — | | | 3,805 | | | — | | | 8,997 | | | 9,469 | | | 18,466 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue of shares, net of transaction costs of Nil (Refer Note 27) | | 808 | | | 29,712 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | 30,520 | | | — | | | 30,520 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share based compensation (Refer Note 28) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 22,901 | | | — | | | 22,901 | | | 570 | | | 23,471 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued on exercise of employee stock options and awards (Refer Note 27) | | 276 | | | 13,273 | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,549 | ) | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue out of treasury shares (Refer Note 29) | | — | | | (164 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,182 | | | 1,018 | | | — | | | 1,018 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in ownership interests in subsidiaries that do not result in a loss of control | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 689 | | | — | | | — | | | 689 | | | 290 | | | 979 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as at March 31, 2017 | $ | 31,877 | | $ | 399,686 | | $ | (55,810 | ) | $ | 6,238 | | $ | 1,829 | | $ | (375 | ) | $ | (22,752) | | $ | 70,275 | | $ | 389,474 | | $ | (15,985 | ) | $ | 804,457 | | $ | 79,091 | | $ | 883,548 | |
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | (unaudited) | | | | |
| Operating activities | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (86,361 | ) | | $ | (193,195 | ) | | $ | (138,001 | ) | | $ | (42,606 | ) | | $ | (26,113 | ) |
| Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | | 1,218 | | | | 1,915 | | | | 2,348 | | | | 1,190 | | | | 1,114 | |
| Stock compensation expense | | | 536 | | | | 4,613 | | | | 195 | | | | 99 | | | | 81 | |
| Amortization and impairment of film and television costs | | | 54,681 | | | | 140,241 | | | | 120,076 | | | | 54,522 | | | | 52,410 | |
| Amortization of debt discount and issuance costs | | | 3,104 | | | | 3,160 | | | | 3,333 | | | | 1,644 | | | | 1,788 | |
| Disposal of fixed assets | | | — | | | | — | | | | 60 | | | | — | | | | 6 | |
| Accrual of paid in kind interest | | | 799 | | | | 815 | | | | 832 | | | | 415 | | | | 423 | |
| Loss on extinguishment of liability | | | — | | | | — | | | | 5,000 | | | | 5,000 | | | | — | |
| Shareholder exit expense/(income) | | | — | | | | — | | | | 25,000 | | | | 5,777 | | | | (13,767 | ) |
| Other | | | 201 | | | | 192 | | | | 48 | | | | 48 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | 4,767 | | | | (47,954 | ) | | | (76,685 | ) | | | (17,471 | ) | | | 51,195 | |
| Prepaid expenses and other assets | | | (37,812 | ) | | | 1,862 | | | | 7,503 | | | | 2,278 | | | | (25,684 | ) |
| Lease asset and liability | | | — | | | | — | | | | — | | | | — | | | | (98 | ) |
| Increase in film and television costs | | | (87,324 | ) | | | (193,094 | ) | | | (105,759 | ) | | | (86,246 | ) | | | (7,699 | ) |
| Accounts payable and accrued expenses | | | 3,169 | | | | 145,607 | | | | (64,305 | ) | | | (85,614 | ) | | | (18,649 | ) |
| Accrued participations and residuals | | | 8,956 | | | | 44,133 | | | | 22,497 | | | | 23,035 | | | | (6,644 | ) |
| Deferred revenue | | | 10,465 | | | | 30,068 | | | | (14,941 | ) | | | 4,332 | | | | (6,248 | ) |
| Other liabilities | | | 172 | | | | 147 | | | | (479 | ) | | | (281 | ) | | | 8,227 | |
| Net cash provided by/(used in) operating activities | | | (123,429 | ) | | | (61,490 | ) | | | (213,278 | ) | | | (133,878 | ) | | | 10,342 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | (1,713 | ) | | | (2,757 | ) | | | (354 | ) | | | (428 | ) | | | (475 | ) |
| Net cash used in investing activities | | | (1,713 | ) | | | (2,757 | ) | | | (354 | ) | | | (428 | ) | | | (475 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Financing activities | | | | | | | | | | | | | | | | | | | | |
| Proceeds from exercise of stock options | | | — | | | | 1,099 | | | | — | | | | — | | | | — | |
| Term loan draw | | | — | | | | 3,322 | | | | — | | | | — | | | | — | |
| Revolving credit facilities draw | | | 286,807 | | | | 465,012 | | | | 286,419 | | | | 201,496 | | | | 158,351 | |
| Revolving credit facilities repayment | | | (205,099 | ) | | | (362,177 | ) | | | (332,853 | ) | | | (209,595 | ) | | | (160,429 | ) |
| Debt issuance costs | | | (7,478 | ) | | | (193 | ) | | | (372 | ) | | | (343 | ) | | | — | |
| Issuance of Class C convertible preferred stock | | | 40,600 | | | | 49,000 | | | | — | | | | — | | | | — | |
| Costs from issuance of Class C convertible preferred stock | | | (76 | ) | | | (967 | ) | | | — | | | | — | | | | — | |
| Issuance of Class D convertible preferred stock | | | — | | | | — | | | | 110,211 | | | | 105,211 | | | | 35 | |
| Costs from issuance of Class D convertible preferred stock | | | — | | | | — | | | | (550 | ) | | | (528 | ) | | | — | |
| Net cash provided by/(used in) financing activities | | | 114,754 | | | | 155,096 | | | | 62,855 | | | | 96,241 | | | | (2,043 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | | (10,388 | ) | | | 90,849 | | | | (150,777 | ) | | | (38,065 | ) | | | 7,824 | |
| Foreign exchange effects on cash | | | 164 | | | | (230 | ) | | | (193 | ) | | | (1 | ) | | | 7 | |
| Cash, cash equivalents and restricted cash at the beginning of year | | | 88,449 | | | | 78,225 | | | | 168,844 | | | | 168,844 | | | | 17,874 | |
| Cash, cash equivalents and restricted cash at the end of year | | $ | 78,225 | | | $ | 168,844 | | | $ | 17,874 | | | $ | 130,778 | | | $ | 25,705 | |
| | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information | | | | | | | | | | | | | | | | | | | | |
| Cash paid for interest | | $ | 12,096 | | | $ | 18,122 | | | $ | 21,088 | | | $ | 10,537 | | | $ | 11,041 | |
| Cash paid for income tax | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
See accompanying notes
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
1. Description of Business, Basis of Presentation and Significant Accounting Policies
Description of Business
STX Filmworks, Inc. (the “Company”) was formed as a limited liability company on August 4, 2011, under the name Lunatic Fringe Entertainment, LLC. Its name was later changed to STX Filmworks, LLC and it converted to a Delaware corporation in February 2014. The primary purpose and business of the Company is to develop, produce, finance, distribute, invest in and otherwise exploit feature length motion pictures, television programming, and digital media content. The Company specializes in the development, production, marketing and distribution of talent driven films, television, and digital content across multi-platform distribution channels on a worldwide basis.
Basis of Presentation
These accompanying consolidated financial statements are presented on the accrual basis of accounting and are in accordance with accounting principles generally accepted in the United States (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). These financial statements present the consolidated financial position and results of operations of the Company and its wholly owned subsidiaries. All intercompany transactions are eliminated in consolidation.
As discussed in Note 3, the Company's revolving credit facility matures on October 7, 2021. The maturity of the Company’s revolving credit facility now falls within the twelve-month period following the issuance of these financial statements for which the Company is required to evaluate as part of its assessment of its ability to continue as a going concern. Management of the Company believes that the Company has adequate liquidity to fund its operations up until the maturity of the revolving credit facility. However, absent a refinancing with cash from operations, assets sales or a combination thereof, the Company does not currently expect to have sufficient liquidity to repay the full amount of the revolving credit facility at maturity. Based on continuing discussions with existing and potential lenders, management is optimistic that it will be able to successfully implement its ongoing plan to address its debt maturities as they become due. However, management recognizes that its plan depends on the actions of these third parties and, therefore, the Company is unable at this time to conclude that such plan is probable of being achieved. Accordingly, given the uncertainty with respect to the Company’s ability to pay its revolving credit facility in full at maturity, the Company acknowledges that substantial doubt exists regarding its ability to continue as a going concern pursuant to ASC 205-40 Presentation of Financial Statements—Going Concern. There can be no assurance that the Company will succeed in reaching agreements with the lenders under its revolving credit facility or accessing new capital to pay the revolving credit facility in full at maturity.
The accompanying notes form an integral partconsolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of asset and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements.
EROS INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED MARCH 31, 2016
| | | | | | Other components of equity | | Reserves | | | | | | | | | |
| | Share
capital | | Share
premium
account | | Currency
translation
reserve | | Available
for sale
fair value reserves | | Revaluation
reserve | | Hedging
reserve | | Reverse
acquisition
reserve | | Merger
reserve | | Retained
earnings | | JSOP
reserve | | Equity
Attributable to
Shareholders
of EROS
International
PLC | | Non-
controlling
interest | | Total
equity | |
| | (in thousands) | |
| Balance as at April 1, 2015 | $ | 30,622 | | $ | 345,385 | | $ | (50,048 | ) | $ | 6,622 | | $ | 1,528 | | $ | (1,983 | ) | $ | (22,752 | ) | $ | 63,238 | | $ | 349,196 | | $ | (24,474 | ) | $ | 697,334 | | $ | 58,721 | | $ | 756,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Profit for the year | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,797 | | | — | | | 3,797 | | | 9,491 | | | 13,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income/(loss) for the year | | — | | | — | | | (10,561) | | | — | | | 328 | | | 804 | | | — | | | — | | | — | | | — | | | (9,429) | | | (2,361) | | | (11,790) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income/(loss) for the year | | — | | | — | | | (10,561) | | | — | | | 328 | | | 804 | | | — | | | — | | | 3,797 | | | — | | | (5,632) | | | 7,130 | | | 1,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue of shares, net of transaction costs of Nil (Refer Note 27) | | 153 | | | 5,302 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | 5,455 | | | — | | | 5,455 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share based compensation (Refer Note 28) | | 18 | | | 7,191 | | | — | | | — | | | — | | | — | | | — | | | — | | | 23,324 | | | — | | | 30,533 | | | 459 | | | 30,992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue out of treasury shares (Refer Note 29) | | — | | | (1,013) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,307 | | | 6,294 | | | — | | | 6,294 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in ownership interests in subsidiaries that do not result in a loss of control | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,348 | | | — | | | — | | | 6,348 | | | 2,452 | | | 8,800 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as at March 31, 2016 | $ | 30,793 | | $ | 356,865 | | $ | (60,609) | | $ | 6,622 | | $ | 1,856 | | $ | (1,179) | | $ | (22,752) | | $ | 69,586 | | $ | 376,317 | | $ | (17,167) | | $ | 740,332 | | $ | 68,762 | | $ | 809,094 | |
The As such, the accompanying notes form an integral part of these consolidated financial statements.
statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
EROS INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED MARCH 31, 2015
| | | | | | Other components of equity | | Reserves | | | | | | | | | |
| | Share
capital | | Share
premium
account | | Currency
translation
reserve | | Available
for sale
fair value reserves | | Revaluation
reserve | | Hedging
reserve | | Reverse
acquisition
reserve | | Merger
reserve | | Retained
earnings | | JSOP
reserve | | Equity
Attributable to
Shareholders
of EROS
International
PLC | | Non-
controlling
interest | | Total
equity | |
| | (in thousands) | |
| Balance as at April 1, 2014 | $ | 26,322 | | $ | 223,333 | | $ | (43,858 | ) | $ | 5,802 | | $ | 1,528 | | $ | (2,787 | ) | $ | (22,752 | ) | $ | 62,203 | | $ | 303,405 | | $ | (25,505 | ) | $ | 527,691 | | $ | 50,350 | | $ | 578,041 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Profit for the year | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 40,344 | | | — | | | 40,344 | | | 8,986 | | | 49,330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income/(loss) for the year | | — | | | — | | | (6,190 | ) | | 820 | | | — | | | 804 | | | — | | | — | | | — | | | — | | | (4,566 | ) | | (1,057 | ) | | (5,623 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income/(loss) for the year | | — | | | — | | | (6,190 | ) | | 820 | | | — | | | 804 | | | — | | | — | | | 40,344 | | | — | | | 35,778 | | | 7,929 | | | 43,707 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue of shares, net of transaction costs of $61 (Refer Note 27) | | 4,026 | | | 106,001 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 110,027 | | | — | | | 110,027 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issue out of treasury shares | | — | | | (143 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,031 | | | 888 | | | — | | | 888 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share based compensation (Refer Note 28) | | 274 | | | 16,194 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,447 | | | — | | | 21,915 | | | — | | | 21,915 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in ownership interests in subsidiaries that do not result in a loss of control | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,035 | | | — | | | — | | | 1,035 | | | 442 | | | 1,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as at March 31, 2015 | $ | 30,622 | | $ | 345,385 | | $ | (50,048 | ) | $ | 6,622 | | $ | 1,528 | | $ | (1,983 | ) | $ | (22,752 | ) | $ | 63,238 | | $ | 349,196 | | $ | (24,474 | ) | $ | 697,334 | | $ | 58,721 | | $ | 756,055 | |
Use of Estimates
The accompanying notes form an integral partpreparation of these consolidated financial statements.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 | NATURE OF OPERATIONS, GENERAL INFORMATION AND BASIS OF PREPARATION |
Eros International Plc (“Eros” or the “Company”) and its subsidiaries’ (together with Eros, the “Group”) principal activities include the acquisition, co-production and distribution of Indian films and related content. Eros International Plc is the Group’s ultimate parent company. It is incorporated and domiciled in the Isle of Man. The address of Eros International Plc’s registered office is Fort Anne, Douglas, Isle of Man IM1 5PD.
The consolidated financial statements ofin conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the Group have been prepared in accordance with International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting Standards Board (IASB). The financial statements have been prepared on accrual basis and under the historical cost convention on a going concern basis, with the exceptionreported amounts of revaluation of certain properties, plants and equipments certain financial instruments and assets acquired and liabilities assumed in a business combination that have been measured at fair value as required by relevant IFRSs.
The Group’s accounting policies as set out below have been applied consistently throughout the Group to all the periods presented, unless otherwise stated. The financial statements of Eros and each of it’s subsidiaries are measured using the currency of the primary economic environment in which these entities operate (i.e. the functional currency). The consolidated financial statements are presented in US Dollars (USD) which is the presentation currency of the Company and has been rounded off to the nearest thousands.
The consolidated financial statements for the year ended March 31, 2017 were approved by the Eros Board of Directors and authorized for issue on July 31, 2017.
The Group meets its day to day working capital requirements and funds its investment in content primarily through a variety of banking arrangements and cash generated from operations. Under the terms of such banking arrangements the Group is able to draw down in the local currencies of its operating businesses. The net foreign currency monetary assets and liabilities position at March 31, 2017 and 2016 are shown in Note 32.
The borrowings (as set out in Note 23) are subject to individual covenants which vary but include provisions such as a fixed charge over certain assets, total available facilities against statement of financial position value, net debt against earnings before interest, income, tax expense, depreciation, certain impairments and amortization (“EBITDA”), certain financial ratios (such as a leverage ratio and fixed cover ratio), and a negative pledge that restricts the Group’s ability to incur liens, security interests or similar encumbrances or arrangements on its assets. The Group is cash generating before capital expenditures and is in full compliance with the covenants contained in its existing debt facilities.
The Group is exposed to uncertainties arising from the global economic climate and also in the markets in which it operates. Market conditions could lead to lower than anticipated demand for the Group’s products and services and exchange rate volatility could also impact reported performance. Management has considered the impact of these and other uncertainties and factored them into their financial forecasts and assessment of covenant headroom. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance (and available mitigating actions), show that the Group will be able to operate within the expected limits of the facilitiesbalance sheet dates, as well as the reported amounts of revenues and provide headroom againstexpenses during the covenants for the foreseeable future. For this reason, Management continues to adopt the going concern basis in preparing the consolidated financial statements.
3 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3.1. | Overall Considerations |
reporting periods. The most significant accounting policies that have been usedestimates made by management in the preparation of thesethe financial statements relate to ultimate revenue and costs used for the amortization of investment in films and television programs; estimates of sales returns and other allowances and provisions for doubtful accounts; estimates related to the revenue recognition of sales or usage-based royalties; income taxes including the assessment of valuation allowances for deferred tax assets; accruals for contingent liabilities; and impairment assessments for investment in films and television programs and property and equipment. Actual results could differ from such estimates.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Period Ended March 31, 2019
Amounts included in the consolidated financial statements and accompanying footnotes as of March 31, 2019 and for the six-months then ended are summarized below. Financial statementsunaudited.
Summary of Significant Accounting Policies
Revenue Recognition
The Company generates revenue principally from the licensing of content in domestic theatrical exhibition, home entertainment (e.g., digital media and physical sales), television, and international market places.
Revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services or goods. Revenues do not include taxes collected from customers on behalf of taxing authorities such as sales tax and value-added tax.
Licensing Arrangements
The Company's content licensing arrangements include fixed fee and minimum guarantee arrangements, and sales or usage-based royalties.
Fixed Fee or Minimum Guarantees: The Company's fixed fee or minimum guarantee licensing arrangements may, in some cases, include multiple titles, multiple license periods (windows) with a substantive period in between the windows, rights to exploitation in different media, or rights to exploitation in multiple territories, which may be considered distinct performance obligations. When these performance obligations are subjectconsidered distinct, the fixed fee or minimum guarantee in the arrangement is allocated to the applicationtitle, window, media right or territory as applicable, based on estimates of significant accountingrelative standalone selling prices. The amounts related to each performance obligation (i.e., title, window, media or territory) are recognized when the content has been delivered, and the window for the exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content.
Sales or Usage Based Royalties: Sales or usage based royalties represent amounts due to the Company based on the “sale” or “usage” of the Company's content by the customer, and revenues are recognized at the later of when the subsequent sale or usage occurs, or the performance obligation to which some or all the sales or usage-based royalty has been allocated and has been satisfied (or partially satisfied). Generally, when the Company licenses completed content (with standalone functionality, such as a movie, or television show) its performance obligation will be satisfied prior to the sale or usage. When the Company licenses intellectual property that does not have stand-alone functionality (e.g., brands, themes, logos, etc.), its performance obligation is generally satisfied in the same period as the sale or usage. The actual amounts due to the Company under these arrangements are generally not reported to the Company until after the close of the reporting period. The Company records revenue under these arrangements for the amounts due and not yet reported to the Company based on estimates of the sales or usage of these customers and judgments.pursuant to the terms of the contracts. Such estimates are based on information from the Company's customers, historical experience with similar titles in that market or territory, the performance of the title in other markets, and/or data available in the industry.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Revenues by Market or Product Line
The following describes the revenues generated by market or product line.
Theatrical - Theatrical revenues are derived from the domestic theatrical release of motion pictures licensed to theatrical exhibitors on a picture-by-picture basis (distributed by the Company directly in the United States). Revenue from the theatrical release of feature films are treated as sales or usage- based royalties, are recognized as revenue starting at the exhibition date and are based on the Company's participation in box office receipts of the theatrical exhibitor.
Home Entertainment - Home entertainment consists of Digital Media and Physical Sales.
Digital Media - Digital media includes digital transaction revenue sharing arrangements (pay-per-view and video-on-demand platforms, electronic sell through ("EST"), and digital rental) and licenses of content to digital platforms for a fixed fee.
Digital Transaction Revenue Sharing Arrangements: Primarily represents revenue sharing arrangements with certain digital media platforms which generally provide that, in exchange for a nominal or no upfront sales price, the Company shares in the rental or sales revenues generated by the platform on a title-by-title basis. These digital media platforms generate revenue from rental and EST arrangements, such as download-to-own, download-to-rent, and video-on-demand. These revenue sharing arrangements are summarizedrecognized as sales or usage-based royalties based on the performance of these platforms and pursuant to the terms of the contract, as discussed above.
Licenses of Content to Digital Platforms: Primarily represents the licensing of content to subscription-video-on-demand ("SVOD") or other digital platforms for a fixed fee. As discussed above, revenues are recognized when the content has been delivered and the window for the exploitation right in Note 38.that territory has begun.
Physical Sales- Physical Sales represent the sale of motion pictures and television shows (produced or acquired) on physical discs (DVD’s, Blu-ray, and 4K Ultra HD) in the retail market. Revenues are recognized, net of an allowance for estimated returns and other allowances, on the later of receipt by the customer or “street date” (when it is available for sale by the customer).
Television - Television revenues are derived from the licensing to domestic markets (linear pay, basic cable, free television markets, syndication) of motion pictures (including theatrical productions and acquired films). Television also includes revenue from licenses to SVOD platforms in which the initial license of a television series is to an SVOD platform. Revenues associated with a title, right, or window from television licensing arrangements are recognized when the feature film is delivered and the window for the exploitation right has begun.
International - International revenues are derived from (1) licensing of the Company's productions, acquired films, and catalog product to international distributors, on a territory-by-territory basis; (2) the direct distribution of our productions, acquired films, and our catalog product in the United Kingdom; and (3) licensing to international markets of scripted and unscripted series, television movies, mini-series and non-fiction programming. License fees and minimum guarantee amounts associated with title, window, media or territory, are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the contract, and the right to exploit the feature film or television program in that window, media or territory has commenced. Revenues are also generated from sales or usage based royalties received from international distributors based on their distribution performance pursuant to the terms of the contracts after the recoupment of certain costs in some cases, and the initial minimum guarantee, if any, and are recognized when the sale by our customer generating a royalty due to us has occurred.
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
3.2. | Basis of Consolidation |
Other - Other revenues are derived from the licensing of the Company's film intellectual property for merchandising (i.e., licenses of motion picture characters or logos) and scripted and unscripted content to linear pay, basic cable, free television markets, and other ancillary markets.
The Group financial statements consolidate resultsRevenues from other content are recognized when the license period has begun. Revenues from the licensing of television are recognized when the content has been delivered.
Deferred Revenue
Deferred revenue relates primarily to customer cash advances or deposits received prior to when the Company satisfies the corresponding performance obligation.
Payment terms vary by location and type of customer and the nature of the licensing arrangement: however, other than certain multi-year license arrangements, payments are generally due within 60 days after revenue is recognized. For certain multi-year licensing arrangements, primarily in the television, digital media, and international markets, payments may be due over a longer period. When we expect the period between fulfillment of our performance obligation and the receipt of payment to be greater than a year, a significant financing component is present. In these cases, such payments are discounted to present value based on a discount rate reflective of a separate financing transaction between the customer and the Company, at contract inception. The significant financing component is recorded as a reduction to revenue and entities controlledaccounts receivable initially, with such accounts receivable discount amortized to interest income over the period to receipt of payment. The Company does not assess contracts with deferred payments for significant financing components if, at contract inception, we expect the period between fulfillment of the performance obligation and subsequent payment to be one year or less.
In other cases, customer payments are made in advance of when the Company fulfills its performance obligation and recognizes revenue. This primarily occurs under television production contracts, in which payments may be received as the production progresses, international motion picture contracts, where a portion of the payments are received prior to the completion of the movie and prior to license rights start dates and pay television contracts with multiple windows with a portion of the revenues deferred until the subsequent exploitation windows commence. These arrangements do not contain significant financing components because the reason for the payment structure is not for the provision of financing to the Company, but rather to mitigate the Company's risk of customer non-performance and incentivize the customer to exploit the Company's content.
Film and Television Costs
Film costs represent the costs of films produced by the Company, and its subsidiary undertakings. Control exists whenor for which the Company has existing rights that giveacquired distribution rights. For films produced by the Company, capitalized costs include all direct production costs, production overhead, and capitalized interest. Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for the current abilityproduction of films and excludes selling and marketing costs. The amount of interest capitalized is an allocation of interest cost incurred during the period required to directcomplete the activities which affectproduction, but not while the entity’s returns;project is in development. During the Company is exposedyears ended September 30, 2017, 2018 and 2019, interest of $860, $4,033 and $2,573, respectively, was capitalized to or hasfilms in production. During the six months ended March 31, 2019 and 2020, interest of $1,348 and $368, respectively, was capitalized to films in production. During the years ended September 30, 2017, 2018 and 2019, overhead of $1,935, $4,418 and $5,495, respectively, was capitalized to films in production. During the six months ended March 31, 2019 and 2020, overhead of $3,275 and $394, was capitalized to films in production.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Film costs consist of four categories: (1) films in development, (2) films in production, (3) films completed and not released and (4) released films. Films in development primarily include the costs of acquiring film rights to a return which may vary depending onbooks or original screenplays and costs to adapt such projects, as well as the entity’s performance;costs of scripted development for original ideas. Such costs are capitalized and, upon commencement of production, will be transferred to films in production. Films in development are written off at the Company has the ability to use its powers to affect its own returns from its involvement with the entity.
Unrealized gains on transactions between the Group and its subsidiaries are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairmentearlier of the asset transferred. Amounts reporteddate they are determined not to be recoverable or when abandoned, or three years from the date of initial investment if the production has not been greenlit. Films in production include the financial statements of subsidiariesinventory cost associated with projects that have been adjusted where necessaryselected for release and for which principal photography has commenced. Films will be held as an asset in production until release, including completed but not released films, at which time the asset balance is transferred to ensure consistency with the accounting policies adopted by the Group.
Business combinationsreleased films. Capitalized film costs are accounted for under the purchase method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary priorsubject to acquisition. On initial recognition, the assets and liabilities of the subsidiaryimpairment testing when certain triggering events are included in the consolidated statement of financial position at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Transaction costs that the company incurs in connection with a business combination such as finder’s fees, legal fees, due diligence fees, and other professional and consulting fees are expensed as incurred. Goodwill is stated after separating out identifiable intangible assets. Goodwill represents the excess of acquisition cost overidentified. If the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition.
Changes in controlling interest in a subsidiary that do not result in gaining or losing control are not business combinations as defined by IFRS 3. The Group adopts the “equity transaction method” which regards the transaction as a realignment of the interests of the different equity holders in the Group. Under the equity transaction method an increase or decrease in the Group’s ownership interest is accounted for as follows:
| · | the non-controlling component of equity is adjusted to reflect the non-controlling interest revised share of the net carrying value of the subsidiaries net assets; |
| · | the difference between the consideration received or paid and the adjustment to non-controlling interests is debited or credited to a different component of equity — merger reserves; |
| · | no adjustment is made to the carrying amount of goodwill or the subsidiaries’ net assets as reported in the consolidated financial statements; and |
| · | no gain or loss is reported in the consolidated statements of income. |
IFRS 8 Operating Segments (“IFRS 8”) requires operating segments to be identified on the same basis as is used internally for the review of performance and allocation of resources by the Group chief executive officer. The revenues of films are earned over various formats; all such formats are functional activities of filmed entertainment and these activities take place on an integrated basis. The management team reviews the financial information on an integrated basis for the Group as a whole, with respective heads of business for each region and in accordance with IFRS 8, the Company provides a geographical split as it considers that all activities fall within one segment of business which is filmed entertainment. The management team also monitors performance separately for individual films for at least 12 months after the theatrical release. Certain resources such as publicity and advertising, and the cost of a film are also reviewed globally.
Eros has identified four geographic areas, consisting ofwere to fall below its main geographic areas (India, North America and Europe), together with the rest of the world.
Revenueunamortized costs, an impairment is recognized, net of sales related taxes, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, the product is delivered or services have been rendered and collectability is reasonably assured. The Group considers the terms of each arrangement to determine the appropriate accounting treatment.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following additional criteria apply in respect of various revenue streams within filmed entertainment:
| · | Theatrical — Contracted minimum guarantees are recognized on the theatrical release date. The Group’s share of box office receipts in excess of the minimum guarantee is recognized at the point they are notified to the Group. |
| · | Television —License fees received in advance which do not meet all the above criteria are included in deferred income until the above criteria is met. In arrangements for catalogue sales the Company recognizes revenue if above recognition criteria is met such as a valid sales contract exists, all films are delivered, the Company is reasonably certain on collectability, and the Company’s contractual obligations are complete, even if the arrangement provides for a deferred payment term up to a year. |
| · | Digital and ancillary — Digital and ancillary media revenues are recognized at the earlier of when the content is accessed or declared. |
| · | Other — DVD, CD and video distribution revenue is recognized on the date the product is delivered or if licensed in line with the above criteria. Visual effects, production and other fees for services rendered by the Group and overhead recharges are recognized in the period in which they are earned and in certain cases, the stage of production is used to determine the proportion recognized in the period. |
Goodwill represents the excess of the consideration transferred in a business combination over the fair value of the Group’s share of the identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses. Gain on bargain purchase is recognized immediately after acquisition in the consolidated statement of income.
Intangible assets acquired by the Group are stated at cost less accumulated amortization less impairment loss, if any, except those acquired as part of a business combination, which are shown at fair value at the date of acquisition less accumulated amortization less impairment loss, if any (film production cost and content advances are transferred to film and content rights at the point at which content is first exploited). “Eros” (the “Trade name”) is considered to have an indefinite life because of the institutional nature of the corporate brand name, its proven ability to maintain market leadership and the Group’s commitment to develop, enhance and retain its value. The carrying value is reviewed at least annually for impairment and adjusted to recoverable amount if required.
Content
Investments in films and associated rights, including acquired rights and distribution advances in respect of completed films, are stated at cost less amortization less provision for impairment. Costs include production costs, overhead and capitalized interest costs net of any amounts received from third party investors. A charge is made to write down the cost of completed rights over the estimated useful lives, writing off more in year one which recognizes initial income flows and then the balance over a period of up to nine years, except where the asset is not yet available for exploitation. The average life of the assets is the lesser of 10 years or the remaining life of the content rights. The amortization charge is recognized in the consolidated statement of income within cost of sales. The determination of useful life is based upon management’s judgment and includes assumptions on the timing and future estimated revenues to be generated by these assets, which are summarized in Note 38.3.
Others
Other intangible assets, which comprise internally generated and acquired software used within the Group’s digital, home entertainment and internal accounting activities, are stated at cost less amortization less provision for impairment. A charge is made to write down the cost of completed rights over the estimated useful lives except where the asset is not yet available for exploitation. The average life of below intangible assets ranges from 3-6 years. The amortization charge is recognized in the consolidated statements of income within administrative expenses as stated below:
| | Life of asset | Rate of
amortization
% straight line
per annum | |
Information technology assets | | 3 years | 33 | |
Other intangibles | | 3 - 6 years | 17 - 33 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Subsequent expenditure
Expenditure on capitalized intangible assets subsequent to the original expenditure is included only when it increases the future economic benefits embodied in the specific asset to which it relates.
Information technology assets
An internally generated intangible asset arising from the Group’s software development activities that is expected to be completed is recognized only if all the following criteria are met:
| · | an asset is created that can be identified (such as software and new processes); |
| · | it is probable that the asset created will generate future economic benefits; and |
| · | the development cost can be measured reliably. |
When these criterias are met and there are appropriate resources to complete development, the expenditure is capitalized at cost. Where these criteria are not met development expenditure is recognized as an expense in the period in which it is incurred. Internally generated intangible assets are amortized over their useful economic life from the date that they start generating future economic benefits.
3.7. | Impairment Testing of Goodwill, Other Intangible Assets and Property, Plant and Equipment |
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which Management monitors the related cash flows.
Goodwill and Trade names are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognizedrecorded for the amount by which the asset’s or cash-generating unit’s carrying amountunamortized capitalized costs exceeds its recoverable amount.the production’s fair value. The recoverable amount isCompany recorded film impairments of $3,596 for the higher ofyear ended September 30, 2017. There were no film impairments for the years ended September 30, 2018 and 2019 and for the six months ended March 31, 2019 and 2020. In determining the fair value reflecting market conditions lessof its films, the Company employs a discounted cash flows ("DCF") methodology that includes cash flow estimates of a film's ultimate revenue and costs to sell, and valueas well as a discount rate. The discount rate utilized in usethe DCF analysis is based on an internal discounted cash flow evaluation. Impairment losses recognized for cash-generating units, tothe weighted average cost of capital of the Company plus a risk premium representing the risk associated with producing a particular film or television program. An impairment is recorded in the amount by which goodwill has been allocated, are credited initially tothe unamortized costs exceed the estimated fair value of the film program. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying amountvalue of goodwill. Any remaining impairment loss is charged pro rata to the other assetsfilm costs may be required because of changes in the cash generating unit.management’s future revenue estimates.
Film and content rights are stated at the lower of unamortized cost and estimated recoverable amounts. In accordance with IAS 36 Impairment of Assets, film content costs are assessed for indication of impairment on a library basis as the nature of the Group’s business, the contracts it has in place and the markets it operates in do not yet make an ongoingrelated participations and residuals are amortized using the individual film evaluation feasible with reasonable certainty. Impairment losses on content advances are recognized when film production does not seem viable and refund of the advance is not probable.
With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist.
3.8. | Property, Plant & Equipment |
Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. Land and freehold buildings are shown at what Management believes to be their fair value,forecast method based on among other things, periodic but at least triennial valuations by an external independent valuer, less subsequent depreciation for freehold buildings. Any accumulated depreciation atthe proportion that the current year’s revenue bears to the estimate of ultimate revenue that management regularly reviews and revises when necessary. Ultimate revenue includes estimates over a period not to exceed ten years following the date of revaluation is eliminated against the gross carrying amountinitial release of the assetfilm.
Television costs primarily represent the costs the Company has incurred to produce scripted and the net amount is restatedunscripted television programs for third parties. The capitalized costs will be expensed to the revalued amount. Increasesstatement of operations when the program is delivered to the third party.
As of September 30, 2018 and 2019 and March 31, 2020, the Company’s film and television costs consist of the following:
| | September 30 | | | March 31 | |
| | | 2018 | | | 2019 | | | 2020 | |
| Film costs: | | | | | | | | | | | | |
| In development | | $ | 6,584 | | | $ | 12,475 | | | $ | 12,560 | |
| In production | | | 59,532 | | | | 41,809 | | | | 3,330 | |
| Completed but not released | | | — | | | | 25,555 | | | | — | |
| Released | | | 86,881 | | | | 56,156 | | | | 75,779 | |
| Total film costs | | | 152,997 | | | | 135,995 | | | | 91,669 | |
| | | | | | | | | | | | | |
| Television costs: | | | | | | | | | | | | |
| In development | | | 726 | | | | 1,514 | | | | 1,865 | |
| In production | | | 4,082 | | | | 4,443 | | | | 3,774 | |
| Total television costs | | | 4,808 | | | | 5,957 | | | | 5,639 | |
| Total film and television costs | | $ | 157,805 | | | $ | 141,952 | | | $ | 97,308 | |
The Company anticipates that approximately 68% of the costs of its completed films and 91% of the costs of its films in release as of March 31, 2020 will be amortized over the carrying amount arising on revaluation of freehold landnext 12 months and buildings are credited to other reserves in shareholders’ equity. Decreases that offset previous increases are charged against other reserves.3 years, respectively.
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
Depreciation is providedCo-Film Production Financing and Distribution
The Company enters into agreements with third parties to write - offco-produce certain of its theatrical and television productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements, primarily for theatrical productions, include studio and non-studio entities, both domestic and international. In several of these agreements, other parties control certain distribution rights. The Company records the amount received for the sale of an economic interest as a reduction of the cost of all property, plantthe film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, equipmenttherefore, receive a participation based on the third-party investors’ contractual interest in the profits or losses of the film. Typically, in these arrangements, the Company and the third party will split the profits, based on ownership interest, earned in each of the markets after distribution fees and costs are recouped from the proceeds received from the exploitation of the film. The Company projects the ultimate profit that will be recorded in connection with these arrangements and will amortize the net ultimate amount due to their residual value as stated below:
| | Life of Asset | | Rate of
depreciation
% straight line
per annum | |
Freehold building | | 10 years | | 2-10 | |
Furniture & fittings and equipment | | 5 years | | 15-20 | |
Vehicles and Plant & Machinery | | 3-5 years | | 20-30 | |
Material residual value estimates are updated as required, but at least annually, whether or notfrom the asset is revalued.investors to Direct operating expense using the individual film forecast method.
Advance paid towards the acquisition or improvement of property and equipment not ready for use before the reporting date are disclosed as capital work - in - progress.
Inventories primarily comprise of music CDs and DVDs, and are valued at the lower of cost and net realizable value. Cost in respect of goods for resale is defined as purchase price, including appropriate labor costs and other overhead costs. Costs in respect of raw materials is purchase price.Government Assistance
Purchase price is assigned using a weighted average basis. Net realizable value is defined as anticipated selling price or anticipated revenue less costThe Company has access to completion.government programs (tax credits) that are designed to promote film and television production and distribution in certain states within the United States and foreign countries.
3.10. | Cash and Cash Equivalents |
Tax credits earned with respect to expenditures on qualifying film and television productions are included as an offset to investment in films and television programs when the qualifying expenditures have been incurred provided that there is reasonable assurance that the credits will be realized.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held on deposit and amounts invested in hand, deposits heldmoney market funds. Restricted cash represented collateral for letters of credit pursuant to the Company’s Burbank office lease.
Accounts Receivable
Accounts receivable consist primarily of receivables from theatrical exhibitors, home entertainment, television partners and international distributors. Accounts receivable are reviewed monthly to assess collectability, and at call with banks, other short-term highly liquid investments which are readily convertible into knownSeptember 30, 2018 and 2019 and March 31, 2020 respectively, the allowance for doubtful accounts was immaterial.
Concentrations of Credit Risk and Financial Instruments
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company limits its exposure to credit loss by placing its cash in financial institutions it believes have high-credit quality. At times, these balances exceed the Federal Deposit Insurance Corporation limits.
The carrying amounts of cash and are subjectcash equivalents, accounts receivable, prepaid expenses, and accounts payable and accrued expenses approximate fair value due to insignificant risk of changes their short-term maturities.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in value. Bank overdrafts are shown within “Borrowings” in “Current liabilities”thousands, except share data)
Other Current Assets
Other current assets on the statementconsolidated balance sheets includes amounts receivable from co-finance partners, tax credits or incentives from local government jurisdictions, physical inventory, right of financial position.use assets, prepaid expenses and other current assets. Inventory represents home entertainment product inventory which consists of DVDs and Blu-ray discs and is stated at the lower of cost or net realizable value (first-in, first-out) method. When sold, costs of DVDs and Blu-ray discs sales, including shipping and handling costs, are included in direct operating expense in the accompanying statements of operations.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the following useful lives:
3.11.Furniture and fixtures | Restricted Deposits held with Banks7 years |
Deposits held with banks as security for overdraft facilities are included in restricted deposits held with bank.
3.12.Computer equipment and software | Borrowings3 years |
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost with any difference between the proceeds (net of transaction costs) and the redemption value recognized in the consolidated statement of income within finance costs over the period of the borrowings using the effective interest method. Finance costs in respect of film productions and other assets which take a substantial period of time to get ready for use or for exploitation are capitalized as part of the asset.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.
3.13.Website | Financial Instruments3 years |
Financial assets and financial liabilities are recognized when a Group entity becomes party to the contractual provisions of the instrument.
Financial assets and liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets or liabilities (other than financial assets and liabilities at fair value through profit and loss) and business combination are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit and loss are recognized immediately in consolidated statements of income.Financial assets and financial liabilities are offset against each other and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A financial instrument is held for trading if:
| Leasehold improvements | · | it has been acquired principally for the purpose of selling/repurchasing it in the near term; |
| · | on initial recognition itLease term or useful life, whichever is part of a portfolio of identified financial instruments that the Group manages together and has a recent pattern of short-term profit taking; or |
| · | it is a derivative that is not designated in a hedging relationship.shorter |
The fair valueCompany periodically reviews and evaluates the recoverability of financial instruments denominatedproperty and equipment. Where applicable, estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue estimates. If appropriate and where deemed necessary, a reduction in a foreign currencythe carrying amount is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange component forms part of its fair value gain or loss. Therefore for financial instruments that are classified as fair value through profit and loss, the exchange component is recognized in consolidated statements of income through “other (gains)/losses.”
Financial assets are divided into the following categories:
| · | financial assets at fair value through profit and loss; |
| · | held-to-maturity investments; and |
| · | available-for-sale financial assets. |
Financial assets are assigned to the different categories by management on initial recognition, depending on the nature and purpose of the financial assets. The designation of financial assets is re-evaluated at every reporting date at which a choice of classification or accounting treatment is available.recorded.
LoansDebt Issuance Costs and receivablesDebt Discount
LoansThe Company’s unamortized debt issuance costs at September 30, 2018 and receivables2019 and March 31, 2020 were $9,095, $6,290 and $4,580 respectively. Unamortized debt issuance costs are non-derivative financial assets with fixed or determinable payments thatreflected in Revolving Credit Facilities and Term Loan Due to Related Party in the accompanying consolidated balance sheets. Debt issuance costs are not quoted in an active market. Loans and receivables (including trade and other receivables, bank and cash balances) are measured subsequent to initial recognition at amortized cost using the straight-line method, which approximates the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognized inover the consolidate statement of income.
Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amountrelated term of the write-down is determined asCompany’s borrowings. At September 30, 2018 and 2019 and March 31, 2020, gross debt issuance costs were $15,049, $15,442 and $15,422, respectively. Amortization of debt issuance costs for the difference betweenyears ended September 30, 2017, 2018 and 2019 was $2,949, $3,005 and $3,178 respectively. Amortization of debt issuance costs for the asset’s carrying amountsix months ended March 31, 2019 and 2020 was $1,566 and $1,710, respectively. Amortization of debt discount costs for the present value of estimated future cash flows.
Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable paymentsyears ended September 30, 2017, 2018 and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity.
Available-for-sale financial assets
Available-for-sale financial assets include non-derivative financial assets that are either designated as such or do not qualify2019 was $155 for inclusion in anyall three fiscal years. Amortization of the other categoriesdebt discount costs for the six months ended March 31, 2019 and 2020 was $78 for both periods. The amortization of financial assets. All financial assets within this category are measured subsequently at fair value, with changes in fair value recognized in other comprehensive income. Gainsthe debt issuance and losses arising from investments classifieddiscount was reflected as available-for-sale are recognizedinterest expense in the consolidated statements of income when they are sold or when the investment is impaired.
In the case of impairment of available-for-sale assets, any loss previously recognized in other comprehensive income is transferredoperations. Any amounts that were paid to the consolidate statement of income. Impairment losses recognizeddebt issuer were treated as a reduction in the consolidate statementproceeds received by the issuer and are considered a discount on the issuance and not an issuance cost. As of income on equity instruments are not reversed throughSeptember 30, 2018 and 2019 and March 31, 2020, the consolidated statements of income. Impairment losses recognized previously ontotal debt securities are reversed throughwas reduced by $582, $427 and 349, respectively. The discount is being amortized using the consolidated statement of income when the increase can be related objectively to an event occurring after the impairment loss was recognized in the consolidate statement of income.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Where the Group consider that fair value can be reliably measured the fair values of financial instruments that are not traded in an active market are determined by using valuation techniques. The Group applies its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each statement of financial position date. Available-for-sale equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured are measured at cost less impairment at the end of each reporting period.
An assessment for impairment is undertaken at least at each reporting date.
A financial asset is de-recognized only where the contractual rights to the cash flows from the asset expire or the financial asset is transferred and that transfer qualifies for de-recognition. A financial asset is transferred if the contractual rights to receive the cash flows of the asset have been transferred or the Group retains the contractual rights to receive the cash flows of the asset but assumes a contractual obligation to pay the cash flows to one or more recipients. A financial asset that is transferred qualifies for de-recognition if the Group transfers substantially all the risks and rewards of ownership of the asset, or if the Group neither retains nor transfers substantially all the risks and rewards of ownership but does transfer control of that asset.
3.15. | Financial liabilities |
Financial liabilities are classified as either ‘financial liabilities at fair value through profit or loss’ or ‘other financial liabilities’. Financial liabilities are subsequently measured at amortized cost usingstraight-line method, which approximates the effective interest method, or at fair value through profit or loss.over the term of the related debt.
Financial
Effective October 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, lessees classify arrangements meeting the definition of a lease as operating or financing leases, and leases are recorded on the consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are classified as at fair value through profit or loss when the financial liability is held for trading such as a derivative, except for a designatedincreased by interest and effective hedging instrument, or if upon initial recognition it is thus designated to eliminate or significantly reduce measurement or recognition inconsistency or it forms part of a contract containing one or more embedded derivativesreduced by payments each period, and the contractright of use asset is designated as fair value through profitamortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease payments that are based on an index or loss.
Financial liabilities at fair value through profit or loss are stated at fair value. Any gains or losses arising from held for trading financial liabilities are recognized in consolidated statements of income. Such gains or losses incorporate any interest paid andrate are included in the “other gainsmeasurement of right-of-use assets and losses” line item.lease liabilities at lease inception. All other variable lease payments are expensed as incurred and are not included in the measurement of right-of-use assets and lease liabilities.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Other financial liabilities (including borrowingIn calculating the right-of-use asset and tradelease liability, the Company used the lease components. The non-lease components; common area maintenance expenses, insurance, taxes, utilities, etc. charged by the landlord are recorded as variable lease expenses. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and other payables) are subsequently measured at amortized cost usinginstead recognizes rent expense on a straight-line basis over the effective interest method.lease term.
The effective interest method is a method of calculatingOperating lease right-of-use assets, representing the amortized cost of a financial liability and of allocating interest expense overCompany's right to use the relevant period. The effective interest rate isunderlying asset for the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
A financial liability is derecognized only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires. Changes in liabilities’ fair value that are reported in profit or losslease term, are included in the "Other assets" line item in the Company's March 31, 2020 consolidated balance sheet. Operating lease liabilities, representing the present value of the Company's obligation to make payments over the lease term, are included in the “Accounts payable and accrued liabilities” and “Other liabilities” line items in the Company's March 31, 2020 consolidated balance sheet.
There are currently no finance leases as of March 31, 2020.
Upon adoption of the new guidance, The Company recognized lease liabilities on the Company’s consolidated balance sheet for its operating leases of approximately $11.7 million, with a corresponding right-of-use assets balance of $8.5 million, net of existing lease incentives of $3.2 million previously classified in accounts payable and accrued expenses. The adoption had no material impact on the Company’s consolidated statement of income within ‘finance costs’ or “finance income”.
3.16. | Derivative Financial Instruments |
operations.The Group uses derivative financial instruments (“derivatives”) to reduce its exposure to interest rate movements.Company adopted the standard utilizing the modified retrospective approach, and therefore, results for reporting period beginning after October 1, 2019 are presented under the new guidance, while prior periods have not been adjusted (see further description in the Recent Accounting Pronouncements section below).
Derivatives are initially recognized at fair value at the date the derivative contracts are entered intoDistribution and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in consolidated statements of income immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the profit or loss depends on the nature of the hedge relationship.Marketing Expenses
AtDistribution and marketing expenses are expensed as incurred. Distribution and marketing expenses for the inception ofyears ended September 30, 2017, 2018 and 2019 were $72,554, $230,336 and $200,900. Distribution and marketing expenses for the hedge relationship, the Group documents the relationship between the hedging instrumentsix months ended March 31, 2019 and the hedged item, along with its risk management objectives2020 was $87,865 and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS$95,047.
Cash flow hedgingEquity-Based Compensation
The effective portion of changesCompany accounts for share-based payments in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements. ASC 718 establishes fair value of derivatives that are designatedas the measurement objective in accounting for share-based payment arrangements and qualify as cash flow hedges is recognizedrequires all companies to apply a fair-value based measurement method in other comprehensive income and accumulated under the heading of other reserves. The gain or loss relating to the ineffective portion is recognized immediately in consolidated statements of income, and is included in the ‘other gains and losses’ line item.accounting for generally all share-based payment transactions with employees.
Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to consolidated statements of income in the periods when the hedged item is recognized in consolidated statements of income, in the same line of the consolidated statement of income as the recognized hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognized in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.Income Taxes
Cash flow hedge accountingThe Company is discontinued whentreated as a corporation for income tax purposes. The Company records income taxes under the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive incomeasset and accumulated in equity at that time remains in equityliability method, whereby deferred tax assets and is recognized when the forecast transaction is ultimately recognized in consolidated statements of income. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in consolidated statements of income.
Provisionsliabilities are recognized whenbased on the Group hasfuture tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. The carrying amounts of deferred tax assets are reduced by a present legal or constructive obligation as a result of a past event,valuation allowance, if based on available evidence, if it is more likely than not that an outflow of resources will be required to settle the obligations and can be reliably measured. Provisions are measured at management’s best estimate of the expenditure required to settle the obligations at the statement of financial position date and are discounted to present value where the effect is material.
Leases in which significantly all the risks and rewards incidental to ownership are not transferred to the lessee are classified as operating leases. Payments under such leases are charged to the consolidated statements of income on a straight line basis over the period of the lease.
Taxation on profit and loss comprises current income tax and deferred income tax. Tax is recognized in the consolidated statement of income except to the extent that it relates to items recognized directly in equity or other comprehensive income in which case it is recognized in equity or other comprehensive income.
Current income tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted at the reporting date along with any adjustment relating to tax payable in previous years.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted at the statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled in the appropriate territory.
Deferred income tax in respect of undistributed earnings of subsidiaries is recognized except where the Group is able to control the timing of the reversal of the temporary difference and that the temporary difference will not reverse inbe realized. Accordingly, the foreseeable future. Deferred income tax assets are recognizedneed to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilized.
Deferred income tax assets and deferred income tax liabilities are offset if, and only if the Group has a legally enforceable right to set off current tax assets against current tax liabilities and theestablish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, the deferredduration of statutory carryforward periods, and tax liabilities relateplanning alternatives. From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination, based on their technical merits. The Company’s policy is to recognize interest and/or penalties related to income taxes levied bytax matters in income tax expense. Management has determined that there were no uncertain tax positions for which recognition of a liability for any of the same taxation authority on either the same taxable entity or different taxable entities which intend eitherperiods presented.
STX Filmworks, Inc.
Notes to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, Audited Consolidated Financial Statements
(in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSthousands, except share data)
The Group operates defined contribution pension plans and healthcare and insurance plans on behalf of its employees. The amounts due are all expensed as they fall due.
In accordance with IFRS 2 “Share Based Payments”, the fair value of shares or options granted is recognized as personnel costs with a corresponding increase in equity. The fair value is measured at the grant date and spread over the period during which the recipient becomes unconditionally entitled to payment unless forfeited or surrendered.Foreign Currency Translation
The fair valuefunctional currency of share options grantedforeign subsidiaries is measured using the Black Scholes model or a Monte-Carlo simulation model, each taking into account the terms and conditions upon which the grants are made. At each statement of financial position date, the Group revises its estimate of the number of equity instruments expected to vest as a result of non-market-based vesting conditions. The amount recognized as an expense is adjusted to reflect the revised estimate of the number of equity instruments that are expected to become exercisable, with a corresponding adjustment to equity reserves. None of the Group plans feature any options for cash settlements.
Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares are allocated to share capital with any excess being recorded as share premium.
Transactions in foreign currencies are translated at the rates of exchange prevailing on the dates of the transactions.local currency. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the prevailing rates of exchange rate in effect at the reporting date. Non-monetarybalance sheet dates. Foreign revenues and expense items that are measured at historical cost in a foreign currency are translated at the exchange rate on the transaction date. Adjustments to translate those statements into U.S. dollars are recorded in accumulated other comprehensive income (loss) in stockholders’ deficit. Foreign currency transaction gains and losses are included in the consolidated statements of operations in general and administrative expense.
Derivative Investments and Hedging Activities
Derivative financial instruments are used by the Company in the management of its foreign currency exposures. The Company’s policy is not to use derivative financial instruments for trading or speculative purposes.
The Company enters into forward foreign exchange contracts to hedge its foreign currency exposure of a foreign subsidiary and on future production expenses denominated in various foreign currencies. The Company evaluates whether the foreign exchange contracts qualify for hedge accounting at the dateinception of the transaction. Non-monetary items that are measured atcontract. The fair value in a foreign currencyof the forward exchange contracts are translated usingrecorded on the exchange rates at the date whenconsolidated balance sheets. Changes in the fair value was determined.of the foreign exchange contracts are reflected in the consolidated statements of operations. Gains and losses realized upon settlement of the foreign exchange contracts related to productions are amortized to the consolidated statements of operations on the same basis as the production costs being hedged.
Any exchange differences arising onContingencies and Litigation
In the settlementordinary course of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognized inbusiness, the income statement in the period in which they arise. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at rates prevailing at the dateCompany is subject to various routine litigation matters. The Company establishes loss provisions for claims when the fair value was determined. Non-monetary items that are measured in termsloss is both probable and can be reasonably estimated. If either or both of historical cost in a foreign currencythe criteria are not retranslated.met, the Company assesses whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such proceedings, the Company discloses the estimate of the amount of loss or possible range of loss, or discloses that an estimate of loss cannot be made, as applicable.
Impact of Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be made to lessor, on its balance sheet for all operating leases greater than 12 months. The Company adopted ASU 2016-02 as of October 1, 2019, using the modified retrospective approach by recording a right-of-use asset after an offset for existing deferred rent and a lease liability for operating leases of $8,494 and $11,745, respectively, at that date; the Company did not have any finance lease assets and liabilities upon adoption. Adoption of the ASU did not have an effect on retained earnings. The Company availed itself of the practical expedients provided under ASU 2016-02 and its subsequent amendments regarding identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components. The Company continues to account for leases in the prior period financials statements under ASC Topic 840. See Note 4 Leases for additional information on leases.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
In March 2019 the FASB issued ASU 2019-02, Entertainment—Films—Other Assets—Film Costs (“ASU 2019-02”). ASU 2019-02 aligns the cost capitalization requirements for episodic television series with the guidance for films in ASC 926-20 and adds new disclosure requirements. Entities that predominantly monetize films or license agreements together with other films and/or license agreements will be required to test the “film group” for impairment rather than test each individual title. Entities that monetize content in a film group must reassess their estimate of the use of a film in the film group and account for any changes prospectively. The standard is effective for fiscal periods beginning after December 15, 2019 and can be early adopted. The Company is currently evaluating the impact of the adoption of this standard on its financial statementsstatements.
On October 1, 2018, the Company adopted, on a modified retrospective basis, ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of foreign subsidiaries and related goodwill are translated at the prevailing rate of exchange at the statement of financial position date. Income and expenses are translated at the monthly average rate. The exchange differences arisingnew revenue framework is that an entity should recognize revenue from the retranslationtransfer of promised goods or services to customers in an amount that reflects the foreign operations are recognized in other comprehensive income and taken inconsideration the entity expects to receive for those goods or services. The Company determines revenue recognition through the “currency translation reserve” in equity. On disposal of a foreign operation the cumulative translation differences (including, if applicable, gains and losses on related hedges) are transferred to the consolidated statement of income as part of the gain or loss on disposal.following five step model:
3.22. | Transactions Costs Relating· | Identification of a contract with a customer |
| · | Identification of the performance obligation in the contract |
| · | Determination of the transaction price |
| · | Allocation of the transaction price to Equity Transactionsthe performance obligation in the contract |
| · | Recognition of revenue when or as the performance obligations are satisfied |
The Group defers costsadoption of the new accounting guidance did not result in issuing or acquiring its own equity instrumentssignificant changes to the extent theyCompany's reported operating results. The Company recorded a transition adjustment for all open contracts existing as of October 1, 2018, of $2.9 million as an increase to the opening balance of accumulated deficit related principally to the items noted below:
Sales or Usage Based Royalties: The Company receives royalties from certain domestic and international distributors and other transactional digital distribution partners based on the sales made by these distributors after recoupment of a minimum guarantee, if applicable. Under prior guidance, the Company recorded these sales or usage-based royalties after receiving statements from the licensee and/or film distributor. Under the new guidance, revenues are incremental costs directly attributable to an equity transaction that otherwise would have been avoided. Such costs are accounted for as a deduction from equity (net of any related income tax benefit) upon completionrecorded based on best estimates available of the equity transaction. The costsamounts due to the Company in the period of an equity transaction whichthe customer's sales or usage. Accordingly, the timing of the revenue recognition is abandoned is recognized as an expense.
Basic earnings per share is computed usingaccelerated; however, the weighted averageCompany continues to have a consistent number of ordinary shares outstanding during the period. Diluted earnings per share is computed by consideringperiods of sales or usage based royalties in each reporting period, and therefore the impact of the potential issuance of ordinary shares, using the treasury stock method,new guidance depends on the weighted average numbertiming and performance of shares outstandingthe titles released in those reporting periods.
Renewals of Licenses of Intellectual Property: Under the prior guidance, when the term of an existing license agreement was extended, without any other changes to the provisions of the license, revenue for the renewal period was recognized when the agreement was renewed or extended. Under the new guidance, revenue associated with renewals or extensions of existing license agreements is recognized as revenue when the licensed content becomes available for the customer to use and benefit from under the renewal or extension. This change impacts the timing of revenue recognition (i.e., revenue is recorded at a later time) as compared with prior revenue recognition guidance. While revenues from renewal do occur, they are not a significant portion of our revenue and thus do not have a material impact on our revenue recognition.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
The cumulative effect of adoption at September 30, 2019 and the impact had we not applied the new revenue guidance on the Balance Sheet is as follows:
| | | At September 30, 2019 | |
| | | As Reported | | | Increase/
(Decrease) | | | Without Adoption of New Revenue Guidance | |
| Assets | | | | | | | | | | | | |
| Accounts receivable – current | | $ | 153,625 | | | $ | 9,852 | | | $ | 143,773 | |
| Film and television costs, net | | | 141,952 | | | | (124 | ) | | | 142,076 | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| Accounts payable and accrued expenses | | | 114,020 | | | | 8,096 | | | | 105,924 | |
| Accrued participations and residuals – non-current | | | 67,660 | | | | 63 | | | | 67,597 | |
| | | | | | | | | | | | | |
| Equity | | | | | | | | | | | | |
| Accumulated deficit | | | (732,766 | ) | | | 1,569 | | | | (734,335 | ) |
The impact on the Statement of Operations for fiscal year 2019 due to the adoption of the new revenue guidance is as follows:
| | | Year Ended September 30, 2019 | |
| | | As Reported | | | Increase/ (Decrease) | | | Without Adoption of New Revenue Guidance | |
| Statement of Operations | | | | | | | | | | | | |
| Revenue | | $ | 434,261 | | | $ | 1,757 | | | $ | 432,504 | |
| Direct operating | | | 260,673 | | | | 188 | | | | 260,485 | |
| Loss from operations | | | (90,372 | ) | | | (1,569 | ) | | | (91,941 | ) |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. (“ASU 2016-13”). The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period except whereperiod. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the results wouldamendments in this Update require that credit losses be anti-dilutive.presented as an allowance rather than as a write-down. The standard is effective for fiscal periods beginning after April 1, 2020 and allows for a modified-retrospective adoption approach. The Company is currently evaluating the impact of the adoption of this standard on its financial statements. The Company does not expect a material impact to the financial statements.
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
Equity comprises the following components:2. Property and Equipment, net
| · | Share capital – this represents the nominal value of equity shares; |
| · | Share premium – this represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue; |
| · | Joint share ownership reserve – this represents the cost of shares of Eros held by the JSOP trust, consolidated as a part of the Group and treated as treasury shares; and |
| · | Non-controlling interests – this represents amounts attributable to non-controlling interests as a result of their interests in subsidiary undertakings. |
Other components of equity, which comprisesProperty and equipment, net, consisted of the following components:following:
| · | Currency translation reserve – this represents the differences arising from translation of investments in overseas subsidiaries; |
| · | Available-for-sale investments – this represents fair value movement net of impairment loss, if any, recognized since the date of acquisition of investments; |
| · | Revaluation reserve – this represents the fair value movement of land and buildings measured on a fair value basis; and |
| · | Hedging reserve – this represents effective portion of change in fair value of derivative instruments designated in a cash flow hedge relationship. |
| | September 30 | | | March 31 | |
| | | 2018 | | | 2019 | | | 2020 | |
| Furniture and fixtures | | $ | 1,132 | | | $ | 1,087 | | | $ | 1,089 | |
| Computers, equipment and software | | | 3,829 | | | | 4,035 | | | | 4,038 | |
| Leasehold improvements | | | 4,392 | | | | 4,295 | | | | 4,756 | |
| Website | | | 304 | | | | 356 | | | | 357 | |
| | | | 9,657 | | | | 9,773 | | | | 10,240 | |
| Less: accumulated depreciation | | | (3,748 | ) | | | (5,730 | ) | | | (6,744 | ) |
| Total | | $ | 5,909 | | | $ | 4,043 | | | $ | 3,496 | |
Reserves, which comprises of the following components:3. Debt
| · | Reverse acquisition reserve – this represents the difference between the required total of the Group’s equity instruments and the reported equity of the legal parent; |
| · | Merger reserve – this represents the gain/loss recognized as a result of a change in parent undertakings ownership interest in a subsidiary undertaking without loss of control; and |
| · | Retained earnings – this represents undistributed earnings of the Group. |
JPMorgan Credit Facility
On August 1, 2015, Eros’ subsidiary Eros International Media Limited (“EIML”) acquired 100%October 7, 2016, the Company and JPMorgan Chase Bank, N.A. entered into a $400 million five-year senior secured revolving credit facility. This new revolving credit facility, which replaced prior existing production and corporate facilities, can be increased by up to $200 million. All advances are subject to a borrowing base determined and secured by a variety of Company assets. Repayments of all outstanding balances and interest will be due on October 7, 2021. For LIBOR loans, the interest is equal to 3.00% plus LIBOR. The Company is required to pay a commitment fee at an annual rate of 0.75%, if credit exposure is less than 50% of total commitments, and 0.50% if credit exposure is more than 50% of the sharesundrawn amounts. The effective interest rate is 5.56% as of September 30, 2019 and voting interests 5.03% as of March 31, 2020.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in Universal Power Systems Private Limited (“Techzone”thousands, except share data)
P&A Facility
On March 3, 2014, the Company entered into a five-and-a-half-year $30 million senior secured revolving credit facility, with Seer Capital Master Fund, LP as the administrative agent (the “P&A Facility”). In accordance withThe P&A Facility, as amended and restated as of May 2, 2014, was used to finance prints and advertising expenses of films. Amounts outstanding under the termsP&A Facility bore interest at 12.0%. The Company was required to pay an annual maintenance fee of 1.0% of the average principal balance of loans outstanding with a minimum yield protection on the loan advance for each picture to be the greater of the interest on the advance or 2.0% for loans made less than or equal to 14 days prior to release or 3.0% for loans made more than 14 days in advance of release. For each film that utilizes this facility, the Company was also required to pay a 2.5% participation in the respective film. The P&A facility was amended several times until on January 9, 2020, the Company repaid the remaining amounts owed under this facility.
The summary of the revolving credit facilities described above and related debt issuance costs are as follows:
| | September 30 | | | March 31 | |
| | | 2018 | | | 2019 | | | 2020 | |
| JPMorgan credit facility | | $ | 257,560 | | | $ | 222,448 | | | $ | 230,369 | |
| P&A facility | | | 18,000 | | | | 10,000 | | | | — | |
| Debt issuance costs | | | (8,625 | ) | | | (6,046 | ) | | | (4,380 | ) |
| Revolving credit facilities | | $ | 266,935 | | | $ | 226,402 | | | $ | 225,989 | |
Term Loans
On March 3, 2014, the Company entered into a six-year term loan agreement, betweenas amended and restated as of May 2, 2014, for $35.2 million with Red Fish Blue Fish, LLC, who is also a stockholder and an affiliate of a stockholder. The term loan was drawn on October 20, 2014 and was used to finance production and acquisition of feature-length motion pictures and for general corporate purposes. The term loan is currently recorded at a discount, which includes a 1% agent fee deducted from the parties, EIML issued 900,970 equity shares tototal debt and the shareholders of Techzone at an acquisition date fair value of INR 586 ($9.16) per share, calculatedthe 940,524 common shares issued to the lender as part of the agreement. The term loan was initially set to mature on March 3, 2020.
On October 7, 2016, the Company amended the existing term loan agreement with Red Fish Blue Fish, LLC to extend the maturity to July 7, 2022 to comply with the extension of the credit facilities. Red Fish Blue Fish, LLC received 26,525 shares of common stock in connection with this agreement. The Company is required to pay interest at an annual rate of 11.0% (9.0% in cash and 2.0% in kind).
On April 20, 2018 the Company entered into a one-and-a-half year term loan agreement for a total commitment of approximately $4,700 with Aperture Media Partners, LLC to fund the production of a film. As of September 30, 2018, $3,200 had been drawn on the basisloan, net of traded share pricedebt issuance costs. Repayment of EIMLthe principal, and interest on the dateloan was made on May 10, 2019.
The following tables sets forth future annual contractual principal payment commitments of acquisition.debt as of March 31, 2020.
| | | | At March 31 | |
| Debt Type | | Maturity Date | | 2021 | | | 2022 | | | 2023 | | | Total | |
| JPMorgan credit facility | | October 2021 | | | — | | | | 230,369 | | | | — | | | $ | 230,369 | |
| Red Fish Blue Fish term | | July 2022 | | | — | | | | — | | | | 42,640 | | | | 42,640 | |
| | | | | | — | | | | 230,369 | | | | 42,640 | | | | 273,009 | |
| Less: aggregate unamortized discount and debt issuance costs | | | | | | | | | | | | | | | | | (4,928 | ) |
| Total | | | | | | | | | | | | | | | | $ | 268,081 | |
As of March 31, 2020, the Company is in compliance with all debt covenants.
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
4. Leases
The Company has operating leases for its offices. Its leases have remaining lease terms of up to six years, some of which include options to extend leases up to 5 years. Certain leases contain provisions for property related costs that are variable in nature for which the Company is responsible, including common area maintenance and other property operating services. These costs are calculated based on a variety of factors including property values, tax and utility rates, property service fees, and other factors. The Company records rent expense for operating leases, some of which have escalating rent payments, on a straight-line basis over the lease term. The Company does not have any finance leases.
The tables below present information regarding the Company’s lease assets and liabilities:
| | | At March 31, 2020 | |
| Assets: | | | | |
| Operating lease right of use assets | | $ | 9,772 | |
| | | | | |
| Liabilities: | | | | |
| Current operating | | | 1,830 | |
| Long-term operating | | | 11,095 | |
| Total | | $ | 12,925 | |
| | | | | |
| Weighted-average remaining lease term – operating leases (in years) | | | 5.5 | |
| Weighted-average discount rate – operating leases | | | 7.8% | |
The components of lease expense were as follow:
| | | Six months ended March 31, 2020 | |
| Operating leases: | | | | |
| Operating lease costs | | $ | 1,226 | |
| Variable lease costs | | | 7 | |
| Operating lease expense | | | 1,233 | |
| | | | | |
| Short-term lease rent expense | | | 40 | |
| Net rent expense | | $ | 1,273 | |
The following tables sets forth our future annual repayment of contractual commitments of future minimum rental payments due under office leases as of March 31, 2020:
| At March 31: | | Operating Leases | |
| 2021 | | $ | 2,776 | |
| 2022 | | | 2,897 | |
| 2023 | | | 2,889 | |
| 2024 | | | 2,996 | |
| 2025 | | | 2,476 | |
| Thereafter | | | 2,003 | |
| Total | | | 16,037 | |
| Less: Present value discount | | | (3,112 | ) |
| Operating lease liabilities | | $ | 12,925 | |
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Supplemental cash flow information related to leases was as follows:
| | | Six months ended March 31, 2020 | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating lease costs | | $ | 1,312 | |
| Right-of-use assets obtained in exchange for new lease obligations: | | | | |
| Operating lease costs | | $ | 2,000 | |
Rent expense was $2,415, $2,456 and $3,092 for the years ended September 30, 2017, 2018 and 2019, respectively. Rent expense was $1,520 and $1,273 for the six months ended March 31, 2019 and 2020. As of September 30, 2018, the Company had restricted cash that collateralizes letters of credit pursuant to the Company’s Burbank office lease and is included in restricted cash in the accompanying balance sheets. During the year ended March 31, 2017,September 30, 2019 the Company concludedrestricted cash was converted to a security deposit with the fair value adjustments of the assets acquired and liabilities assumed on acquisition of Techzone. Corresponding changes to the comparatives for the year ended March 31, 2016 have been summarized as under
| | | Provisional amount recorded as of March 31, 2016 | | | Adjustment based on final valuation report | | | As at August 1, 2015 (Re-casted) | |
| | | (in thousands) | |
| Current assets | | | | | | | | | | | | |
| Cash | | $ | 263 | | | $ | — | | | $ | 263 | |
| Trade and other receivables | | | 4,866 | | | | — | | | | 4,866 | |
| Non-current assets | | | | | | | | | | | | |
| Goodwill | | | — | | | | 3,329 | | | | 3,329 | |
| Intangible assets – Others | | | — | | | | 3,704 | | | | 3,704 | |
| Property, plant and equipment | | | 584 | | | | — | | | | 584 | |
| Purchase price pending allocation | | | 5,751 | | | | (5,751 | ) | | | — | |
| Deferred income tax assets | | | 134 | | | | — | | | | 134 | |
| Other non-current assets | | | 2,585 | | | | — | | | | 2,585 | |
| Current liabilities | | | | | | | | | | | | |
| Trade and other payables | | | (3,338 | ) | | | — | | | | (3,338 | ) |
| Short-term borrowings | | | (1,490 | ) | | | — | | | | (1,490 | ) |
| Non-current borrowings | | | | | | | | | | | | |
| Long-term borrowings | | | (992 | ) | | | — | | | | (992 | ) |
| Other long-term liabilities | | | (112 | ) | | | — | | | | (112 | ) |
| Deferred income tax liabilities | | | — | | | | (1,282 | ) | | | (1,282 | ) |
Goodwill is attributable mainly to expected synergies and assembled work force arising from the acquisition.lessor.
The acquisition of Techzone contributed $4.2 million (2016: $4.3 million) to the Company’s consolidated revenue and a profit of $0.3 million (2016: $(0.2) million to the Company’s profit for the year ended March 31, 2017 and March 31, 2016. Had the acquisition occurred on 1 April 2015, consolidated revenue and profit after tax for the year would have been $278.7 million and $13.4 million respectively during the fiscal 2016.
The Group acquires, co-produces and distributes Indian filmsRight-of-use assets are recorded in multiple formats worldwide. Film content is monitored and strategic decisions around the business operations are made based on the film content, whether it is new release or library. Hence, Management identifies only one operating segment in the business, film content. We distribute our film content to the Indian population in India, the South Asian diaspora worldwide and to non-Indian consumers who view Indian films that are subtitled or dubbed in local languages. As a result of these distribution activities, Eros has identified four geographic markets: India, North America, Europe and the Rest of the world.
Revenues are presented based on the region of domicile and by customer location:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Revenue by region of domicile of Group’s operation | | | | | | | | | | | | |
| India | | $ | 121,966 | | | $ | 159,855 | | | $ | 110,015 | |
| Europe | | | 25,686 | | | | 34,209 | | | | 29,528 | |
| North America | | | 2,549 | | | | 14,622 | | | | 10,014 | |
| Rest of the world | | | 102,793 | | | | 65,742 | | | | 134,618 | |
| Total Revenue | | $ | 252,994 | | | $ | 274,428 | | | $ | 284,175 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenue of $74,006 (2016: $35,869 and 2015: $80,267) from the United Arab Emirates is included within Rest of the world and revenue of $25,686 (2016: $34,209 and 2015: $29,528) from the United Kingdom is included under Europe in the above table.
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Revenue by region of domicile of customer’s location | | | | | | | | | | | | |
| India | | $ | 129,251 | | | $ | 158,843 | | | $ | 109,513 | |
| Europe | | | 7,695 | | | | 24,367 | | | | 27,146 | |
| North America | | | 10,132 | | | | 19,865 | | | | 19,052 | |
| Rest of the world | | | 105,916 | | | | 71,353 | | | | 128,464 | |
| Total Revenue | | $ | 252,994 | | | $ | 274,428 | | | $ | 284,175 | |
Revenue of $62,966 (2016: $61,546 and 2015: $103,786) from the United Arab Emirates is included within Rest of the world and revenue of $5,791 (2016: $22,755 and 2015: $26,426) from United Kingdom is included under Europe in the above table.
For the year ended March 31, 2017, March 31, 2016 and March 31, 2015, no customers accounted for more than 10% of the Group’s total revenues. In each year no revenue arose in the Isle of Man.
Segment assets by region of domicile of Group’s operation:
| | | Total | | | India | | | North
America | | | Europe | | | Rest of the
World | |
| | | | | | (in thousands) | |
| Non-current assets* | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2017 | | $ | 938,669 | | | $ | 386,921 | | | $ | 13 | | | $ | 24,620 | | | $ | 527,115 | |
| As of March 31, 2016 | | $ | 830,677 | | | $ | 350,078 | | | $ | 22 | | | $ | 30,694 | | | $ | 449,882 | |
Segment assets of $514,089 (2016: $371,955) in the United Arab Emirates is included under Rest of the world and segment assets of $ 24,620 (2016: $30,694) in the United Kingdom is included under Europe in the above table. In each year, there were no segmentnon-current Other assets in the Isleaccompanying consolidated balance sheet as of Man.
*Non-current assets include Property, plant and equipment, Intangibles assets (tradename, content and others) and goodwill by geographic area.
Profit for the year is arrived at after the following are charged to the consolidate statements of income:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Publicity and advertisement costs | | $ | 17,152 | | | $ | 22,333 | | | $ | 20,404 | |
| Film distribution costs | | | 11,772 | | | | 22,128 | | | | 18,119 | |
| Amortisation expenses | | | 135,316 | | | | 128,303 | | | | 117,254 | |
| Personnel costs | | | 42,902 | | | | 46,414 | | | | 33,728 | |
| Rent expenses | | | 1,559 | | | | 2,112 | | | | 1,424 | |
| Legal and professional expenses | | | 4,697 | | | | 3,177 | | | | 2,960 | |
| Provision for trade and other receivables | | | 2,430 | | | | 1,315 | | | | 3,963 | |
| Depreciation and amortization of other intangibles | | | 2,898 | | | | 2,285 | | | | 1,697 | |
| Impairment loss on content advances and loans and advances | | | 1,887 | | | | 2,545 | | | | 3,431 | |
| Other expenses | | | 6,936 | | | | 6,171 | | | | 2,343 | |
| | | $ | 227,549 | | | $ | 236,783 | | | $ | 205,323 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Salaries | | $ | 18,590 | | | $ | 14,616 | | | $ | 11,092 | |
| Social security and other employment charges | | | 792 | | | | 771 | | | | 687 | |
| Salaries and other charges | | | 19,382 | | | | 15,387 | | | | 11,779 | |
| Share based compensation | | | 23,471 | | | | 30,992 | | | | 21,915 | |
| Pension charges | | | 49 | | | | 35 | | | | 34 | |
| | | $ | 42,902 | | | $ | 46,414 | | | $ | 33,728 | |
| | | Year ended March 31 | |
| Key Management Compensation | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Salaries | | $ | 5,062 | | | $ | 5,250 | | | $ | 4,724 | |
| Share based compensation | | | 15,946 | | | | 20,916 | | | | 17,942 | |
| Pension charges | | | 38 | | | | 35 | | | | 34 | |
| | | $ | 21,046 | | | $ | 26,201 | | | $ | 22,700 | |
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Interest on borrowings | | $ | 25,828 | | | $ | 22,644 | | | $ | 20,858 | |
| Reclassification of cash flow hedge to consolidated statements of income | | | 804 | | | | 804 | | | | 804 | |
| Total interest expense for financial liabilities not classified at fair value through profit or loss | | | 26,632 | | | | 23.448 | | | | 21,662 | |
| Capitalized interest on eligible film rights and content advances | | | (7,111 | ) | | | (9,729 | ) | | | (10,871 | ) |
| Total finance costs | | | 19,521 | | | | 13,719 | | | | 10,791 | |
| Less: Interest income | | | | | | | | | | | | |
| Bank deposits | | | (2,365 | ) | | | (5,709 | ) | | | (4,930 | ) |
| Total finance income | | | (2,365 | ) | | | (5,709 | ) | | | (4,930 | ) |
| | | | | | | | | | | | | |
| | | $ | 17,156 | | | $ | 8,010 | | | $ | 5,861 | |
For the year ended March 31, 2017, the capitalization rate of interest was 7.6% (2016: 6.9%2020. Lease liabilities are recorded in Accounts payable and 2015: 5.9%).
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Losses/(gains) on disposal of property, plant and equipment | | $ | 22 | | | $ | 21 | | | $ | (9 | ) |
| Net foreign exchange (gains)/losses | | | (3,872 | ) | | | 49 | | | | 1,323 | |
| Net (gain)/loss on held for trading financial liabilities | | | (10,297 | ) | | | 3,566 | | | | 7,801 | |
| Transaction costs relating to equity transactions | | | — | | | | — | | | | 61 | |
| Gain on available-for-sale financial assets | | | (58 | ) | | | — | | | | — | |
| Impairment loss on available-for-sale financial assets | | | — | | | | — | | | | 1,307 | |
| | | $ | (14,205 | ) | | $ | 3,636 | | | $ | 10,483 | |
The net (gain)/loss on held for trading financialaccrued expenses, and Other liabilities in the years endedaccompanying consolidated balance sheet as of March 31, 2017, 2016 and 2015 principally relate to derivative instruments not designated in a hedging relationship.2020.
During the year ended March 31, 2015, the Company incurred $6,118 towards the issue of ‘A’ ordinary shares in a follow-on offering on the NYSE and sale of certain existing shares. As the transaction costs incurred relate to more than one transaction, the Company allocated these costs in proportion to the number of existing shares listed on NYSE and the number of shares newly issued. Transaction costs of Nil (2016: Nil, 2015: 61) attributed towards sale/listing of existing shares are recorded in profit or loss and as a result, Nil (2016: Nil, 2015: 6,057) was recorded in equity.5. Convertible Redeemable Preferred Stock
Convertible Redeemable Preferred Stock
| | | September 30, 2018 | |
| | | Shares Authorized | | | Shares
Issued and outstanding | | | Liquidation
Preference ($000) | |
| Class A | | | 10,207 | | | | 10,207 | | | $ | 17,196 | |
| Class B | | | 85,000 | | | | 85,000 | | | $ | 143,069 | |
| Class C | | | 214,588 | | | | 166,088 | | | $ | 198,158 | |
| | | September 30, 2019 | |
| | | Shares Authorized | | | Shares
Issued and outstanding | | | Liquidation
Preference ($000) | |
| Class A | | | 10,207 | | | | 10,207 | | | $ | 19,271 | |
| Class B | | | 85,000 | | | | 85,000 | | | $ | 160,238 | |
| Class C | | | 214,588 | | | | 166,088 | | | $ | 222,430 | |
| Class D | | | 132,168 | | | | 125,000 | | | $ | 132,328 | |
| | | March 31, 2020 | |
| | | Shares Authorized | | | Shares
Issued and outstanding | | | Liquidation Preference ($000) | |
| Class A | | | 10,207 | | | | 10,207 | | | $ | 20,377 | |
| Class B | | | 85,000 | | | | 85,000 | | | $ | 169,442 | |
| Class C | | | 214,588 | | | | 166,088 | | | $ | 235,491 | |
| Class D | | | 132,168 | | | | 125,104 | | | $ | 138,769 | |
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Current income tax expense | | $ | 10,521 | | | $ | 8,161 | | | $ | 7,472 | |
| Deferred income tax charge | | | 518 | | | | 4,550 | | | | 5,706 | |
| Income tax expenses | | $ | 11,039 | | | $ | 12,711 | | | $ | 13,178 | |
Reconciliation of tax charge
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Profit before tax | | $ | 22,494 | | | $ | 25,999 | | | $ | 62,508 | |
| Income tax expense at tax rates applicable to individual entities | | | 10,003 | | | | 10,785 | | | | 10,827 | |
| Tax effect of: | | | | | | | | | | | | |
| Adjustments in respect of current income tax of previous years | | | 375 | | | | — | | | | — | |
| Changes in tax rates on temporary differences brought forward | | | — | | | | 718 | | | | — | |
| Items not deductible for income tax | | | 815 | | | | 1,131 | | | | 1,953 | |
| Others | | | (154 | ) | | | 77 | | | | 398 | |
| Income tax expense | | $ | 11,039 | | | $ | 12,711 | | | $ | 13,178 | |
11 | DEFERRED INCOME TAX ASSETS AND LIABILITIES |
Changes in deferred income tax assetsThe rights and liabilities
| | | Year ended March 31, 2017 | |
| | | Opening
Balance | | | Utilization | | | Recognized
in consolidated
statements of income | | | Recognized
in other
comprehensive
income | | | Exchange
Difference | | | Closing
Balance | |
| | | (in thousands) | |
| Deferred tax assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum alternate tax carry-forward | | $ | 14,170 | | | $ | (2,699 | ) | | $ | 78 | | | $ | — | | | $ | 200 | | | $ | 11,749 | |
| Property, plant and equipment | | | 57 | | | | — | | | | 95 | | | | — | | | | 3 | | | | 155 | |
| Others | | | 834 | | | | — | | | | 216 | | | | — | | | | 32 | | | | 1,082 | |
| Total income deferred tax asset | | $ | 15,061 | | | $ | (2,699 | ) | | $ | 389 | | | $ | — | | | $ | 235 | | | $ | 12,986 | |
| Deferred income tax liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Property, plant and equipment | | | (1,247 | ) | | | — | | | | 24 | | | | — | | | | (5 | ) | | | (1,228 | ) |
| Intangible assets | | | (45,714 | ) | | | — | | | | (917 | ) | | | — | | | | (959 | ) | | | (47,590 | ) |
| Others | | | (14 | ) | | | — | | | | (14 | ) | | | — | | | | (1 | ) | | | (29 | ) |
| Total deferred income tax liability | | $ | (46,975 | ) | | $ | — | | | $ | (907 | ) | | $ | — | | | $ | (965 | ) | | $ | (48,847 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net deferred tax (liability) / asset | | $ | (31,914 | ) | | $ | (2,699 | ) | | $ | (518 | ) | | $ | — | | | $ | (730 | ) | | $ | (35,861 | ) |
| As at March 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred income tax asset | | | | | | | | | | | | | | | | | | | | | | $ | 112 | |
| Deferred income tax liability | | | | | | | | | | | | | | | | | | | | | | $ | (35,973 | ) |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | Year ended March 31, 2016 (recasted) | |
| | | Opening
Balance | | | Additions due
to acquisition
during
the year | | | Recognized
in consolidated
statements of income | | | Recognized
in other
comprehensive
income | | | Exchange
Difference | | | Closing
Balance | |
| | | (in thousands) | |
| Deferred income tax assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum alternate tax carry-forward | | $ | 14,246 | | | $ | — | | | $ | 821 | | | $ | — | | | $ | (897 | ) | | $ | 14,170 | |
| Property, plant and equipment | | | 151 | | | | 86 | | | | (177 | ) | | | — | | | | (3 | ) | | | 57 | |
| Others | | | 768 | | | | 48 | | | | 86 | | | | — | | | | (68 | ) | | | 834 | |
| Total deferred income tax asset | | $ | 15,165 | | | $ | 134 | | | $ | 730 | | | $ | — | | | $ | (968 | ) | | $ | 15,061 | |
| Deferred income tax liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Property, plant and equipment | | | (240 | ) | | | — | | | | (11 | ) | | | (1,010 | ) | | | 14 | | | | (1,247 | ) |
| Intangible assets | | | (41,753 | ) | | | (1,280 | ) | | | (5,363 | ) | | | — | | | | 2,682 | | | | (45,714 | ) |
| Others | | | (107 | ) | | | — | | | | 94 | | | | — | | | | (1 | ) | | | (14 | ) |
| Total deferred income tax liabilities | | $ | (42,100 | ) | | $ | (1,280 | ) | | $ | (5,280 | ) | | $ | (1,010 | ) | | $ | 2,695 | | | $ | (46,975 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net deferred income tax (liability) / asset | | $ | (26,935 | ) | | $ | (1,146 | ) | | $ | (4,550 | ) | | $ | (1,010 | ) | | $ | 1,727 | | | $ | (31,914 | ) |
| As at March 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred income tax asset | | | | | | | | | | | | | | | | | | | | | | $ | 167 | |
| Deferred income tax liability | | | | | | | | | | | | | | | | | | | | | | $ | (32,081 | ) |
| | | Year ended March 31, 2015 | |
| | | Opening
Balance | | | Recognized in
consolidated statements of income | | | Exchange
Difference | | | Closing
Balance | |
| | | (in thousands) | |
| Deferred income tax assets: | | | | | | | | | | | | | | | | |
| Minimum alternate tax carry-forward | | $ | 11,681 | | | $ | 3,045 | | | $ | (480 | ) | | $ | 14,246 | |
| Property, plant and equipment | | | 77 | | | | 74 | | | | — | | | | 151 | |
| Others | | | 1,880 | | | | (1,114 | ) | | | 2 | | | | 768 | |
| Total deferred income tax asset | | $ | 13,638 | | | $ | 2,005 | | | $ | (478 | ) | | $ | 15,165 | |
| Deferred income tax liabilities | | | | | | | | | | | | | | | | |
| Property, plant and equipment | | $ | (311 | ) | | $ | 61 | | | $ | 10 | | | $ | (240 | ) |
| Intangible assets | | | (35,457 | ) | | | (7,728 | ) | | | 1,432 | | | | (41,753 | ) |
| Others | | | (53 | ) | | | (44 | ) | | | (10 | ) | | | (107 | ) |
| Total deferred income tax liability | | $ | (35,821 | ) | | $ | (7,711 | ) | | $ | 1,432 | | | $ | (42,100 | ) |
| | | | | | | | | | | | | | | | | |
| Net deferred income tax (liability) / asset | | $ | (22,183 | ) | | $ | (5,706 | ) | | $ | 954 | | | $ | (26,935 | ) |
| As at March 31, 2015 | | | | | | | | | | | | | | | | |
| Deferred income tax asset | | | | | | | | | | | | | | $ | 151 | |
| Deferred income tax liability | | | | | | | | | | | | | | $ | (27,086 | ) |
Deferred tax is calculated in full on all temporary differences under the liability method using the local tax ratepreferences of the country in which the timing difference occurs.holders of preferred stock are as follows:
Deferred tax assets have been recognizedDividend and liquidation preferences – No dividends shall be paid on any shares of any class of capital stock of the Company, unless a dividend is paid with respect to all outstanding shares of Class D, Class C and Class B, followed by Class A. The Company has not declared any dividends on any class of capital stock as of March 31, 2020. Unpaid dividends accumulate for each share of Class A, Class B, and Class C on a daily basis at the rate of 12% per annum and for Class D on a daily basis at the rate of 10% per annum on the basis that there is reasonable certaintysum of profitabilitythe Class liquidation value thereof from and including the date of issuance to utilizeand including the first occurrence of liquidation, conversion, or acquisition. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of preferred stock shall be entitled to be paid out of the assets of the Company available losses and tax credits. Deferred tax liabilitiesfor distribution to its stockholders, before any payment shall be made to the extentholders of $40,432 (2016: $34,400) havecommon stock, an amount per share equal to the greater of the aggregate Class liquidation value, plus unpaid accrued and accumulated dividends, and the amount that would be received upon liquidation if all shares of the Class were converted into common stock immediately prior to liquidation.
The Class D are entitled to receive a cash payment (“Exit Payment”) of $33,000, pro rata to each holder of Class D, upon the consummation of certain transactions, including a liquidation of the Company or a Qualified IPO or Deemed Liquidation, each as defined in the Amended Charter. The aggregate Exit Payment will increase by approximately $8,375 as of May 11, 2020 (the fifteen-month anniversary of the Class D Issuance Date) and each three-month anniversary thereof until the total Exit Payment reaches a maximum of $100,000. If the Exit Payment has not been providedpaid on or prior to July 8, 2022, each holder of Class D will be entitled to receive a pro rata share of the Exit Payment in connection with any redemption of Class D. The Class D Exit Payment is liability-classified and marked to market at each reporting period. The fair value attributed to the liability as of February 2019 (issuance) was $23,500 which was recorded as an offset to the proceeds of Class D. As of September 30, 2019 and March 30, 2020, the fair value attributed to the Exit Payment liability was $48,500 and $34,733, respectively, which is recorded in Other liabilities on the undistributed earningsaccompanying consolidated balance sheets. The fair value of subsidiaries as Eros is able to controlthe Exit Payment liability was determined using Level 3 of the fair value hierarchy under ASC 820 Fair Value Measurements and Disclosures. The fair value was determined using a valuation model which considers the probability of a voluntary conversion, the timing of the reversalconversion and the Company’s cost of capital.The expense (benefit) for year ended September 30, 2019 was $25,000 and for the six months ended March 31, 2020 was ($13,767) which is recorded to Shareholder exit (expense)/income in the accompanying consolidated statements of operations.
Conversion rights – Preferred stock shall be convertible at the option of the temporary differenceholder, at any time and itfrom time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock as is probabledetermined by multiplying the number of preferred shares to be converted by $1,000 and dividing the result by the Class conversion price for each class of stock. The conversion price for Class A, Class B, Class C and Class D is $1.1838, $7.4378, $42.7282 and $42.7282, respectively.
Voting rights – The holders of the preferred stock shall be entitled to the number of votes equal to the number of whole shares of common stock into which the shares of preferred stock held by such holders are convertible as of the record date for determining stockholders entitled to vote on such matters.
Redemption rights – Preferred stock shall be redeemed by the Company at a price equal to the Class liquidation value, plus all declared but unpaid dividends there on request, in annual installments commencing not more than 90 days after receipt by the Company at any time on or after July 8, 2022, from the holders of at least a majority of the then-outstanding shares of the Class, with written notice requesting redemption of all shares. Since redemption of the preferred stock is outside of the control of the Company, the shares have been reflected outside of stockholders deficit. All classes of preferred stock are being accreted to their redemption value through redemption date by periodic charges to paid-in-capital (or retained deficit if paid-in-capital is reduced to zero) each reporting period, using the interest method. An aggregate of $27,285, $38,499, $54,966 and $23,924 and $33,364 was accreted to preferred stock during the years ended September 30, 2017, 2018 and 2019 and six months ended March 31, 2019 and 2020, respectively.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
On February 8, 2019, certain terms of the existing classes of preferred stock were amended, including extending the initial exercise date for certain redemption rights of the holders of the Company’s Class A, Class B and Class C from December 3, 2019 to July 8, 2022, except for the rights of certain Class C preferred stockholders who did not consent to the Amended Charter (Non-Consenting Class C Holders). The initial exercise date for the redemption rights of Non-Consenting Class C Holders, who collectively hold 13,000 shares of Class C as of the Class D Issuance Date, was not amended and such rights remain exercisable during the six-month period beginning December 3, 2019. The Non-Consenting Class C Holders were entitled to elect, up until September 30, 2019, that the temporary differenceinitial exercise date of their redemption rights be extended to commence as of July 8, 2022. Class D shall rank senior to Class C, which shall rank senior to Class B, which shall rank senior to Class A, the common stock, and any other junior securities with respect to the payment of dividends and the redemption or repurchase of any shares of the Company.
In December 2019, the Company received Notices of Redemption from Non-Consenting Class C Holders to exercise their redemption rights for 12,000 shares of Class C stock. The Company has not received notices from Non-Consenting Class C Holders holding 1,000 shares. Redemption of the Class C shares of Non-Consenting Class C Holders will not reversebe required under the Company’s certificate of incorporation if not permitted under the Company’s existing debt agreements. The Company has not yet determined whether or when such redemption will be required. None of the Non-Consenting Class C Holders have elected to extend the exercise date to July 8, 2022. As of the date of the redemption notices received in December 2019, the foreseeable future.Company reclassified $15,372 from Class C convertible preferred stock to Accounts payable and accrued expenses to reflect this obligation.
Eros International Media Limited is liable to pay Minimum Alternate Tax (“MAT”)6. Stock Based Compensation
Equity Awards
In prior years, stock options were granted under the Indian Income tax laws.Company’s 2014 Incentive Stock Plan (“2014 Plan”). In April 2017, the Company and the Board of Directors approved the 2017 Equity Incentive Plan (“2017 Plan”). Under the 2017 Plan, stock options, stock appreciation rights, restricted stock awards and other stock-based awards may be granted to eligible employees. There are 1,750,000 common stock shares are available for grant under the 2017 Plan, of which 558,412 and 519,048 were awarded and outstanding as of September 30, 2019 and March 30, 2020 as restricted stock units and stock options. Stock options under the plan are granted with exercise prices equal to fair market value on the date of the grant. All option grants expire ten years after the date of the grant.
Equity awards to officers, employees, and consultants become exercisable on a vesting schedule established by management and approved by the Board of Directors at the time of grant, generally straight line over a four-year period. The tax paid under MAT provisions can be carried forwardCompany treats equity awards with multiple vesting tranches as a single award for expense attribution purposes and set-off against future income tax liabilities computed under normal tax provisions within arecognizes compensation cost based on the vesting schedule over the requisite service period of ten years, and has been treated as a deferred tax asset.the entire award.
ExceptThe following table summarizes stock option activity for Nil (2016: $1,010, 2015: Nil) relating to tax on revaluation of freehold building, no amount has been recognized in other comprehensive income. No amounts relating to tax have been recognized directly in equity.the years ended September 30, 2017, 2018 and 2019 and for the six months ended March 31, 2019 and 2020:
| | | Number of Options | | | Weighted-Average Exercise Price | |
| | | | | | | |
| Outstanding at September 30, 2016 | | | 3,495,504 | | | $ | 1.36 | |
| Granted | | | 255,000 | | | | 3.77 | |
| Forfeited | | | (214,960 | ) | | | 1.25 | |
| Exercised | | | (59,596 | ) | | | 0.74 | |
| Outstanding at September 30, 2017 | | | 3,475,948 | | | | 1.55 | |
| Forfeited | | | (29,688 | ) | | | 1.28 | |
| Exercised | | | (532,891 | ) | | | 2.06 | |
| Outstanding at September 30, 2018 | | | 2,913,369 | | | | 1.43 | |
| Forfeited | | | (154,700 | ) | | | 1.79 | |
| Outstanding at September 30, 2019, vested or expected to vest in future | | | 2,758,669 | | | | 1.41 | |
| | | | | | | | | |
| Exercisable at September 30, 2019 | | | 2,659,006 | | | | 1.33 | |
Domestic tax is Nil as the company is subject to Income tax in IOM at a rate of zero percent. Foreign taxes are based on applicable tax rates in each subsidiary jurisdiction.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSSTX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
12 | EARNINGS PER SHARE (EPS) |
| | | Number of Options | | | Weighted-Average Exercise Price | |
| | | | | | | |
| Outstanding at September 30, 2018 | | | 2,913,369 | | | $ | 1.43 | |
| Forfeited | | | (43,868 | ) | | | 1.73 | |
| Outstanding at March 31, 2019, vested or expected to vest in future (unaudited) | | | 2,869,501 | | | | 1.43 | |
| | | | | | | | | |
| Exercisable at March 31, 2019 (unaudited) | | | 2,705,218 | | | | 1.29 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | Basic | | | Diluted | | | Basic | | | Diluted | | | Basic | | | Diluted | |
| | | (in thousands, except number of shares and earnings per share) | |
| Earnings | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings attributable to the equity holders of the parent | | $ | 3,805 | | | $ | 3,805 | | | $ | 3,797 | | | $ | 3,797 | | | $ | 40,344 | | | $ | 40,344 | |
| Potential dilutive effect related to share based compensation scheme in subsidiary undertaking | | | — | | | | (673 | ) | | | — | | | | (732 | ) | | | — | | | | (531 | ) |
| Adjusted earnings attributable to equity holders of the parent | | $ | 3,805 | | | $ | 3,132 | | | $ | 3,797 | | | $ | 3,065 | | | $ | 40,344 | | | $ | 39,813 | |
| Number of shares | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares | | | 59,410,292 | | | | 59,410,292 | | | | 57,731,839 | | | | 57,731,839 | | | | 54,277,849 | | | | 54,277,849 | |
| Potential dilutive effect related to share based compensation scheme | | | — | | | | 1,532,839 | | | | — | | | | 1,304,185 | | | | — | | | | 690,902 | |
| Adjusted weighted average number of shares | | | 59,410,292 | | | | 60,943,131 | | | | 57,731,839 | | | | 59,036,024 | | | | 54,277,849 | | | | 54,968,751 | |
| Earnings per share | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings attributable to the equity holders of the parent per share (cents) | | | 6.4 | | | | 5.1 | | | | 6.6 | | | | 5.2 | | | | 74.3 | | | �� | 72.4 | |
| | | Number of Options | | | Weighted-Average Exercise Price | |
| | | | | | | |
| Outstanding at September 30, 2019 | | | 2,758,669 | | | $ | 1.41 | |
| Forfeited | | | (23,762 | ) | | | 2.98 | |
| Outstanding at March 31, 2020, vested or expected to vest in future | | | 2,734,907 | | | | 1.40 | |
| | | | | | | | | |
| Exercisable at March 31, 2020 | | | 2,670,869 | | | | 1.34 | |
There were 59,596, 532,891 and nil stock options exercised with intrinsic values of $23, $574 and nil during the years ended September 30, 2017, 2018 and 2019, respectively.
There were no stock options exercised for the six months ended March 31, 2019 and 2020.
The above table does not split the earnings per share separately for the ‘A’ ordinary 30p sharesweighted-average remaining contractual term and the ‘B’ ordinary 30p sharesaggregate fair value of outstanding options as there is no variation in their entitlement to participate in undistributed earnings. All shareof September 30, 2019 was 5.1 years and per share data provided herein gives effect to$114,926.
The weighted-average remaining contractual term and the three-for-one stock split conversion that occurred in November 2013, retrospectively.aggregate fair value of outstanding options as of September 30, 2018 was 6.3 years and $117,192.
The weighted-average remaining contractual term and the aggregate fair value of outstanding options as of September 30, 2017 was 7.4 years and $7,788.
The weighted-average remaining contractual term and the aggregate fair value of outstanding options as of March 31, 2020 was 4.6 years and $113,936.
The weighted-average remaining contractual term and the aggregate fair value of outstanding options as of March 31, 2019 was 5.4 years and $119,543.
The Company excludes options with exercise prices that are greater thangranted 357,986, 801,690 and nil restricted stock units during the average market price fromyears ended September 30, 2017, 2018 and 2019 respectively. The Company did not grant restricted stock awards for the calculation of diluted EPS because their effect would be anti-dilutive. In the yearsix months ended March 31, 2017, 1,370,625 shares were not included2019 and 2020. The awards contain service-based and performance-based conditions to vest in diluted earnings per share (2016: 602,500, 2015: 630,000).
13 | PROPERTY, PLANT AND EQUIPMENT |
| | | Year ended March 31, 2017 | |
| | | Land
and
Building | | | Furniture,
fittings and
equipment | | | Vehicles | | | Plant and
machinery | | | Total | |
| | | (in thousands) | |
| Opening net carrying amount | | $ | 8,768 | | | $ | 407 | | | $ | 399 | | | $ | 492 | | | $ | 10,066 | |
| Exchange difference | | | 100 | | | | 6 | | | | 11 | | | | 14 | | | | 131 | |
| Revaluation | | | — | | | | — | | | | — | | | | — | | | | — | |
| Additions | | | 385 | | | | 187 | | | | 260 | | | | 463 | | | | 1,295 | |
| Others | | | — | | | | (27 | ) | | | — | | | | (26 | ) | | | (53 | ) |
| Disposals | | | — | | | | (24 | ) | | | (5 | ) | | | (5 | ) | | | (34 | ) |
| Adjustment of depreciation on disposal | | | — | | | | — | | | | 5 | | | | 5 | | | | 10 | |
| Depreciation charge | | | (462 | ) | | | (117 | ) | | | (166 | ) | | | (337 | ) | | | (1,082 | ) |
| Balance as at March 31, 2017 | | $ | 8,791 | | | $ | 432 | | | $ | 504 | | | $ | 606 | | | $ | 10,333 | |
| Capital work-in-progress | | | | | | | | | | | | | | | | | | $ | 21 | |
| Net carrying value as at March 31, 2017 | | | | | | | | | | | | | | | | | | $ | 10,354 | |
| | | As at March 31, 2017 | |
| | | (in thousands) | |
| Cost or valuation | | $ | 12,274 | | | $ | 1,932 | | | $ | 1,364 | | | $ | 4,049 | | | $ | 19,619 | |
| Accumulated depreciation | | | (3,483 | ) | | | (1,500 | ) | | | (860 | ) | | | (3,443 | ) | | | (9,286 | ) |
| Net carrying amount | | $ | 8791 | | | $ | 432 | | | $ | 504 | | | $ | 606 | | | $ | 10,333 | |
| Capital work-in-progress | | | | | | | | | | | | | | | | | | $ | 21 | |
| Net carrying value as at March 31, 2017 | | | | | | | | | | | | | | | | | | $ | 10,354 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | Year ended March 31, 2016 | |
| | | Land
and
Building | | | Furniture,
Fittings and
Equipment | | | Vehicles | | | Plant and
Machinery | | | Total | |
| | | (in thousands) | |
| Opening net carrying amount | | $ | 8,292 | | | $ | 386 | | | $ | 281 | | | $ | 313 | | | $ | 9,272 | |
| Exchange difference | | | (518 | ) | | | (15 | ) | | | (22 | ) | | | (17 | ) | | | (572 | ) |
| Revaluation | | | 1,410 | | | | — | | | | — | | | | — | | | | 1,410 | |
| Additions on account of acquisition of Techzone | | | — | | | | 66 | | | | 168 | | | | 350 | | | | 584 | |
| Others | | | — | | | | 118 | | | | 199 | | | | 286 | | | | 603 | |
| Disposals | | | — | | | | — | | | | (119 | ) | | | — | | | | (119 | ) |
| Adjustment of depreciation on disposal | | | — | | | | — | | | | 42 | | | | — | | | | 42 | |
| Depreciation charge | | | (416 | ) | | | (148 | ) | | | (150 | ) | | | (440 | ) | | | (1,154 | ) |
| Balance as at March 31, 2016 | | $ | 8,768 | | | $ | 407 | | | $ | 399 | | | $ | 492 | | | $ | 10,066 | |
| Capital work-in-progress | | | | | | | | | | | | | | | | | | $ | 620 | |
| Net carrying value as at March 31, 2016 | | | | | | | | | | | | | | | | | | $ | 10,686 | |
| | | As at March 31, 2016 | |
| | | (in thousands) | |
| Cost or valuation | | $ | 11,749 | | | $ | 1,772 | | | $ | 1,081 | | | $ | 3,554 | | | $ | 18,156 | |
| Accumulated depreciation | | | (2,981 | ) | | | (1,365 | ) | | | (682 | ) | | | (3,062 | ) | | | (8,090 | ) |
| Net carrying amount | | $ | 8,768 | | | $ | 407 | | | $ | 399 | | | $ | 492 | | | $ | 10,066 | |
| Capital work-in-progress | | | | | | | | | | | | | | | | | | $ | 620 | |
| Net carrying value as at March 31, 2016 | | | | | | | | | | | | | | | | | | $ | 10,686 | |
Property, Plant and Equipment with a net carrying amountthe underlying common stock. Most restricted stock units contain performance conditions that are satisfied only on consummation of $7,849 (2016: $10,118) have been pledged to secure borrowings (Refer Note 23).
Land and buildings were revalued as at March 31, 2016 by independent valuers on the basis of market value. Fair values were estimated based on recent market transactions, which were then adjusted for specific conditions relating to the land and buildings. As at March 31, 2017, had land and buildings of the Group been carried at historical cost less accumulated depreciation, their carrying amount would have been $5,909 (2016: $5,726)
Capital work-in-progress of $21 (2016: $620) primarily related to leasehold improvement cost in Company’s leased premises.
14 | GOODWILL AND TRADE NAME |
| | | Goodwill | | | Trade
Name | |
| | | (in thousands) | |
| Balance as at March 31, 2017 | | $ | 4,992 | | | $ | 14,000 | |
| Balance as at March 31, 2016 (Goodwill is recasted) | | $ | 5,097 | | | $ | 14,000 | |
| Goodwill | | Amount in US$ | |
| Balance as at March 31, 2015 | | $ | 1,878 | |
| Goodwill arising from acquisition of Techzone (Refer Note 4) | | | 3,329 | |
| Foreign currency translation | | | (110 | ) |
| Balance as at March 31, 2016 (recasted) | | | 5,097 | |
| Foreign currency translation | | | (105 | ) |
| Balance as at March 31, 2017 | | $ | 4,992 | |
Goodwill has been assessed for impairment at the Group level as the Group is considered as one single cash generating unit and represents the lowest level at which the goodwill is monitored for internal management purposes.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSan initial public offering.
The recoverable amount of the cash generating unitperformance measures are not considered probable at September 30, 2017, 2018 or 2019 and March 31, 2019 and 2020. Accordingly, no compensation expense has been determined based on value in use. Value in use has been determined based on future cash flows after considering current economic conditionsrecorded for such awards for the years ended September 30, 2017, 2018 and trends, estimated future operating results, growth rates2019 and anticipated future economic conditions.for the six months ended March 31, 2019 and 2020.
As of March 31, 2017, for assessing impairment of goodwill, value in use is determined using discounted cash flow method. The estimated cash flows for a period of four years were developed using internal forecasts, extrapolated for the fifth year, and a pre-tax discount rate of 17.2% and terminal growth rate of 4%.
As of March 31, 2017, for assessing the impairment of the trade name, value in use is determined using the relief from royalty method based on a Royalty rate of 3% on the estimated total revenue for a period of four years, extrapolated for the fifth year, and, a pre-tax discount rate of 22.5% and terminal growth rate of 4%.
Management believes that any reasonably possible change in the key assumptions would not cause the carrying amount to exceed the recoverable amount of the cash generating unit.
15 | INTANGIBLE CONTENT ASSETS |
| | | Gross
Content
Assets | | | Accumulated
Amortization | | | Content
Assets | |
| | | (in thousands) | |
| As at March 31, 2017 | | | | | | | | | | | | |
| Film and content rights | | $ | 1,430,523 | | | $ | (796,058 | ) | | $ | 634,465 | |
| Content advances | | | 266,232 | | | | — | | | | 266,232 | |
| Film productions | | | 3,931 | | | | — | | | | 3,931 | |
| Non-current content assets | | $ | 1,700,686 | | | $ | (796,058 | ) | | $ | 904,628 | |
| | | | | | | | | | | | | |
| As at March 31, 2016 | | | | | | | | | | | | |
| Film and content rights | | $ | 1,158,737 | | | $ | (652,651 | ) | | $ | 506,086 | |
| Content advances | | | 284,817 | | | | — | | | | 284,817 | |
| Film productions | | | 4,236 | | | | — | | | | 4,236 | |
| Non-current content assets | | $ | 1,447,790 | | | $ | (652,651 | ) | | $ | 795,139 | |
Changes in the intangible - content assets are as follows:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | |
| | | | (in thousands) | | | | | |
| Film productions | | | | | | | | |
| Opening balance | | $ | 4,236 | | | $ | 3,971 | |
| Additions | | | 5,498 | | | | 3,887 | |
| Exchange difference | | | 86 | | | | (231 | ) |
| Transfer to film and content rights | | | (5,889 | ) | | | (3,391 | ) |
| Closing balance | | $ | 3,931 | | | $ | 4,236 | |
| | | | | | | | | |
| Content advances | | | | | | | | |
| Opening balance | | $ | 284,817 | | | $ | 236,285 | |
| Additions | | | 236,536 | | | | 220,166 | |
| Exchange difference | | | 2,279 | | | | (7,588 | ) |
| Impairment | | | (1,625 | ) | | | (2,545 | ) |
| Transfer to film and content rights | | | (255,775 | ) | | | (161,501 | ) |
| Closing balance | | $ | 266,232 | | | $ | 284,817 | |
| | | | | | | | | |
| Film and content rights | | | | | | | | |
| Opening balance | | $ | 506,086 | | | $ | 4,78,958 | |
| Amortization | | | (135,316 | ) | | | (128,303 | ) |
| Exchange difference | | | 2,031 | | | | (9,461 | ) |
| Transfer from film productions and content advances | | | 261,664 | | | | 164,892 | |
| Closing balance | | $ | 634,465 | | | $ | 506,086 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment loss on content advances relate to amounts advanced, to the extent not considered recoverable, for prospective film productions that are not being developed further or not considered viable.
Film and content rights with a carrying amount of $321,872 (2016: $207,412) have been pledged against secured borrowings (Refer Note 23).
16 | OTHER INTANGIBLE ASSETS |
Other intangibles comprise of software and other intangibles used within the Group’s digital and home entertainment activities and internal accounting activities.
The changes in other intangible assets are as follows:
| | | Year ended March 31, 2017 | |
| | | (in thousands) | |
| | | Information technology assets | | | Other
intangibles | | | Total | |
| Opening net carrying amount as on March 31, 2016 | | $ | 3,303 | | | $ | 2,824 | | | $ | 6,127 | |
| Exchange difference | | | 15 | | | | 36 | | | | 51 | |
| Disposals | | | — | | | | (2 | ) | | | (2 | ) |
| Amortization charge | | | (1,158 | ) | | | (658 | ) | | | (1,816 | ) |
| Closing net carrying amount as on March 31, 2017 | | $ | 2,160 | | | $ | 2,200 | | | $ | 4,360 | |
| | | As at March 31, 2017 | |
| | | (in thousands) | |
| Cost or valuation as on March 31, 2017 | | $ | 4,850 | | | $ | 4,497 | | | $ | 9,347 | |
| Accumulated amortization | | | (2,690 | ) | | | (2,297 | ) | | | (4,987 | ) |
| Net carrying amount as on March 31, 2017 | | $ | 2,160 | | | $ | 2,200 | | | $ | 4,360 | |
| | | Year ended March 31, 2016 (recasted) | |
| | | (in thousands) | |
| | | Information technology assets | | | Other
applications | | | Total | |
| Opening net carrying amount as on March 31, 2015 | | $ | 1,581 | | | $ | 623 | | | $ | 2,204 | |
| Exchange difference | | | (38 | ) | | | (112 | ) | | | (150 | ) |
| Additions | | | 1,500 | | | | — | | | | 1,500 | |
| Additions on account of acquisition of Techzone (Refer Note 4) | | | 1,156 | | | | 2,548 | | | | 3,704 | |
| Amortization charge | | | (896 | ) | | | (235 | ) | | | (1,131 | ) |
| Closing net carrying amount as on March 31, 2016 | | $ | 3,303 | | | $ | 2,824 | | | $ | 6,127 | |
| | | As at March 31, 2016 | |
| | | (in thousands) | |
| Cost or valuation as on March 31, 2016 | | $ | 4,827 | | | $ | 4,447 | | | $ | 9,274 | |
| Accumulated amortization | | | (1,524 | ) | | | (1,623 | ) | | | (3,147 | ) |
| Net carrying amount as on March 31, 2016 | | $ | 3,303 | | | $ | 2,824 | | | $ | 6,127 | |
Other intangible assets with a carrying amount of $239 (2016: $375) have been pledged against secured borrowings (Refer Note 23).
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17 | AVAILABLE-FOR-SALE FINANCIAL ASSETS |
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Valuable Technologies Limited | | $ | 11,097 | | | $ | 11,097 | |
| LMB Holdings Limited | | | 16,800 | | | | 16,800 | |
| Valuable Innovations Private Limited | | | 1,636 | | | | 2,020 | |
| Cloudstream Media Inc | | | 80 | | | | — | |
| The Culture Trip | | | — | | | | 230 | |
| | | $ | 29,613 | | | $ | 30,147 | |
Eros acquired an interest Notes to Audited Consolidated Financial Statements
(in Valuable Technologies Limited (“Valuable”) in the year ended March 31, 2009. Valuable manages and operates a number of companies within media and entertainment, technology and infrastructure. These companies include UFO Moviez, the leading provider of Digital projection solutions for cinemas in India, Boxtech which is involved with digital movie rentals, and Impact whose business is theatrical ticketing and sales data. As at March 31, 2017, Eros owns 7.21% of Valuable’s equity. In the year ended March 31, 2017, due to the range of potential outcomes in valuing Valuable, the Board was unable to give, with reasonable certainty, a fair value in the absence of detailed financial and/or valuation related information. Management has therefore held it at cost which equates to the fair value recognized in the year ended March 31, 2012.
Acacia Investments Holdings Limited (“Acacia”) is a dormant holding company and owns 24% of L.M.B Holdings Limited (“LMB”) which through its subsidiaries operates satellite television channels, such as B4U Music, B4U Movies and the Movie House Channel. As of March 31, 2017, and prior, the Group had no Board representation, no involvement in policy decision making, did not provide input in respect of technical know-how and had no material contract with LMB or its subsidiaries nor did they have the power to exert significant influence. As a result Management has historically concluded, throughout the ownership of the investment, that they did not exert any significant influence over LMB. Due to the range of potential outcomes in valuing LMB, the Board was unable to give, with reasonable certainty, a fair value. Management has therefore held it at cost which equates to the fair value recognized in the year ended March 31, 2012.
In April 2010, Eros acquired a 1.27% interest in Valuable Innovations Private Limited (“Valuable Innovations”) at a total cost of $2,020. An entity related to Valuable Technologies, Valuable Innovations houses new technology and patents of the Valuable group entities and develops related products. During ended March 31, 2017, the Company recorded an impairment loss of $384 within other comprehensive income, basis change in fair value of such investment. The fair value of the investment was estimated using level 3 inputs, wherein net asset value method is used as against income approach, as there are no revenue generating activities in Valuable Innovations.
In July 2015, Eros acquired a 2% stake in The Cultural Trip (‘‘TCT’’), a website which is a global platform for local culture, showcasing the best art, culture, food and travel for every country in the world. The acquisition of stake in TCT has been classified as Available-for-sale investment and has been recognized at the transaction price of $230. Subsequently, on June 3, 2016 this investment was sold at a price of $288. The profit on sale of TCT has been recognized as Other gains in consolidated statements of income. (Refer Note 9).
Investments in these unquoted equity instruments are not held for trading. Instead, they are held for medium or long-term strategic purpose.
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Goods for resale | | $ | 214 | | | $ | 287 | |
| | | $ | 214 | | | $ | 287 | |
During the year ended March 31, 2017, inventory of $350 (2016: $354 and 2015: $776) was recognized in the consolidated statements of income as an expense. In each year none of the expense was as a result of the write down of inventories. Inventories with a carrying amount of $113 (2016: $593) have been pledged as security for certain of the Group’s borrowings (Refer Note 23).
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19 | TRADE AND OTHER RECEIVABLES |
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Trade accounts receivables | | $ | 226,985 | | | $ | 169,413 | |
| Trade accounts receivables reserve | | | (163 | ) | | | (130 | ) |
| Trade accounts receivables net | | $ | 226,822 | | | $ | 169,283 | |
| | | | | | | | | |
| Other receivables | | | 25,683 | | | | 18,493 | |
| Prepaid charges | | | 277 | | | | 1,071 | |
| Unbilled revenue | | | 1,423 | | | | 9,035 | |
| Trade and other receivables | | $ | 254,205 | | | $ | 197,882 | |
| | | | | | | | | |
| Current trade and other receivables | | | 242,762 | | | | 188,361 | |
| Non-current trade and other receivables | | | 11,443 | | | | 9,521 | |
| | | $ | 254,205 | | | $ | 197,882 | |
The age of financial assets that are past due but not impaired were as follows:
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Not more than three months | | | 23,593 | | | | 38,593 | |
| More than three months but not more than six months | | | 16,729 | | | | 41,448 | |
| More than six months but not more than one year | | | 43,920 | | | | 27,594 | |
| More than one year | | | 58,516 | | | | 2,882 | |
| | | $ | 142,758 | | | $ | 110,517 | |
The Company factored accounts receivable amounting to Nil as of March 31, 2017 and $39,027 as of March 31, 2016.
The movements in the trade accounts receivables reserve are as follows:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| As at April 1 | | $ | 130 | | | $ | 250 | | | $ | 469 | |
| Provisions | | | 2,430 | | | | 1,315 | | | | 3,963 | |
| Amounts written off | | | (2,397 | ) | | | (1,435 | ) | | | (4,182 | ) |
| As at March 31 | | $ | 163 | | | $ | 130 | | | $ | 250 | |
The carrying amount of trade accounts receivables and other receivables are considered a reasonable approximation of fair value. Trade and other accounts receivables with a net carrying amount of $60,128 (2016: $42,672) have been pledged against secured borrowings (Refer Note 23).The Company collected approximately $35,000 relating to above trade receivables subsequent to the reporting date.
20 | TRADE AND OTHER PAYABLES |
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Trade accounts payable | | $ | 12,142 | | | $ | 15,496 | |
| Accruals and other payables (includes creditors for content assets of $71,983 (2016: $ 13,461)) | | | 93,398 | | | | 41,379 | |
| Value added taxes and other taxes payable | | | 14,542 | | | | 8,303 | |
| | | $ | 120,082 | | | $ | 65,178 | |
The carrying amount of trade and other payables are considered a reasonable approximation of fair value.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21 | CASH AND CASH EQUIVALENTS |
Cash and cash equivalents consist of cash on hand and balance with banks (including balances in current account and demand deposits). Cash and cash equivalents included in the statements of cash flows comprise the following amounts in the statement of financial position.
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Cash at bank and in hand | | $ | 112,267 | | | $ | 182,774 | |
| | | $ | 112,267 | | | $ | 182,774 | |
The Group has leased various offices under non-cancellable operating lease agreements. The minimum lease rentals to be paid under non-cancellable operating leases are as follows:
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Within one year | | $ | 645 | | | $ | 647 | |
| Within two to five years | | | 273 | | | | 729 | |
| | | $ | 918 | | | $ | 1,376 | |
An analysis of long-term borrowings is shown in the table below.
| | | Nominal | | | | As at March 31 | |
| | | Interest Rate | | Maturity | | 2017 | | | 2016 | |
| | | | | | | (in thousands) | |
| Asset backed borrowings | | | | | | | | | | | | |
| Vehicle loan | | 10 -12% | | 2017-21 | | $ | 325 | | | $ | 260 | |
| Term loan | | BPLR+1.8% - 2.75% | | 2017 | | | 1,264 | | | | 6,244 | |
| Term loan | | BPLR+2.75% | | 2017-18 | | | 466 | | | | 1,579 | |
| Term loan | | BPLR+2.85% | | 2019-20 | | | 5,776 | | | | 7,932 | |
| Term loan | | BPLR+2.55% – 3.4% | | 2020-21 | | | 11,945 | | | | 12,945 | |
| Term loan | | MCLR+3.45% | | 2021-22 | | | 14,603 | | | | | |
| | | | | | | $ | 34,379 | | | $ | 28,960 | |
| Unsecured borrowings | | | | | | | | | | | | |
| Retail bond(1) | | 6.5% | | 2021-22 | | $ | 62,672 | | | $ | 71,901 | |
| Revolving facility(2) | | LIBOR +1.9%-7.5% and Mandatory Cost | | 2017 | | | 85,000 | | | | 123,750 | |
| Other borrowings | | 10.5% | | 2021-22 | | | 5,853 | | | | 6,933 | |
| | | | | | | $ | 153,525 | | | $ | 202,584 | |
| | | | | | | | | | | | | |
| Nominal value of borrowings | | | | | | $ | 187,904 | | | $ | 231,544 | |
| Cumulative effect of unamortized costs | | | | | | | (1,665 | ) | | | (2,109 | ) |
| Installments due within one year | | | | | | | (96,398 | ) | | | (136,805 | ) |
| Long-term borrowings — at amortized cost | | | | | | $ | 89,841 | | | $ | 92,630 | |
Bank prime lending rate and marginal cost lending rate (“BPLR” & “MCLR”) is the Indian equivalent to LIBOR. Asset backed borrowings are secured by fixed and floating charges over certain Group assets.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Analysis of short-term borrowings
| | | Nominal | | As at March 31 | |
| | | interest rate (%) | | 2017 | | | 2016 | |
| | | | | (in thousands) | |
| Asset backed borrowings | | | | | | | | | | |
| Export credit, bill discounting and overdraft | | BPLR+1-3.5% | | $ | 41,687 | | | $ | 12,028 | |
| Export credit and overdraft | | LIBOR+3.5% | | | 24,572 | | | | 26,586 | |
| Short term loan(3) | | 13% - 14.25% | | | 5,396 | | | | — | |
| Short term loan | | MCLR+4.25% | | | 4,943 | | | | — | |
| | | | | $ | 76,598 | | | $ | 38,614 | |
| Unsecured borrowings | | | | | | | | | | |
| Commercial paper | | 10.0% 13.0% | | | — | | | | 1,511 | |
| Other short term loan | | 1.75% - 2.6% | | | — | | | | 32,871 | |
| Other short term loan(4) | | 12% - 14% | | | 7,033 | | | | 786 | |
| Installments due within one year on long-term borrowings | | | | | 96,398 | | | | 136,805 | |
| Short-term borrowings - at amortized cost | | | | $ | 180,029 | | | $ | 210,587 | |
(1) | Subsequently, in April 2017, Retail bond were fully secured by certain group assets. |
(2) | Revolving credit facility maturing in January 2017 was amended and the maturity date was extended up to March 31, 2017. Subsequently, on April 1, 2017 the Group entered into an amended credit agreement where in the revolving credit facility bearing interest rate 7.5% plus LIBOR, is secured by certain group assets and is payable in three instalments by September 30, 2017. |
(3) | Secured by pledge of shares held in the Group’s majority owned subsidiary, Eros International Media Limited, India. |
(4) | Includes loan of $6,417 from Eros Television Private Limited, a related party. (See Note 35). |
Fair value of the long-term borrowings as at March 31, 2017 is $155,923 (2016: $195,924). Fair values of long-term financial liabilitiesthousands, except retail bonds have been determined by calculating their present values at the reporting date, using fixed effective market interest rates available to the Companies within the Group. As at March 31, 2017, the fair value of retail bond amounting to $43,416 has been determined using quoted prices from the London Stock Exchange. Carrying amount of short-term borrowings are considered a reasonable approximation of fair value.
The company has placed time deposits of $7,316 (2016: 2,689) which has been disclosed as restricted deposits.
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Payable under the film financing arrangements | | $ | 8,935 | | | $ | 8,688 | |
| | | $ | 8,935 | | | $ | 8,688 | |
Acceptances comprise of credit availed from financial institutions for payment to film producers for film co-production arrangement entered by the group. The carrying value of acceptances are considered a reasonable approximation of fair value.
25 | OTHER LONG – TERM LIABILITIES |
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Deferred revenue | | $ | 4,654 | | | $ | — | |
| Employee benefit obligation | | | 695 | | | | 536 | |
| | | $ | 5,349 | | | $ | 536 | |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26 | DERIVATIVE FINANCIAL INSTRUMENTS |
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Non-Current | | | | | | |
| Derivative liabilities – Held for trading | | | | | | | | |
| Interest rate cap | | $ | (12,553 | ) | | $ | (22,850 | ) |
The above interest rate derivative instruments are not designated in a hedging relationship. They are carried at fair value through profit or loss. (Refer Note 9).
| | | Number of
Shares | | | GBP | |
| | | | | | | | (in thousands) | |
| Authorized | | | | | | | | |
| Ordinary shares of 30p each at March 31, 2017 and March 31, 2016 | | | 83,333,333 | | | | 25,000 | |
| | | Number of Shares | | | USD | |
| Allotted, called up and fully paid | | A Ordinary
30p Shares | | | B Ordinary
30p Shares | | | (in thousands) | |
| As at March 31, 2015 | | | 31,982,488 | | | | 25,555,220 | | | $ | 30,622 | |
| Issue of shares on July 16, 2015 | | | 300,000 | | | | — | | | | 138 | |
| Issue of shares on August 18, 2015 | | | 3,500 | | | | — | | | | 2 | |
| Issue of shares in February 2016 | | | 57,860 | | | | — | | | | 26 | |
| Issue of shares in March 2016 | | | 10,900 | | | | — | | | | 5 | |
| Transfer of B Ordinary to A Ordinary share | | | 594,566 | | | | (594,566 | ) | | | — | |
| As at March 31, 2016 | | | 32,949,314 | | | | 24,960,654 | | | $ | 30,793 | |
| Issue of shares on April 1, 2016 | | | 1,750 | | | | — | | | | 1 | |
| Issue of shares in July 29, 2016 | | | 20,813 | | | | — | | | | 8 | |
| Issue of shares in August, 2016 | | | 387,613 | | | | — | | | | 153 | |
| Issue of shares in September, 2016 | | | 2,107,010 | | | | — | | | | 825 | |
| Issue of shares in October, 2016 | | | 98,500 | | | | — | | | | 36 | |
| Issue of shares in November, 2016 | | | 117,963 | | | | — | | | | 45 | |
| Issue of shares in December, 2016 | | | 14,580 | | | | — | | | | 6 | |
| Transfer of B Ordinary to A Ordinary share | | | 5,581,272 | | | | (5,581,272 | ) | | | — | |
| Issue of shares of in January, 2017 | | | 4,200 | | | | — | | | | 2 | |
| Issue of shares of in February, 2017 | | | 17,437 | | | | — | | | | 5 | |
| Issue of shares of in March, 2017 | | | 11,750 | | | | — | | | | 3 | |
| As at March 31, 2017 | | | 41,312,202 | | | | 19,379,382 | | | $ | 31,877 | |
In July, August and November 2016, the Company issued 62,439 ‘A’ ordinary shares to certain executive directors and ex-employee out of IPO 2006 Plan. As at March 31, 2017, all the share options have been exercised and issued.
On June 9, 2015, the Board of Directors approved a grant of 580,000 ‘A’ ordinary shares to certain executive directors with a fair market value of $21.34 per share. Subject to continued employment, these awards with Nil exercise price, vest over a period of three years. In August 2016, 360,000 shares of 580,000 share awards were issued of which 180,000 shares were issued with restriction. Further, in October 2016, 60,000 shares out of the remaining 220,000 share awards were issued.
The Board of Directors approved grant of 13,500 share awards to certain consultants in August and September 2016. These awards with Nil exercise price and fair market value of $15.91-$17.01 vested on grant date were issued immediately on such dates.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On September 8, 2016, the Board of Directors approved a grant of 100,000 ‘A’ ordinary share awards to a certain employee with Nil exercise price and a fair market value of $16.2. These awards vested on grant date and were issued on September 23, 2016.
In September 2016, the Company issued 2,000,310 ‘A’ ordinary shares to two of its existing institutional shareholders for an aggregate consideration of $30 million.
On July 4, 2016, the Company entered into an employment exit agreement with an employee pursuant to which the management approved a grant of 1,000 ‘A’ ordinary share awards with Nil exercise price and a fair market value of $15.71 per share. These shares awards were issued on October 6, 2016.
On October 12, 2016 and January 23, 2017, permitted Class B shares holders converted 3,247,939 and 2,333,333 Class B shares respectively, into Class A shares. This was effected through the cancellation of 5,581,272 Class B shares and subsequent issuance of the equivalent amount of Class A shares.
On September 15, 2016, the Company entered into an employment exit agreement with an employee pursuant to which the management approved a grant of 10,000 ‘A’ ordinary share awards with Nil exercise price and a fair market value of $15.99 per share. These shares awards were issued on October 18, 2016.
On June 5, 2014, the Board of Directors had approved a grant of 525,000 ‘A’ ordinary share awards with a fair market value of $14.95 per share, to certain executive directors and members of senior management. These awards vest subject to certain share price conditions being met on or before May 31, 2015 and the employee remaining in service until May 31, 2015. On fulfilment of share price condition, 487,500 restricted shares were issued on December 1, 2014. All these awards have since vested and shares issued. In case of except 30,000 share awards for which shares were issued on November 2, 2016.
On September 4, 2015, the Company entered into an employment exit agreement with an employee pursuant to which the Board approved a grant of 20,000 ‘A’ ordinary share awards with Nil exercise price and a fair market value of $33.66 per share. These shares were issued on November 2, 2016.
On September 24, 2014, the Board approved a grant of 116,730 ‘A’ ordinary share awards to certain employees. These awards, granted to the employees on October 21, 2014 with Nil exercise price, subject to continued employment, vest annually in three equal tranches from the date of grant. Fair value of each award was $17.07. In April 2016, 1,750 shares were issued with further issuances of 35,050 in October 2016, November 2016, and January 2017.
On June 28, 2016, the Board of Directors approved a grant of 197,820 ‘A’ ordinary share awards to certain employees with a fair value of $ 14.68 per share. Subject to continued employment, these awards with Nil exercise price vest over a period of two and half years with first tranche vesting on November 11, 2016. In November and December 2016, 56,780 shares were issued with further issuance of 13,350 shares in March 2017.
On February 13, 2017, the Company entered into an employment exit agreement with an employee pursuant to which the management approved a grant of 17,437 ‘A’ ordinary share awards with Nil exercise price and a fair market value of $11.5 per share. These shares were issued on February 24, 2017.
As at March 31, 2017, none of the awards were forfeited.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28 | SHARE BASED COMPENSATION PLANS |
The compensation cost recognized with respect to all outstanding plans and by grant of shares, which are all equity settled instruments, is as follows:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| IPO India Plan | | $ | 2,140 | | | $ | 1,736 | | | $ | 869 | |
| JSOP Plan | | | 3,622 | | | | 2,696 | | | | 1,603 | |
| Option award scheme 2012 | | | 699 | | | | 1,610 | | | | 1,824 | |
| 2014 Share Plan | | | 1,427 | | | | 2,361 | | | | 264 | |
| 2015 Share Plan | | | 328 | | | | 932 | | | | 60 | |
| Other share option awards | | | 4,405 | | | | 894 | | | | 554 | |
| Management scheme (staff share grant) | | | 10,850 | | | | 20,763 | | | | 16,741 | |
| | | $ | 23,471 | | | $ | 30,992 | | | $ | 21,915 | |
Joint Stock Ownership Plan (JSOP)
In April 2012, the Company established a controlled trust called the Eros International Plc Employee Benefit Trust (“JSOP Trust”). The JSOP Trust purchased 2,000,164 shares of the Company out of funds borrowed from the Company and repayable on demand. The Company’s Board, Nomination and Remuneration Committee recommends to the JSOP Trust certain employees, officers and key management personnel, to whom the JSOP Trust will be required to grant shares from its holdings at nominal price. Such shares are then held by the JSOP Trust and the scheme is referred to as the “JSOP Plan.” The shares held by the JSOP Trust are reported as a reduction in stockholders’ equity and termed as ‘JSOP reserves’.
On August 4, 2015, the Company’s Employee Benefit Trust entered into a Joint ownership deed (the “2015 JSOP deed”) with certain employees in respect of 380,000’A’ ordinary shares. These options were issued at a strike price of $24.00 and fair market value of $15.66. Subject to continued employment and market conditions set out in the 2015 JSOP deed, these options vest in May 2017.
The movement in the shares held by the JSOP Trust is given below:
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| Shares held at the beginning of the year | | | 1,239,497 | | | | 1,723,657 | | | | 2,000,164 | |
| Shares granted | | | — | | | | 380,000 | | | | 242,033 | |
| Shares exercised | | | (92,530 | ) | | | (573,260 | ) | | | (80,704 | ) |
| Shares forfeiture/lapsed | | | — | | | | (290,900 | ) | | | (437,836 | ) |
| Shares held at the end of the year | | | 1,146,967 | | | | 1,239,497 | | | | 1,723,657 | |
| Unallocated shares held by trust | | | 106,701 | | | | 106,701 | | | | 195,803 | |
| | | | 1,253,668 | | | | 1,346,198 | | | | 1,919,460 | |
Employee Stock Option Plans
A summary of the general terms of the grants under stock option plans and stock awards are as follows:
| | Range of
exercise prices |
IPO India Plan | | INR10 – 175 |
IPO Plan – June 2006 | | GBP 5.28 |
JSOP Plan | | $11.00 – 24.00 |
Option award scheme 2012 | | $11.00 |
2014 Share Plan | | $14.97– 18.50 |
2015 Share Plan | | $7.40 – 33.12 |
Other share option plans | | $18– $18.88 |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Employees covered under the stock option plans are granted an option to purchase shares of the Company at the respective exercise prices, subject to fulfilment of vesting conditions (generally service conditions). These options generally vest in tranches over a period of one to five years from the date of grant. Upon vesting, the employees can acquire one share for every option. The maximum contractual term for these stock option plans ranges between two to ten years.
The activity in these employee stock option plans is summarized below:
| | | | | Year ended March 31 |
| | | | | 2017 | | 2016 | | 2015 |
| | | Name of Plan | | Number
of
shares | | Weighted
average
exercise
price | | Number
of
shares | | Weighted
average
exercise
price | | Number
of
shares | | Weighted
average
exercise
price |
| Outstanding at the beginning of the year | | IPO India Plan | | 2,196,215 | | INR | 35.17 | | 1,437,400 | | INR | 52 | | 1,397,682 | | INR | 120 |
| Granted | | | | 269,381 | | | 10 | | 966,009 | | | 10 | | 691,961 | | | 10 |
| Exercised | | | | (269,553) | | | 10 | | (180,920) | | | 39 | | (534,084) | | | 153 |
| Forfeited and lapsed | | | | (87,980) | | | 10 | | (26,274) | | | 10 | | (118,159) | | | 147 |
| Outstanding at the end of the year | | | | 2,108,063 | | | 34.96 | | 2,196,215 | | | 35.17 | | 1,437,400 | | | 52 |
| Exercisable at the end of the year | | | | 911,854 | | INR | 63.75 | | 632,566 | | INR | 78.00 | | 413,337 | | INR | 82 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | IPO Plan June 2006 | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| Granted | | | | — | | | — | | — | | | — | | — | | | — |
| Exercised | | | | (62,438) | | | 5.28 | | —- | | | — | | — | | | — |
| Forfeited and lapsed | | | | —- | | | | | —- | | | — | | — | | | — |
| Outstanding at the end of the year | | | | — | | GBP | — | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| Exercisable at the end of the year | | | | — | | GBP | — | | 62,438 | | GBP | 5.28 | | 62,438 | | GBP | 5.28 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | JSOP Plan | | 1,239,486 | | $ | 14.98 | | 1,723,657 | | $ | 11.60 | | 2,000,164 | | $ | 11.00 |
| Granted | | | | — | | | — | | 380,000 | | | 24.00 | | 242,035 | | | 15.34 |
| Exercised | | | | (92,530) | | | 11 | | (573,262) | | | 11.00 | | (80,704) | | | 11.00 |
| Forfeited and lapsed | | | | — | | | — | | (290,900) | | | 11.00 | | (437,838) | | | 11.00 |
| Outstanding at the end of the year | | | | 1,146,956 | | $ | 14.98 | | 1,239,495 | | $ | 14.98 | | 1,723,657 | | $ | 11.60 |
| Exercisable at the end of the year | | | | 728,736 | | $ | 11 | | 617,450 | | $ | 11.00 | | 196,642 | | $ | 11.00 |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | Option award scheme 2012 | | 674,045 | | | 11 | | 674,045 | | | 11.00 | | — | | | — |
| Granted | | | | — | | $ | — | | — | | $ | — | | 807,648 | | $ | 11.00 |
| Exercised | | | | — | | | — | | — | | | — | | (133,603) | | | 11.00 |
| Forfeited and lapsed | | | | — | | | — | | — | | | — | | — | | | — |
| Outstanding at the end of the year | | | | 674,045 | | $ | 11 | | 674,045 | | $ | 11.00 | | 674,045 | | $ | 11.00 |
| Exercisable at the end of the year | | | | 449,363 | | | 11 | | 224,682 | | | 11.00 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | 2014 Share Plan | | 773,749 | | | 17.86 | | 230,000 | | | 16.27 | | — | | | — |
| Granted | | | | — | | $ | — | | 600,000 | | $ | 18.40 | | 230,000 | | $ | 16.27 |
| Exercised | | | | — | | | — | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (50,000) | | | 14.97 | | (56,251) | | | 17.13 | | — | | | — |
| Outstanding at the end of the year | | | | 723,749 | | $ | 18.06 | | 773,749 | | $ | 17.86 | | 230,000 | | $ | 16.27 |
| Exercisable at the end of the year | | | | 288,333 | | | 17.80 | | 96,664 | | | 15.99 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | 2015 Share Plan | | 282,500 | | | 16.68 | | 200,000 | | | 17.46 | | — | | | — |
| Granted | | | | — | | $ | | | 105,000 | | $ | 15.35 | | 200,000 | | $ | 17.46 |
| Exercised | | | | (8,750) | | | 8.84 | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (61,667) | | | 18.68 | | (22,500) | | | 19.17 | | — | | | — |
| Outstanding at the end of the year | | | | 212,083 | | $ | 16.23 | | 282,500 | | $ | 16.68 | | 200,000 | | $ | 17.46 |
| Exercisable at the end of the year | | | | 127,604 | | | 17.46 | | 72,708 | | | 16.90 | | — | | | — |
| | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | Other share option plans | | 1,000,000 | | | 18.88 | | 500,000 | | | 18.88 | | — | | | — |
| Granted | | | | — | | | — | | 500,000 | | | 18.00 | | 500,000 | | | 18.88 |
| Exercised | | | | — | | | — | | — | | | — | | — | | | — |
| Forfeited and lapsed | | | | (500,000) | | | 18 | | — | | | — | | — | | | — |
| Outstanding at the end of the year | | | | 500,000 | | $ | 18.88 | | 1,000,000 | | $ | 18.44 | | 500,000 | | $ | 18.88 |
| Exercisable at the end of the year | | | | 200,000 | | | 18.88 | | 100,000 | | | 18.88 | | — | | | — |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSdata)
The following table summarizes information about outstandingrestricted stock options:unit activity for the years ended September 30, 2017, 2018 and 2019 and for the six months ended March 31, 2019 and 2020:
| | | | Year ended March 31 | |
| | | | 2017 | | | 2016 | | | 2015 | |
| Name of Plan | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | | | Weighted
average
remaining
life
(Years) | | | Weighted
average
exercise
price | |
| IPO India Plan | | | 4.10 | | | INR* | 35.0 | | | 4.10 | | | INR | 35.0 | | | 2.90 | | | INR | 52 | |
| IPO Plan June 2006 | | | — | | | GBP** | — | | | 0.25 | | | GBP | 5.28 | | | 1.00 | | | GBP | 5.28 | |
| JSOP Plan | | | 4.93 | | | $ | 16.19 | | | 5.93 | | | $ | 14.98 | | | 7.30 | | | $ | 11.60 | |
| Option award scheme 2012 | | | 4.83 | | | $ | 11.00 | | | 5.83 | | | $ | 11.00 | | | 5.50 | | | $ | 11.00 | |
| 2014 Share Plan | | | 7.11 | | | $ | 18.06 | | | 6.88 | | | $ | 17.86 | | | 6.47 | | | $ | 16.27 | |
| 2015 Share Plan | | | 6.08 | | | $ | 16.23 | | | 5.91 | | | $ | 16.68 | | | 6.49 | | | $ | 17.46 | |
| Other share option plans | | | 4.75 | | | $ | 18.88 | | | 5.75 | | | $ | 18.44 | | | 6.00 | | | $ | 18.88 | |
| | | Number of RSU’s | | | Weighted-Average Grant-Date Fair Value | |
| | | | | | | |
| Outstanding at September 30, 2016 | | | — | | | | — | |
| Granted | | | 357,986 | | | $ | 4.18 | |
| Forfeited | | | (11,317 | ) | | | 4.18 | |
| Outstanding at September 30, 2017 | | | 346,669 | | | | 4.18 | |
| Granted | | | 801,690 | | | | 41.66 | |
| Forfeited | | | (33,744 | ) | | | 4.18 | |
| Outstanding at September 30, 2018 | | | 1,114,615 | | | | 32.44 | |
| Forfeited | | | (556,203 | ) | | | 38.23 | |
| Outstanding at September 30, 2019 | | | 558,412 | | | | 24.04 | |
| | | Number of RSU’s | | | Weighted-Average Grant-Date Fair Value | |
| | | | | | | |
| Outstanding at September 30, 2018 | | | 1,114,615 | | | $ | 32.44 | |
| Forfeited | | | (482,243 | ) | | | 38.91 | |
| Outstanding at March 31, 2019 (unaudited) | | | 632,372 | | | | 25.18 | |
| | | Number of RSU’s | | | Weighted-Average Grant-Date Fair Value | |
| | | | | | | |
| Outstanding at September 30, 2019 | | | 558,412 | | | $ | 24.04 | |
| Forfeited | | | (39,364 | ) | | | 33.28 | |
| Outstanding at March 31, 2020 | | | 519,048 | | | | 23.34 | |
*INR – Indian RupeesThe fair values of restricted stock units are determined based on the market value of the shares on the date of grant.
**GBP – Great Britain Pound
As of September 30, 2017, 2018 and 2019, there was $885, $6,140 and $192 respectively, of total unrecognized stock-based compensation cost related to non-vested stock options and restricted stock unit awards. That cost is expected to be recognized over a weighted-average remaining vesting period of 2.9, 7.2 and 1.4 years, respectively.
As of March 31, 2019 and 2020, there was $307 and $123 respectively, of total unrecognized stock-based compensation cost related to non-vested stock options and restricted stock unit awards. That cost is expected to be recognized over a weighted-average remaining vesting period of 1.7, and 0.9 years, respectively.
The following table summarizes information about inputs to the fair valuation model for options grantedCompany recognized noncash stock-based compensation expense of $536, $447 and $195 during the year:years ended September 30, 2017, 2018 and 2019, respectively. The Company recognized noncash stock-based compensation expense of $97 and $81 during the six months ended March 31, 2019 and 2020. As of September 30, 2017, 2018 and 2019, there were 114,701, 44,389 and 199,089 awards, respectively, in the 2014 Plan and 1,403,131, 204,436 and 1,191,588 awards, respectively, in the 2017 Plan that were available for grant. As of March 31, 2019 and 2020, there were 88,257 and 222,851 awards, respectively, in the 2014 Plan and 1,117,628 and 1,230,952 awards, respectively, in the 2017 Plan that were available for grant.
| | IPO
India Plan | | JSOP(4) | | 2014
Share plan | | 2015
Share plan |
| Expected volatility(1)(2) | 35% - 75% | | 42% | | 40% | | 40% - 60% |
| Option life (Years) | 1.91 - 7.00 | | 10.00 | | 4.50 - 5.25 | | 10.00 |
| Dividend yield | 0% | | 0% | | 0% | | 0% |
| Risk free rate | 6.51% - 8.50% | | 0.43% - 2.82% | | 0.67% - 1.70% | | 0.24% - 1.46% |
| Range of fair value of the granted options at the grant date(3) | INR 179 – 380 | | $15.66 | | $6.9 – 8.44 | | $2.7 - 13.10 |
The Company issued 100,000 fully vested common shares during the year ended September 30, 2018 and recorded stock compensation expense of $4,166.
(1) | The expected volatility in respect of the IPO India Plan is based on Eros International Media Limited’s historic volatility. |
(2) | The expected volatility of all other options is based on the historic share price volatility of the Company over time periods comparable to the time from the grant date to the maturity dates of the options. |
(3) | The fair value of options under the JSOP Plan was measured using a Monte-Carlo simulation models. Fair value of options granted under all other schemes is measured using a Black Scholes model. |
(4) | Options under the JSOP Plan are subject to service and performance conditions as set out in the JSOP deed |
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
Management Scheme (staff share grant)7. Warrants
In June 2015, 300,000 ‘A’ ordinaryconnection with theatrical exhibition agreements entered into in July 2013, the Company issued warrants exercisable for 1,342,298 common shares awards were granted to the Group CFO with a fair market valueon March 3, 2014, at an exercise price of $21.34$7.29 per share. Subject to continued employment, these awards with nominal value exercise price vests annually in three tranches beginning June 9, 2016. As at March 31, 2017, these shares are yet to be issued.
On June 9, 2015,To prevent dilution, the Board of Directors approved a grant of 580,000 ‘A’ ordinary shares to certain executive directors with a fair market value of $21.34 per share. Subject to continued employment, these awards with Nil exercise price, vest over a period of three years. In August 2016, 360,000 shares of 580,000 share awards were issued of which 180,000 shares were issued with restriction. Further, in October 2016, 60,000 shares out of the remaining 220,000 share awards were issued.
In June 2016, the Board of Directors approved 620,000 ‘A’ ordinary share awards to certain executive directors with a fair value of $14.68 per share. Subject to continued employment these awards with Nil exercise price, vest over a period of three years.
On September 18, 2013, 1,676,645 ‘A’ ordinary shares were issued to CEO and Managing Director at $4.02 per share based on the closing market price on such date. In September, 2016 all restrictions were lifted.
On February 17, 2017, the Board of Directors approved, 50,000 ‘A’ ordinary share awards to an employee with a fair market value of $12.5 per share. Subject to continued employment, these awards with Nil exercise price, vest over a period of three years.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
500,000 'A' ordinary share options were granted to a non-executive director with a fair market value of $8.44 per option. Subject to continued employment, these options with $18.00 exercise price, vest annually in five equal tranches beginning June 9, 2016 which lapsed on non-reappointment of the non-executive director on December 1, 2016.
None of the above grants have been forfeited during the period. The charge for these grants have been accrued under ‘Management scheme’ (Staff share grant).
Subsequently, in May 2017, the Company entered into an employment exit agreement with an employee pursuant to which the Board approved a grant of 90,000 A ordinary share awards with Nil exercise price and a fair market value of $10 per share. These shares were issued on July 28, 2017.
29 | JOINT STOCK OWNERSHIP PLAN RESERVE (JSOP Reserve) |
| | | (in thousands) | |
| Balance at April 1, 2015 | | $ | (24,474 | ) |
| Issue out of treasury shares | | | 7,307 | |
| Balance at April 1, 2016 | | $ | (17,167 | ) |
| Issue out of treasury shares | | | 1,182 | |
| Balance at March 31, 2017 | | $ | (15,985 | ) |
The JSOP Reserve represents the cost of shares issued by Eros International Plc and held by the JSOP Trust to satisfy the requirements of the JSOP Plan (Refer Note 28). On June 5, 2014, the Board approved discretionary vesting of 20% of the applicable JSOP shares. In the current year 92,530 (2016: 573,262) ‘A’ ordinary shares held by the JSOP Trust were issued to eligible employees.
The number of common shares held by the JSOP Trust at March 31, 2017 was 1,253,657 ‘A’ Ordinary shares (2016: 1,346,198 ‘A’ Ordinary shares).
30 | OTHER COMPONENTS OF EQUITY |
| | | As at March 31
(in thousands) | |
| | | 2017 | | | 2016 | | | 2015 | |
| Movement in Hedging reserve: | | | | | | | | | | | | |
| Opening balance | | $ | (1,179 | ) | | $ | (1,983 | ) | | $ | (2,787 | ) |
| Reclassified to consolidated statements of income | | | 804 | | | | 804 | | | | 804 | |
| Closing balance | | $ | (375 | ) | | $ | (1,179 | ) | | $ | (1,983 | ) |
| | | | | | | | | | | | | |
| Movement in revaluation reserve: | | | | | | | | | | | | |
| Opening balance | | $ | 1,856 | | | $ | 1,528 | | | $ | 1,528 | |
| Gain recognized on revaluation of property, plant and equipment | | | — | | | | 328 | | | | — | |
| Impact of translation difference | | | (27 | ) | | | — | | | | — | |
| Closing balance | | $ | 1,829 | | | $ | 1,856 | | | $ | 1,528 | |
| | | | | | | | | | | | | |
| Movement in available for sale fair value reserve: | | | | | | | | | | | | |
| Opening balance | | $ | 6,622 | | | $ | 6,622 | | | $ | 5,802 | |
| Impairment loss on available-for-sale financial assets | | | (384 | ) | | | — | | | | 820 | |
| Closing balance | | $ | 6,238 | | | $ | 6,622 | | | $ | 6,622 | |
| | | | | | | | | | | | | |
| Movement in Foreign currency translation reserves | | | | | | | | | | | | |
| Opening balance | | $ | (60,609 | ) | | $ | (50,048 | ) | | $ | (43,858 | ) |
| Other comprehensive loss due to translation of foreign operations | | | 4,799 | | | | (10,561 | ) | | | (6,190 | ) |
| Closing balance | | $ | (55,810 | ) | | $ | (60,609 | ) | | $ | (50,048 | ) |
| | | | | | | | | | | | | |
| Total other components of equity | | $ | (48,118 | ) | | $ | (53,310 | ) | | $ | (43,881 | ) |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 | SIGNIFICANT NON-CASH EXPENSES |
Significant non-cash expenses, except loss on saleissuable are subject to adjustment. The warrants have an exercise life of assets, share based compensation, depreciation and amortizationten years. No warrants were as follows:
| | | As at March 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
| Net loss/(gain) on held for trading financial liabilities | | $ | (10,297 | ) | | $ | 3,566 | | | $ | 7,801 | |
| Impairment loss on available-for-sale financial assets | | | — | | | | — | | | | 1,307 | |
| Provisions for trade and other receivables | | | 2,430 | | | | 1,315 | | | | 3,963 | |
| Balances written back | | | (798 | ) | | | — | | | | — | |
| Impairment loss on content advances and loans and advances | | | 1,887 | | | | 2,545 | | | | 3,431 | |
| Unrealized foreign exchange (gain)/loss | | | (3,838 | ) | | | (2,864 | ) | | | 503 | |
| | | $ | (10,616 | ) | | $ | 4,562 | | | $ | 17,005 | |
32 | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
The Group has established objectives concerning the holding and use of financial instruments. The underlying basis of these objectives is to manage the financial risks faced by the Group.
Formal policies and guidelines have been set to achieve these objectives. The Group does not enter into speculative arrangements or trade in financial instruments and it is the Group’s policy not to enter into complex financial instruments unless there are specific identified risks for which such instruments help mitigate uncertainties.
Management of Capital Risk and Financial Risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to shareholders through the optimization of the debt and equity balance. The capital structure of the Group consists of debt, which includes the cash and cash equivalents, borrowings and equity attributable to equity holders of Eros, comprising issued capital, reserves and retained earnings as disclosed in Notes 21, 23 and 27 and the consolidated statement of changes in equity.
The gearing ratio at the end of the reporting period was as follows:
| | | As at March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Debt (net of debt issuance cost of $1,665 (2016: $2,109)) | | $ | 269,870 | | | $ | 303,217 | |
| Cash and cash equivalents | | | 112,267 | | | | 182,774 | |
| Net debt | | | 157,603 | | | | 120,443 | |
| Equity | | | 883,548 | | | | 809,094 | |
| Net debt to equity ratio | | | 17.8% | | | | 14.9% | |
Debt is defined as long and short-term borrowings (excluding derivatives). Equity includes all capital and reserves of the Group that are managed as capital.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Categories of financial instruments
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| Financial assets | | | | | | | | |
| Available-for-sale investments | | $ | 29,613 | | | $ | 30,147 | |
| Other financial assets(1) | | | 362,286 | | | | 377,312 | |
| | | $ | 391,899 | | | $ | 407,459 | |
| Financial liabilities at amortized cost | | | | | | | | |
| Trade payables and acceptances excluding value added tax and other tax payables | | $ | 114,475 | | | $ | 65,563 | |
| Borrowings | | | 269,870 | | | | 303,217 | |
| Financial Liabilities at fair value through profit or loss | | | | | | | | |
| Derivatives at fair value through profit or loss - held for trading | | | 12,553 | | | | 22,850 | |
| | | $ | 396,898 | | | $ | 391,630 | |
(1) Other financial assets include loans and receivables, excluding prepaid charges and statutory receivables, and includes cash and cash equivalents and restricted deposits held with banks.
Financial risk management objectives
Based on the operations of the Group throughout the world, Management considers that the key financial risks that it faces are credit risk, currency risk, liquidity risk and interest rate risk. The objectives under each of these risks are as follows:
| · | credit risk: minimize the risk of default and concentration. |
| · | currency risk: reduce exposure to foreign exchange movements principally between U.S. dollar, Indian Rupee and GBP. |
| · | liquidity risk: ensure adequate funding to support working capital and future capital expenditure requirements. |
| · | interest rate risk: mitigate risk of significant change in market rates on the cash flow of issued variable rate debt. |
Credit Risk
The Group’s credit risk is principally attributable to its trade receivables, advances, financial guarantees and cash balances. As a number of the Group’s trading activities require third parties to report revenues due to the Group this risk is not limited to the initial agreed sale or advance amounts. The amounts shown within the statements of financial position in respect of trade receivables and advances are net of allowances for doubtful debts based upon objective evidence that the Group will not be able to collect all amounts due.
Trading credit risk is managed on a country by country basis by the use of credit checks on new clients and individual credit limits, where appropriate, together with regular updates on any changes in the trading partner’s situation. In a number of cases trading partners will be required to make advance payments or minimum guarantee payments before delivery of any goods. The Group reviews reports received from third parties and in certain cases as a matter of course reserve the right within the contracts it enters into to request an independent third - party audit of the revenue reporting. Further, in many of the catalogue sales, the trading partners have extended payment terms of up to a year and often fall behind contractual payment terms. With respect to catalogue customers with a long trading history with the Group and who have contracted and paid significant amounts in the past without any prior history of bad debt, the Group closely monitors the same and secures post-dated bank instruments where possible and revised payment plans to assure collections. In case of new customer onboarding, the Group follows certain standard Know Your Client (KYC) procedures to ascertain financial stability of the counterparty and follows internal policies to not make ongoing sales to such new customers who are not reasonably current with their payments.
The credit risk on cash balances and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Group from time to time will have significant concentration of credit risk in relation to individual theatrical releases, television syndication deals or music licenses. This risk is mitigated by contractual terms which seek to stagger receipts and/or the release or airing of content. As at March 31, 2017, 25.1% (2016: 54.2%) of trade account receivables were represented by the top five debtors. The maximum exposure to credit risk is that shown within the statements of financial position. The maximum credit exposure on financial guarantees given by the Group for various financial facilities is described in Note 33.
As at March 31, 2017, the Group did not hold any material collateral or other credit enhancements to cover its credit risks associated with its financial assets.
Currency Risk
The Group operates throughout the world with significant operations in India, the British Isles, the United States of America and the United Arab Emirates. As a result it faces both translation and transaction currency risks which are principally mitigated by matching foreign currency revenues and costs wherever possible.
The Group’s major revenues are denominated in U.S. Dollars, Indian Rupees and British pounds sterling which are matched where possible to its costs so that these act as an automatic hedge against foreign currency exchange movements.
The Group has identified that it will need to utilize hedge transactions to mitigate any risks in movements between the U.S. Dollar and the Indian Rupee and has adopted an agreed set of principles that will be used when entering into any such transactions. No such transactions have been entered into to date and the Group has managed foreign currency exposure to date by seeking to match foreign currency inflows and outflows as much as possible. Details of the foreign currency borrowings that the Group uses to mitigate risk are shown within Interest Risk disclosures.
As at the reporting date there were no outstanding forward foreign exchange contracts. The Group adopts a policy of borrowing where appropriate in the local currency as a hedge against translation risk. The table below shows the Group’s net foreign currency monetary assets and liabilities position in the main foreign currencies, translated to USD equivalents, as at the year-end:
| | | | | | Net Balance | |
| | | USD | | | GBP | | | Other | |
| | | | | | (in thousands) | |
| As at March 31, 2017 | | | 4,025 | | | | (39,460 | ) | | | (2,320 | ) |
| As at March 31, 2016 | | | (12,578 | ) | | | (22,842 | ) | | | 300 | |
The above exposure to foreign currency arises where a consolidated entity holds monetary assets and liabilities denominated in a currency different to the functional currency of that entity.
A uniform decrease of 10% in exchange rates against all foreign currencies in positionexercised as of March 31, 2017 would have decreased2020. The warrants were valued at $0.427 per share for an aggregate value of approximately $573 on the date of grant. Since the warrants were issued in connection with obtaining domestic theatrical distribution rights, the Company’s net income before tax by approximately $3,775 (2016: gain of $3,947value was capitalized in other assets and 2015: gain of $731). An equal and opposite impact would be experienced in the event of an increase by a similar percentage.
Our sensitivitywas being amortized to foreign currency has increased during the year ended March 31, 2017 as a result of an increase in liabilities compared to assets denominated in foreign currencyfilm operating expenses over the comparative period. In Management’s opinion, the sensitivity analysis is unrepresentativefive-year term of the inherent foreign exchange risk because the exposure at the end of the reporting period does not reflect the exposure during the year.
Liquidity Risk
The Group manages liquidity risk by maintaining adequate reserves and agreed committed banking facilities. Management of working capital takes account of film release dates and payment terms agreed with customers.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
An analysis of short-term and long-term borrowings is set out in Note 23. Set out below is a maturity analysis for non-derivative and derivative financial liabilities. The amounts disclosed are based on contractual undiscounted cash flows. The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rates as at March 31, in each year.
| | | Total | | | Less than
1 year | | | 1-3
years | | | 3-5
years | | | More than
5 years | |
| | | (in thousands) | |
| As at March 31, 2017 | | | | | | | | | | | | | | | | | | | | |
| Borrowing principal payments(1) | | $ | 271,535 | | | $ | 180,722 | | | $ | 18,079 | | | $ | 71,881 | | | $ | 853 | |
| Borrowing interest payments | | | 40,987 | | | | 22,019 | | | | 12,046 | | | | 6,922 | | | | — | |
| Derivative financial instruments | | | 12,553 | | | | — | | | | — | | | | 12,533 | | | | — | |
| Acceptances | | | 8,935 | | | | 8,935 | | | | — | | | | — | | | | — | |
| Trade and other payables | | | 120,082 | | | | 120,082 | | | | — | | | | — | | | | — | |
| | | Total | | | Less than
1 year | | | 1-3
years | | | 3-5
years | | | More than
5 years | |
| | | (in thousands) | |
| As at March 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Borrowing principal payments(1) | | $ | 305,326 | | | $ | 211,375 | | | $ | 12,412 | | | $ | 7,705 | | | $ | 73,834 | |
| Borrowing interest payments | | | 37,358 | | | | 12,802 | | | | 12,122 | | | | 9,937 | | | | 2,497 | |
| Derivative financial instruments | | | 22,850 | | | | — | | | | — | | | | — | | | | 22,850 | |
| Acceptances | | | 8,688 | | | | 8,688 | | | | — | | | | — | | | | — | |
| Trade and other payables | | | 65,178 | | | | 65,178 | | | | — | | | | — | | | | — | |
(1) Excludes cumulative effect of unamortized costs.
At March 31, 2017, the Group had facilities available of $282,685 (2016: $318,391) and had net undrawn amounts of $2,215 (2016: $4,377) available.
In addition, the Group has issued financial guarantees amounting to $2,192 (2016: $2,373) in the ordinary course of business, having maturity dates up to the next 12 months. The Group did not earn any fees to provide such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused.
Interest Rate Risk
The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed, capped and floating rate borrowings, and by the use of interest rate swap contracts and forward interest rate contracts. Hedging activities are evaluated to align with interest rate views to ensure the most cost effective hedging strategies are applied.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Currency, Maturity and Nature of Interest Rate of the Nominal Value of Borrowings
| | | As at March 31 | |
| | | 2017 | | | % | | | 2016 | | | % | |
| | | (in thousands, except percentages) | |
| Currency | | | | | | | | | | | | | | | | |
| U.S. Dollar | | $ | 115,424 | | | | 42.5% | | | $ | 163,740 | | | | 53.6% | |
| Great British Pounds Sterling | | | 62,672 | | | | 23.1% | | | | 94,826 | | | | 31.1% | |
| Indian Rupees | | | 93,439 | | | | 34.4% | | | | 46,760 | | | | 15.3% | |
| Total | | $ | 271,535 | | | | 100.0% | | | $ | 305,326 | | | | 100% | |
| | | | | | | | | | | | | | | | | |
| Maturity | | | | | | | | | | | | | | | | |
| Due before one year | | $ | 180,722 | | | | 66.6% | | | $ | 211,375 | | | | 69.2% | |
| Due between one and three years | | | 18,079 | | | | 6.7% | | | | 12,412 | | | | 4.1% | |
| Due between four and five years | | | 71,881 | | | | 26.5% | | | | 7,705 | | | | 2.5% | |
| Due after five years | | | 853 | | | | 0.2% | | | | 73,834 | | | | 24.2% | |
| | | $ | 271,535 | | | | 100.0% | | | $ | 305,326 | | | | 100% | |
| Nature of rates | | | | | | | | | | | | | | | | |
| Fixed interest rate | | $ | 131,279 | | | | 48.3% | | | $ | 164,262 | | | | 53.8% | |
| Floating rate | | | 140,256 | | | | 51.7% | | | | 141,064 | | | | 46.2% | |
| Total | | $ | 271,535 | | | | 100.0% | | | $ | 305,326 | | | | 100% | |
In the fiscal year, the interest exposure was managed through an interest cap on $100 million entered into in 2012. Two written floor contracts each with $100 million notional value were also entered into in 2012.
The effect of these instruments in combination is that the maximum cash outflow is 6% although the written floors mean that should market rates fall below the floor rate, then the interest charged would be twice the floor rate, although never exceeding 6%. $100 million of the debt facility is classified as floating interest rate borrowings as at March 31, 2017 and 2016.
The sensitivity analysis assumes a parallel shift of 100 basis points interest rate across all yield curves. This calculation also assumes that the change occurs at the statement of financial position date and has been calculated based on risk exposures outstanding as at that date. The period end balances are not necessarily representative of the average debt outstanding during the period.
At 1% increase in underlying bank rates would lead to decrease in the Company’s net income before tax by $ 2,461 for the year ended March 31, 2017 (2016: $2,721) on net income. An equal and opposite impact would be felt if rates fell by 1%.
This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
Under the interest swap contracts, we have agreed to exchange the difference between fixed and floating rate interest amounts calculated on an agreed notional principal amount. Such contracts enable us to mitigate the risk of changing interest rates on the cash flow of issued variable rate debt.exhibition agreements.
The fair value of the warrants at the grant date was determined using the Black-Scholes option pricing model using an expected life of 10 years, expected volatility of 65%, risk-free interest rate derivatives which comprise derivatives at fair value through profitof 0.5%, and loss is determinedno dividend yield as the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.assumptions.
Financial instruments — disclosureIn connection with the issuance of fairClass D shares, the Company issued 9,858 warrants to certain investors with an exercise price of $0.01 per share. The warrants were fully vested and exercised on the date of issuance by the investors. The difference between the value measurement levelof the warrants and the issue price of the Class D shares is being accreted to redemption value consistent with the other shares of Class D.
Disclosures of fair value measurements are grouped into the following levels:
| · | Level 1 fair value measurements derived from unadjusted quoted prices in active markets for identical assets or liabilities; |
| · | Level 2 fair value measurements derived from inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and |
| · | Level 3 fair value measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data. |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS8. Revenue
The table below presents assetsrevenues by market and liabilities measured at fair value on a recurring basis, which are all category level 2:product line for the fiscal years ended September 30, 2017, 2018 and 2019 and the six months ended March 2019 and 2020, respectively. The fiscal year 2017 and 2018 information in the table below has not been adjusted under the modified retrospective method of adoption of the new revenue guidance adopted in fiscal year 2019.
| | | | | As at March 31, 2017 | | |
| | | | | (in thousands) | | |
| Description of type of financial assets | | Gross amount of
recognized financial assets | | Gross amount of recognized
financial liabilities offset in the
statement of financial position | | Net amounts financial assets
presented in the statement
of financial position |
| Derivative assets | | 179 | | (179) | | — |
| Total | | 179 | | (179) | | — |
| | | | | | | |
| Description of type of financial liabilities | | Gross amount of
recognized financial liabilities | | Gross amount of recognized
financial assets offset in the
statement of financial position | | Net amounts financial liabilities
presented in the statement
of financial position |
| Derivative liabilities | | (12,732) | | 179 | | (12,553) |
| Total | | (12,732) | | 179 | | (12,553) |
| | | | | As at March 31, 2016 | | |
| | | | | (in thousands) | | |
| Description of type of financial assets | | Gross amount of
recognized financial assets | | Gross amount of recognized
financial liabilities offset in the
statement of financial position | | Net amounts financial assets
presented in the statement
of financial position |
| Derivative assets | | 200 | | (200) | | — |
| Total | | 200 | | (200) | | — |
| | | | | | | |
| Description of type of financial liabilities | | Gross amount of
recognized financial liabilities | | Gross amount of recognized
financial assets offset in the
statement of financial position | | Net amounts financial liabilities
presented in the statement
of financial position |
| Derivative liabilities | | (23,050) | | 200 | | (22,850) |
| Total | | (23,050) | | 200 | | (22,850) |
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | (unaudited) | | | | |
| Film: | | | | | | | | | | | | | | | | | | | | |
| Theatrical | | $ | 20,339 | | | $ | 136,474 | | | $ | 109,716 | | | $ | 58,619 | | | $ | 49,162 | |
| Home entertainment | | | 94,457 | | | | 102,971 | | | | 118,716 | | | | 71,382 | | | | 53,405 | |
| TV/Streaming | | | 40,368 | | | | 32,026 | | | | 71,575 | | | | 42,123 | | | | 35,168 | |
| Other post theatrical | | | 2,772 | | | | 1,245 | | | | 4,988 | | | | 1,506 | | | | 2,649 | |
| International | | | 37,836 | | | | 154,915 | | | | 88,633 | | | | 46,876 | | | | 38,198 | |
| Total film | | | 195,772 | | | | 427,631 | | | | 393,628 | | | | 220,506 | | | | 178,582 | |
| | | | | | | | | | | | | | | | | | | | | |
| Television and other | | | 5,669 | | | | 21,215 | | | | 40,633 | | | | 3,562 | | | | 9,871 | |
| Total revenue | | $ | 201,441 | | | $ | 448,846 | | | $ | 434,261 | | | $ | 224,068 | | | $ | 188,453 | |
9. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, making significant changes to the taxation of the U.S. business entities. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, imposed a one-time transition tax in connection with the move from worldwide tax system to a territorial tax system, provided for accelerated deductions for certain U.S film production costs, imposed limitations on certain tax deductions such as executive compensation in future periods, and included numerous other provisions. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 24.3% for the fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. Since we are not in a current U.S. federal tax paying position, our U.S. tax provision consists primarily of deferred tax benefits calculated at the 21% tax rate.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.
With the enactment of the CARES Act, the Company does not expect a financial statement impact. The Company has not recorded any financial statement expense or benefit relate to the Act for the six months ended March 30, 2020.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial assetsStatements
(in thousands, except share data)
The Company’s income tax provision (benefit) differs from the federal statutory rate multiplied by pre-tax income (loss) primarily due to valuation allowance recognized against federal, state and liabilities subject to offsetting enforceable master netting arrangements or similar agreements as at March 31, 2017foreign deferred tax assets. The Company’s total income tax provision primarily consists of foreign withholding taxes.
The Company’s income tax provision (benefit) can be affected by many factors, including the overall level of pre-tax income, the mix of pre-tax income generated across the various jurisdictions in which the Company operates, changes in tax laws and regulations in those jurisdictions, and changes in valuation allowances on its deferred tax assets.
The components of pre-tax net loss, are as follows:
| | | As at March 31,2017 |
| | | (in thousands) |
| | | Average
contract rate | | Notional
principal
amount | | Fair value of
derivative
instrument
2017 | | | Fair value of
derivative
instrument
2016 | |
| 2012 Interest Rate Cap | | 6% | | 100,000 | | | (179 | ) | | | (200 | ) |
| 2012 Interest Rate Floor | | 0.5% - 3% | | 100,000 | | | 6,366 | | | | 11,525 | |
| 2012 Interest Rate Floor | | 0.5% - 3% | | 100,000 | | | 6,366 | | | | 11,525 | |
| Total | | | | | | $ | 12,553 | | | $ | 22,850 | |
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | | (unaudited) | | | | | |
| Domestic | | $ | (77,453 | ) | | $ | (173,261 | ) | | $ | (131,189 | ) | | $ | (41,568 | ) | | $ | (21,694 | ) |
| Foreign | | | (8,521 | ) | | | (19,123 | ) | | | (6,104 | ) | | | (679 | ) | | | (4,258 | ) |
| Total | | $ | (85,974 | ) | | $ | (192,384 | ) | | $ | (137,293 | ) | | $ | (42,247 | ) | | $ | (25,952 | ) |
NoneThe Company’s current and deferred income tax provision (benefit) consists of the above derivative instruments is designated infollowing:
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | | (unaudited) | | | | | |
| Current provision: | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| State | | | — | | | | 5 | | | | — | | | | — | | | | — | |
| Foreign | | | 387 | | | | 806 | | | | 708 | | | | 359 | | | | 161 | |
| Total current provision | | | 387 | | | | 811 | | | | 708 | | | | 359 | | | | 161 | |
| | | | | | | | | | | | | | | | | | | | | |
| Deferred provision: | | | | | | | | | | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | | | | — | | | | — | |
| Foreign | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total deferred provision | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 387 | | | $ | 811 | | | $ | 708 | | | $ | 359 | | | $ | 161 | |
The income tax provision differs from the amount computed by applying the statutory federal income tax rate to pretax loss as a hedging relationship. A gain of $10,297 (loss in 2016: $3,566) in respectresult of the above derivative instruments has been recognized in the consolidated statements of income within other losses. Fair value of interest rate derivative involving interest rate options is estimated as the present value of the estimated future cash flows based on observable yield curves using an option pricing model.following differences:
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | | (unaudited) | | | | | |
| Income taxes computed at Federal statutory rate | | $ | (29,229 | ) | | $ | (46,705 | ) | | $ | (28,831 | ) | | $ | (8,872 | ) | | $ | (5,450 | ) |
| Increase (decrease) in rates resulting from: | | | | | | | | | | | | | | | | | | | | |
| State tax, net of federal tax benefit | | | (3,480 | ) | | | (8,990 | ) | | | (685 | ) | | | 1,449 | | | | (2,869 | ) |
| Shareholder exit | | | | | | | | | | | 5,250 | | | | 1,213 | | | | (2,891 | ) |
| Deferred tax rate adjustment | | | (257 | ) | | | (295 | ) | | | 2,314 | | | | 2,314 | | | | (1,722 | ) |
| Permanent and other | | | 974 | | | | 386 | | | | 1,565 | | | | 1,437 | | | | (399 | ) |
| Meals and entertainment | | | 45 | | | | 84 | | | | 334 | | | | 159 | | | | 172 | |
| Foreign withholding taxes | | | 387 | | | | 806 | | | | 708 | | | | 359 | | | | 161 | |
| Tax law change | | | — | | | | 35,297 | | | | — | | | | — | | | | — | |
| Increase (decrease) in valuation allowance | | | 31,947 | | | | 20,228 | | | | 20,053 | | | | 2,300 | | | | 13,159 | |
| Income tax provision | | $ | 387 | | | $ | 811 | | | $ | 708 | | | $ | 359 | | | $ | 161 | |
EROS INTERNATIONAL PLCSTX Filmworks, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to Audited Consolidated Financial Statements
(in thousands, except share data)
ReconciliationThe income tax provision consists primarily of Level 3 fair value measurements of financial assetsforeign withholding taxes.
| | | Available
for sale of
financial assets | |
| | | (in thousands) | |
| As at March 31, 2015 | | $ | 29,917 | |
| Additions | | | 230 | |
| As at March 31, 2016 | | $ | 30,147 | |
| Total gain or (losses): | | | | |
| - in profit or loss | | | — | |
| - in other comprehensive income | | | (384 | ) |
| Additions | | | 80 | |
| Disposals* | | | (230 | ) |
| As at March 31, 2017 | | $ | 29,613 | |
*On June 3, 2016, the Company sold its investment in The Cultural Trip (“TCT”) for $288 recording a gain of $58. The Company had made investment in TCT in July 2015 at transaction price of $230.
Management uses valuation techniques in measuring the fair value of financial instruments, where active market quotes are not available. In applying the valuation techniques, management makes maximum use of market inputs, and uses estimates and assumptions that are, as far as possible, consistent with observable data that market participants would use in pricing the instrument. Where applicable data is not observable, management uses its best estimate about the assumptions that market participants would make. These estimates may vary from the actual prices that would be achieved in an arm’s length transaction at the reporting date.
There were no transfers between any Levels in any of the years.
33 | CONTRACTUAL OBLIGATIONS AND COMMITMENTS |
Eros’ material contractual obligations are comprised of contracts related to content commitments.
| | | Total | |
| | | (in thousands) | |
| As at March 31, 2017 | | $ | 250,997 | |
| As at March 31, 2016 | | $ | 218,541 | |
The Group has providedincome tax effects of temporary differences between the book value and tax basis of assets and liabilities are as follows:
| | | Year Ended September 30 | | | Six Months Ended March 31 | |
| | | 2017 | | | 2018 | | | 2019 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | (unaudited) | | | | |
| Deferred tax assets: | | | | | | | | | | | | | | | | | | | | |
| Net operating loss | | $ | 69,774 | | | $ | 84,216 | | | $ | 100,166 | | | $ | 82,775 | | | $ | 114,863 | |
| Accrued participants and residuals | | | 14,563 | | | | 21,453 | | | | 25,088 | | | | 25,426 | | | | 24,729 | |
| Production costs | | | 3,741 | | | | 4,056 | | | | 3,390 | | | | 3,592 | | | | 4,403 | |
| Accrued expenses and other | | | 3,710 | | | | 3,095 | | | | 1,916 | | | | 1,294 | | | | 2,335 | |
| Lease liabilities | | | — | | | | — | | | | — | | | | — | | | | 2,771 | |
| Deferred revenue | | | 963 | | | | 825 | | | | 1,877 | | | | 4,622 | | | | 2,107 | |
| Stock compensation | | | 771 | | | | 544 | | | | 556 | | | | 534 | | | | 605 | |
| Intangibles and fixed assets | | | 210 | | | | 163 | | | | 210 | | | | 184 | | | | 11 | |
| Total deferred tax assets | | | 93,731 | | | | 114,352 | | | | 133,203 | | | | 118,427 | | | | 151,824 | |
| Less: valuation allowance | | | (93,731 | ) | | | (114,352 | ) | | | (133,203 | ) | | | (116,605 | ) | | | (146,392 | ) |
| Total net deferred tax assets | | $ | — | | | $ | — | | | $ | — | | | $ | 1,822 | | | $ | 5,432 | |
| | | | | | | | | | | | | | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | | | | | |
| Right of use assets | | | — | | | | — | | | | — | | | | — | | | | (2,039 | ) |
| Other | | | — | | | | — | | | | — | | | | (1,822 | ) | | | (3,393 | ) |
| Total net deferred tax liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | (1,822 | ) | | $ | (5,432 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total net deferred tax assets and liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
At March 31, 2020 the Company had federal, state and foreign net operating loss carryforwards (NOL) of approximately $426.5, $269.1 and $35.8. The federal and state NOL carryforwards will begin to expire in 2034, however, $121.1 of federal NOL will not expire. The foreign NOL carryforwards do not expire.
As of March 31, 2019 and 2020, the Company had valuation allowances against certain stand-by lettersdeferred tax assets totalling $116.6 and $146.4, respectively. As of credit amountingSeptember 30, 2019, 2018 and 2017, the Company had valuation allowances against certain deferred tax assets totalling $133.2, $114.4 and $93.7, respectively. These valuation allowances relate to $80,570 (2016: $96,033) which aretax assets where it is management’s best estimate that there is not a greater than 50 percent probability that the benefit of the assets will be realized in the naturefuture.
Utilization of performance guarantees issued while entering into film co-production contracts and are valid until funding obligations under these contracts are met. These guarantees, issued in connection with the aforementioned content commitments, and includedNOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the table above have varying maturity datesfuture, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and are expected to fall due withintax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of one to three years.more than 50 percentage points of the outstanding stock of a company by certain stockholders.
In addition, the GroupThe Company has issued financial guarantees amounting to $2,192 (2016: $2,373) in the ordinary course of business,completed a study through December 31, 2019 and included in the table above, having varying maturity dates up to the next 12 months. The Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. The Grouphas determined an ownership change did not earn any feeoccur. Should the Company experience future ownership changes, utilization of the net operating loss carryforwards may be subject to provide such guarantees. It does not anticipate any liability on these guarantees as it expectsan annual limitation under Section 382 of the Code. Any limitation may result in expiration of a portion of the net operating loss carryforwards before utilization. Any carryforwards that most of these will expire unused.prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
Operating lease commitments are disclosed in Note 22.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 1. | In Fiscal 2015, Eros received two notices from the Commissioner of Service Tax (India) to show cause why an amount aggregating to $30,000 on for the period April 1, 2009 to March 31, 2014 should not be levied onAs of September 30, 2019, 2018 and paid on account of service tax arising on temporary transfer of copyright services and certain other related matters. Eros has filed its objections against the notice with the authorities. Subsequently in June 2015, Eros received assessment orders from the Commissioner of Service Tax (India) levying tax as stated above and ordering Eros to pay an additional amount of $30,000 as interest and penalties in connection with the aforesaid matters. On September 3, 2015, the Company filed an appeal against the said order before the authorities. In April 2016, Eros, received a show cause notice from the Commissioner of Service Tax on similar grounds amount aggregating to $1,000 for the period 1 April 2014 to 31 March 2015. Considering the facts and nature of levies and the ad-interim protection for service tax levy for a certain period granted by the Honorable High Court of Mumbai, the Group expects that the final outcome of this matter will be favorable. There is no further update on this matter as preliminary hearing is yet to begin. Accordingly, based on the assessment made after taking appropriate legal advice, no additional liability has been recorded in Group’s consolidated financial statements. |
| 2. | In Fiscal 2015, Eros received several assessment orders and demand notices from value added tax and sales tax authorities in India for the payment of amounts aggregating to $3,000 (including interest and penalties) for certain fiscal years between April 1, 2005 and March 31, 2011. Eros has appealed against each of these orders, and such appeals are pending before relevant tax authorities. Though there uncertainties are inherent in the final outcome of these matters, the Company believes, based on assessment made after taking legal advice, that the final outcome of the matters will be favorable. Accordingly, no additional liability has been recorded in Group’s consolidated financial statements. |
| 3. | Beginning on November 13, 2015, Eros International Plc was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company. The three actions in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United States District Court for the Southern District of New York where they were then consolidated with the other two actions on May 27, 2016. In general, the plaintiffs allege that the Company, and in some cases also Company’s management, violated federal securities laws by overstating Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices. On April 5, 2016, a lead plaintiff and lead counsel were appointed in the now consolidated New York action. A single consolidated complaint was filed on July 14, 2016 and amended on October 10, 2016. The Plaintiffs have alleged that the Company and certain individual defendants — Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran — have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act. The amended consolidated complaint has narrowed in scope significantly and does not assert certain claims that had been asserted in prior complaints, including (i) claims arising under Sections 11 and 15 of the Securities Act, (ii) accounting and GAAP allegations, and (iii) claims against certain individual defendants, who are not now named defendants. The remaining claims are primarily focused on whether the Company and individual defendants made material misrepresentations concerning the Company’s film library and materially misstated the usage and functionality of Eros Now. The Company’s most recent motion to dismiss the amended consolidated complaint was filed on November 11, 2016 and its reply brief was filed on January 6, 2017. The Court has not scheduled oral argument or indicated when it will rule on this motion. Given the uncertainty inherent in these matters, based on assessment made after taking appropriate legal advice, the Company does not believe that the ultimate outcome of this matter will be unfavorable. Accordingly, no liability has been recorded in Group’s consolidated financial statements. |
| 4. | During Fiscal 2017, a claim has been filed against Eros International Plc in the Commercial Court, Queen’s Bench Division of the High Court in London. The plaintiff (former employee) alleged that he is not to be treated as a “Leaver” for the purpose of share options awarded to him under the two Joint Ownership Deeds (“the JSOP Agreement”) entered into with the Company on April 20, 2012 at the time he served his vesting notices and that he was entitled to exercise his share options under the JSOP Agreement in accordance with the Vesting Notices. The estimated amount of claim is $ 2,500. The Company is contesting the claim on the grounds that the employee has not met the JSOP Agreement terms and therefore not eligible for awards. Given the uncertainty inherent in the matter, based on assessment made after making appropriate legal advice, the Company does not believe that the ultimate outcome of this matter will be unfavorable. Accordingly, no liability has been recorded in Group’s consolidated financial statements. |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 5. | From time to time, Eros is involved in legal proceedings arising in the ordinary course of its business, typically intellectual property litigation and infringement claims related to the company’s feature films and other commercial activities, which could cause it to incur expenses or prevent it from releasing a film. While the resolution of these matters cannot be predicted with certainty, the Group does not believe, based on current knowledge or information available, that any existing legal proceedings or claims are likely to have a material and adverse effect on its financial position, results of operations or cash flows. |
There were no other material ongoing litigations at March 31, 2017 and March 31, 2016.
35 | RELATED PARTY TRANSACTIONS |
| | | | | As at
March 31,2017 | | | As at
March 31,2016 | |
| | | Details of | | (in thousands) | |
| | | Transaction | | Liability | | | Asset | | | Liability | | | Asset | |
| Red Bridge Ltd. | | President fees | | $ | 210 | | | $ | 0 | | | $ | 201 | | | $ | 0 | |
| 550 County Avenue | | Rent/Deposit | | | 420 | | | | 135 | | | | 355 | | | | 135 | |
| Line Cross Limited | | Rent/Deposit | | | 356 | | | | 258 | | | | 882 | | | | 258 | |
| NextGen Films Pvt Ltd. | | Purchase/Sale | | | — | | | | 34,843 | | | | — | | | | 17,338 | |
| Everest Entertainment Pvt. Ltd | | Purchase/Sale | | | 17 | | | | 115 | | | | — | | | | 111 | |
| Lulla Family | | Rent/Deposit | | | 123 | | | | 1,003 | | | | 187 | | | | 1,022 | |
| Lulla Family | | Salary | | | 1,210 | | | | — | | | | 25 | | | | — | |
| Eros Television India Pvt Ltd | | Borrowing | | | 6,417 | | | | — | | | | — | | | | — | |
2020 and 2019, the Company had no unrecognized tax benefits and does not anticipate this position to change within the next twelve months. The Lulla family refers to Mr. Arjan Lulla, Mr. Kishore Lulla, Mr. Sunil Lulla, Mrs. Manjula Lulla, Mrs. Krishika Lulla, Mrs. Rishika Lulla Singh,Company will recognize any interest and Ms. Riddhima Lulla.
Pursuant to a lease agreement that expired on March 31, 2017,penalties associated with uncertain tax positions within the lease requires Eros International Media Limited to pay $5 each month under this lease. Eros International Media Limited leases apartments for studio use at Kailash Plaza, 3rd Floor, Opp. Laxmi Industrial Estate, Andheri (W), Mumbai, from Manjula K. Lulla, the wife of Kishore Lulla. The lease was renewed on April 1, 2017 for a further period of one year on the same terms.
Pursuant to a lease agreement that expired on September 30, 2015, the lease requires Eros International Media Limited to pay $5 each month under this lease. Eros International Media Limited leases for use as executive accommodations the property Aumkar Bungalow, Gandhi Gram Road, Juhu, Mumbai, from Sunil Lulla. The lease was renewed on October 1, 2015 for a further period of three years on the same terms.
Pursuant to a lease agreement that expires on January 4, 2020, Eros International Media Limited leases office premise for studio use at Supreme Chambers, 5th Floor, Andheri (W), Mumbai from Kishore and Sunil Lulla. Beginning January 2015, the lease requires Eros International Media Limited to pay $60 each month under this lease.
Pursuant to a lease agreement that expires on April 1, 2020, the real estate property at 550 County Avenue, Secaucus, New Jersey, from 550 County Avenue Property Corp, a Delaware corporation owned by Beech Investments and of which our President of Americas Operations Ken Naz serves as a Director. The lease commenced on April 1, 2015, and required the Group to pay $11 each month. The lease was renewed on April 1, 2015 for a further period of five years on the same terms. This is a non-cancellable lease
Pursuant to a lease agreement that expires in March 2018, including renewal periods, the Group leases for U.K. corporate offices, the real property at 13 Manchester Square, London from Linecross Limited, a U.K. company owned indirectly by a discretionary trust of which Kishore Lulla is a potential beneficiary. The lease commenced on November 19, 2009 and requires the Group to pay $130 each quarter.
Pursuant to an agreement the Group entered into with Redbridge Group Ltd. on June 27, 2006, the Group agreed to pay an annual fee set each year of $ 260, $300 and $325 in the respective years ended March 31, 2017, 2016 and 2015, for the services of Arjan Lulla, the father of Kishore Lulla and Sunil Lulla, grandfather of Rishika Lulla Singh, uncle of Vijay Ahuja and Surender Sadhwani and an employee of Redbridge Group Ltd. The agreement makes Arjan Lulla honorary life president and provides for services including attendance at Board meetings, entrepreneurial leadership and assistance in setting the Group’s strategy. Redbridge Group Ltd. is an entity owned indirectly by a discretionary trust of which Kishore Lulla is a potential beneficiary.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSincome tax provision.
The Group has engagedCompany files income tax returns in transactionsthe United States, various state jurisdictions and in the United Kingdom. The Company is not under examination in any jurisdiction; however, Company is subject to income tax examination by federal and state tax authorities beginning in 2015.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
10. Financial Instruments
Credit Risk:
Concentration of credit risk with NextGen Films Pvt. Ltd., an entity owned by the husbandCompany’s customer is limited due to the Company’s customer base and the diversity of Puja Rajani, sisterits sales throughout the world. The Company performs ongoing credit evaluations and maintains a provision for potential credit losses when deemed necessary. The Company generally does not require collateral for its trade accounts receivable.
Forward Contracts:
The Company enters into forward foreign exchange contracts to hedge its foreign currency exposure on future production expenses denominated in various foreign currencies (i.e. cash flow hedges). The Company monitors its positions and the credit quality of, Kishore Lullathe financial institutions that are party to its financial transactions.
As of September 30, 2018 and Sunil Lulla, each2019 and March 31, 2020, the Company had the following outstanding forward foreign exchange contracts (all outstanding contracts have maturities of which involvedless than four months from March 31, 2020):
| September 30, 2018 |
| Foreign Currency | Foreign Currency
Amount | | US Dollar Amount | Weighted Average
Exchange Rate Per USD |
| Canadian dollar | 17,463 | in exchange for | $ 13,525 | $1.28 |
| September 30, 2019 |
| Foreign Currency | Foreign Currency
Amount | | US Dollar Amount | Weighted Average
Exchange Rate Per USD |
| Canadian dollar | 9,376 | in exchange for | $ 7,018 | $1.33 |
| March 31, 2020 |
| Foreign Currency | Foreign Currency
Amount | | US Dollar Amount | Weighted Average
Exchange Rate Per USD |
| Canadian dollar | 9.376 | in exchange for | $ 7,113 | $1.33 |
The loss capitalized to productions and loss/gain recognized in the purchaseaccompanying consolidated statements of operations for the years ended September 30, 2018 and sale of film rights. In the year2019 and six months ended March 31, 2017, NextGen Films Pvt. Ltd. sold film rights $616 (2016: $2,728, 2015: $23,550)2020 related to foreign currency derivatives was immaterial.
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
11. Fair Value
Accounting guidance and standards about fair value define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the Group,fair value measurement. The accounting guidance and purchased film rights, including production services,standards establish three levels of Nil (2016: Nilinputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
The Company has assessed that the fair values of trade receivables, financial assets included in prepaid and 2015: $275). The Group advanced $22,881 (2016: $5,400, 2015: $29,438)other assets, restricted cash and cash and cash equivalents, trade payables, and financial liabilities included in other payables and accruals approximate to NextGen Films Pvt. Ltd. for film co-production and received refundtheir carrying amounts largely due to the short-term maturities of $5,075 (2016: $6,945, 2015: Nil) on abandonment of certain film projects.these instruments.
The Groupfollowing table sets forth the carrying values and fair values of the Company’s outstanding debt at September 30, 2018 and 2019 and March 31, 2020.
| | | September 30, 2018 | | | September 30, 2019 | |
| Liabilities | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
| Red Fish Blue Fish Term Loan | | $ | 40,471 | | | $ | 42,677 | | | $ | 41,546 | | | $ | 44,160 | |
| Aperture Term Loan | | | 3,184 | | | | 3,482 | | | | — | | | | — | |
| JPMorgan Credit Facility | | | 249,223 | | | | 257,560 | | | | 216,608 | | | | 222,448 | |
| P&A Facility | | | 17,712 | | | | 18,000 | | | | 9,794 | | | | 10,000 | |
| | | | | | March 31, 2020 | |
| Liabilities | | | | | | | | | | | Carrying Value | | | | Fair Value | |
| Red Fish Blue Fish Term Loan | | | | | | | | | | $ | 42,092 | | | $ | 44,817 | |
| JPMorgan Credit Facility | | | | | | | | | | | 225,989 | | | | 230,369 | |
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
12. Additional Financial Information
The composition of the Company’s Other current assets, non-current other assets, and accounts payable and accrued expenses are as follows as of September 30, 2018 and 2019 and March 31, 2020:
| | September 30 | | | March | |
| | | 2018 | | | 2019 | | | 2020 | |
| Other current assets: | | | | | | | | | | | | |
| Co-finance receivables | | $ | — | | | $ | 1,799 | | | $ | 3,052 | |
| Prepaid expenses | | | 1,750 | | | | 7,812 | | | | 1,648 | |
| Tax credits receivable | | | 27,422 | | | | 4,816 | | | | 17,416 | |
| Other | | | 1,038 | | | | 1,397 | | | | 2,099 | |
| Total | | $ | 30,210 | | | $ | 15,824 | | | $ | 24,215 | |
| | | | | | | | | | | | | |
| Non-current other assets: | | | | | | | | | | | | |
| Co-finance receivables | | $ | 5,173 | | | $ | — | | | $ | — | |
| Tax credits receivable | | | — | | | | 9,890 | | | | 10,370 | |
| Accounts receivable | | | 2,182 | | | | 7,614 | | | | 15,450 | |
| Lease asset | | | — | | | | — | | | | 9,772 | |
| Other | | | 9,133 | | | | 5,631 | | | | 4,016 | |
| Total | | $ | 16,488 | | | $ | 23,135 | | | $ | 39,608 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued expenses: | | | | | | | | | | | | |
| Print and advertising payable | | $ | 112,662 | | | $ | 41,469 | | | $ | 43,532 | |
| Lease liability | | | — | | | | — | | | | 1,830 | |
| Accounts payable | | | 48,002 | | | | 52,389 | | | | 33,250 | |
| Returns reserve | | | — | | | | 8,096 | | | | 8,096 | |
| Non-consenting shareholders | | | — | | | | — | | | | 15,372 | |
| Accrued payroll and related | | | 12,124 | | | | 6,592 | | | | 4,855 | |
| Accrued interest | | | 3,637 | | | | 3,813 | | | | 2,594 | |
| Accrued other | | | 1,899 | | | | 1,661 | | | | 392 | |
| Total | | $ | 178,324 | | | $ | 114,020 | | | $ | 109,921 | |
13. Valuation and Qualifying Accounts
| Description | | Balance at Beginning of Period | | | Charged to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | |
| | | | | | | | | | | | | | | | |
| Year Ended September 30, 2018 | | | | | | | | | | | | | | | | | | | | |
| Reserves: | | | | | | | | | | | | | | | | | | | | |
| Returns and allowances | | $ | 3,869 | | | $ | 20,971 | | | | — | | | $ | (14,120 | ) | | $ | 10,720 | |
| Deferred tax allowance | | $ | 93,731 | | | $ | 20,621 | | | | — | | | | — | | | $ | 114,352 | |
| Year Ended September 30, 2019 | | | | | | | | | | | | | | | | | | | | |
| Reserves: | | | | | | | | | | | | | | | | | | | | |
| Returns and allowances | | $ | 10,720 | | | $ | 17,206 | | | | — | | | $ | (19,830 | ) | | $ | 8,096 | |
| Deferred tax allowance | | $ | 114,352 | | | $ | 18,851 | | | | — | | | | — | | | $ | 133,203 | |
| Six Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | |
| Reserves: | | | | | | | | | | | | | | | | | | | | |
| Returns and allowances | | $ | 8,096 | | | $ | 6,811 | | | | — | | | $ | (6,811 | ) | | $ | 8,096 | |
| Deferred tax allowance | | $ | 133,203 | | | $ | 13,289 | | | | — | | | | — | | | $ | 146,392 | |
STX Filmworks, Inc.
Notes to Audited Consolidated Financial Statements
(in thousands, except share data)
14. Subsequent Events
The Company evaluated subsequent events through October 30, 2020, which is the date these consolidated financial statements were issued.
COVID-19 Pandemic.
The COVID-19 outbreak has caused significant disruptions, the outbreak has spread globally to the United States and many countries where we distribute films. On March 11, 2020, the World Health Organization designated the outbreak a pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, or nationwide lockdowns, as well as restricting or prohibiting outright some or all commercial and business activity, including the closure of some or all theaters and disrupting the production of film and TV content. These measures, though currently temporary in nature, may become more severe and continue indefinitely depending on the evolution of the pandemic. To date, no fully effective vaccines or treatments have been developed and effective vaccines or treatments may not be discovered soon enough to protect against a further worsening of the pandemic.
The pandemic has affected how the film content is distributed to various distribution channels due to the closure of theaters in the United States and in international territories. There however has been an increase in streaming and digital revenue due to the closure of movie theaters. The pandemic has also engaged in transactions with Everest Entertainment Pvt. Ltd. entity ownedaffected the production of new content for both film and TV due to the closure of productions. The extent of the adverse impact on our financial and operational results will be dictated by the brotherlength of Manjula K. Lulla, wifetime that such disruptions continue, which will, in turn, depend on the currently unknowable duration of Kishore Lulla, which is involvedCOVID-19 and among other things, the impact of governmental actions imposed in the purchase and sale of film rights. In March 31, 2017, Everest Entertainment Pvt. Ltd. sold film rights of Nil (2016: Nil, 2015: $408)response to the Group.pandemic and individuals’ and companies’ risk tolerance regarding health matters going forward. Our business also could be significantly affected even after reopening of certain operations, should the disruptions caused by the COVID-19 lead to changes in consumer behavior (such as social distancing becoming the norm independent of any pandemic conditions) and the delay in having film and TV content to distribute.
In fiscal 2017,We are monitoring the Group obtained unsecured short-term borrowingsrapidly evolving situation and its potential impacts on our financial position, results of $6,417 from Eros Television India Pvt. Ltd at 12% per annum.operations, liquidity, and cash flows.
Mrs. Manjula Lulla,Merger with Eros International Plc
On July 30, 2020, the wife of Kishore Lulla, is an employee ofCompany merged with Eros International Plc. and is entitled to(“Eros”), a salary of $130 per annum (2016: $154 and 2015: $167). Mrs. Krishika Lulla, the wife of Sunil Lulla, is an employee of Erospublic company based in Mumbai, India, and is entitled to a salary of $133 per annum (2016: $138, 2015: $116). Ms. Riddhima Lulla, the daughter of Kishore Lulla, is an employee of Eros Digital FZ LLC and is entitled to a salary of $51 per annum (2016: $38, 2015: $10).
All of the amounts outstanding are unsecured and will be settled in cash.
As at March 31, 2017, the Group has provided performance guarantee to a bank amounting to $19.50 (2016: $32.50) in connection with funding commitments. under film co-production agreements with NextGen Films Pvt. Ltd and having varying maturity dates up to the next 12 months. The Group did not earn any fee to provide such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused. These amounts are included in content commitments under Note 33 above.
36 | MAJOR CONSOLIDATED ENTITIES |
| | Date | | Country of
Incorporation | | % of voting
rights held | |
Copsale Limited | | June 2006 | | BVI | | 100.00 | |
Eros Australia Pty Limited | | June 2006 | | Australia | | 100.00 | |
Eros International Films Pvt. Limited | | June 2006 | | India | | 100.00 | |
Eros International Limited | | June 2006 | | U.K. | | 100.00 | |
Eros International Media Limited | | June 2006 | | India | | 73.30 | |
Eros International USA Inc | | June 2006 | | U.S. | | 100.00 | |
Eros Music Publishing Limited | | June 2006 | | U.K. | | 100.00 | |
Eros Network Limited | | June 2006 | | U.K. | | 100.00 | |
Eros Pacific Limited | | June 2006 | | Fiji | | 100.00 | |
Eros Worldwide FZ-LLC | | June 2006 | | UAE | | 100.00 | |
Big Screen Entertainment Pvt. Limited | | January 2007 | | India | | 64.00 | |
Ayngaran International Limited | | October 2007 | | IOM | | 51.00 | |
Ayngaran International Media Pvt. Limited | | October 2007 | | India | | 51.00 | |
Ayngaran International UK Limited | | October 2007 | | U.K. | | 51.00 | |
EyeQube Studios Pvt. Limited | | January 2008 | | India | | 99.99 | |
Acacia Investments Holdings Limited | | April 2008 | | IOM | | 100.00 | |
Ayngaran Anak Media Pvt. Limited | | October 2008 | | India | | 51.00 | |
Belvedere Holdings Pte. Ltd. | | March 2010 | | Singapore | | 100.00 | |
Eros International Pte Ltd. | | August 2010 | | Singapore | | 100.00 | |
Digicine Pte. Limited | | March 2012 | | Singapore | | 100.00 | |
Colour Yellow Productions Pvt. Limited | | May 2014 | | India | | 50.00 | |
Eros Digital FZ LLC | | September 2015 | | UAE | | 100.00 | |
Eros Digital Limited | | July 2016 | | IOM | | 100.00 | |
Eros Films Limited | | November 2016 | | IOM | | 100.00 | |
Universal Power Systems Private Limited | | August 2015 | | India | | 100.00 | |
All of the companies were involved with the distribution of film content and associated media. All the companies are indirectly owned with the exception of Eros Network Limited, Eros Worldwide FZ-LLC and Eros International Pte Ltd.
In fiscal year 2017, Group shareholding of Eros International Media Ltd reduced to 73.33% (2016: 74.40%) subsequent to the exercise of ESOP by the employees.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In fiscal year 2017, the Group has pledged 6.36% of its holding in Eros International Media Limited as security for certain of the Group’s borrowings (See Note 23).
Subsequent to March 2017, the Group shareholding in EIML reduced to 61.77% on sale of its stake in open market.
In addition to the above the Eros International Plc Employee Benefit Trust, a Jersey based Trust has been consolidated as it is a fully controlled Trust.
37 | NON-CONTROLLING INTERESTS |
Details of subsidiary that have material non-controlling interests
The Group has a number of subsidiaries held directly and indirectly which operate and are incorporated around the world. Note 34 to the financial statements lists details of the major consolidated entities and the interests in these subsidiaries. The non-controlling interests that are material to the Group relate to Eros International Media Limited whose principal place of business is in India.
The table below shows the summarized financial information of Eros International Media Limited whereas at March 31, 2016, non-controlling interests held an economic interest by virtue of shareholding of 26.67% (March 2016: 26.46%). This summarized financial information represents amounts before inter-company eliminations.
| | | Year ended March 31 | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| | | EIML | | | Copsale | | | Total | | | EIML | | | Copsale | | | Total | |
| Current assets | | $ | 56,644 | | | | 79,625 | | | | 136,269 | | | $ | 38,162 | | | | 82,788 | | | | 120,950 | |
| Non-current assets | | | 345,301 | | | | 51,514 | | | | 396,815 | | | | 324,848 | | | | 46,898 | | | | 371,746 | |
| Current liabilities | | | (125,840 | ) | | | (31,209 | ) | | | (157,049 | ) | | | (122,497 | ) | | | (54,404 | ) | | | (176,901 | ) |
| Non-current liabilities | | | (73,135 | ) | | | — | | | | (73,135 | ) | | | (60,491 | ) | | | — | | | | (60,491 | ) |
| Equity attributable to owners of the Group | | | 148,837 | | | | 73,279 | | | | 222,116 | | | | 132,390 | | | | 55,363 | | | | 187,753 | |
| Equity attributable to non-controlling interests | | $ | 54,133 | | | | 26,651 | | | | 80,784 | | | $ | 47,632 | | | | 19,919 | | | | 67,551 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 172,422 | | | | 29,083 | | | | 201,505 | | | $ | 182,167 | | | | 49,856 | | | | 232,023 | |
| Expenses | | | (155,457 | ) | | | (4,435 | ) | | | (159,892 | ) | | | (164,905 | ) | | | (35,083 | ) | | | (199,988 | ) |
| Profit for the year | | $ | 16,965 | | | | 24,648 | | | | 41,613 | | | $ | 17,262 | | | | 14,773 | | | | 32,035 | |
| Profit attributable to the owners of the Group | | $ | 12,441 | | | | 18,075 | | | | 30,516 | | | $ | 12,695 | | | | 10,864 | | | | 23,559 | |
| Profit attributable to non-controlling interests | | $ | 4,524 | | | | 6,573 | | | | 11,097 | | | $ | 4,567 | | | | 3,909 | | | | 8,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income attributable to the owners of the Group | | $ | (2,908 | ) | | | — | | | | (2,908 | ) | | $ | (7,004 | ) | | | — | | | | (7,004 | ) |
| Other comprehensive income attributable to non-controlling interests | | | (1,058 | ) | | | — | | | | (1,058 | ) | | | (2,520 | ) | | | — | | | | (2,520 | ) |
| Other comprehensive income during the year | | $ | (3,966 | ) | | | — | | | | (3,966 | ) | | $ | (9,524 | ) | | | — | | | | (9,524 | ) |
| Total comprehensive income attributable to the owners of the Group | | | 9,532 | | | | 18,075 | | | | 27,607 | | | | 5,691 | | | | 10,864 | | | | 16,555 | |
| Total comprehensive income attributable to non-controlling interests | | | 3,467 | | | | 6,573 | | | | 10,040 | | | | 2,047 | | | | 3,909 | | | | 5,956 | |
| Total comprehensive income during the year | | $ | 12,999 | | | | 24,648 | | | | 37,647 | | | $ | 7,738 | | | | 14,773 | | | | 22,511 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net cash inflow from operating activities | | $ | 35,478 | | | | (11,302 | ) | | | 24,176 | | | $ | 153,829 | | | | 11,058 | | | | 164,887 | |
| Net cash outflow from investing activities | | | (71,211 | ) | | | (8,203 | ) | | | (79,414 | ) | | | (131,263 | ) | | | (1,767 | ) | | | (133,030 | ) |
| Net cash inflow from financing activities | | | 33,365 | | | | — | | | | 33,365 | | | | (24,071 | ) | | | — | | | | (24,071 | ) |
| Net cash (outflow)/inflow | | $ | (2,368 | ) | | | (19,505 | ) | | | (21,873 | ) | | $ | (1,505 | ) | | | 9,291 | | | | 7,786 | |
No dividends were paid to non-controlling interests during the year ended March 31, 2017. (2016: Nil).
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
38 | SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS |
Estimates and judgments are evaluated on a regular basis and are based on historical experience and other factors, such as expectations of future events that are believed to be reasonable under the present circumstances.
The Group makes estimates and assumptions concerning the future. These estimates, by definition, will rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are highlighted below:
38.1. | Goodwill and trade name |
The Group tests annually whether goodwill and trade name have suffered impairment, in accordance with its accounting policy. The recoverable amount of cash-generating units has been determined based on value in use calculations. We use market related information and estimates (generally risk adjusted discounted cash flows) to determine value in use. Cash flow projections take into account past experience and represent management’s best estimate about future developments. Key assumptions on which management has based its determination of fair value less costs to sell and value in use includes estimated growth rates, weighted average cost of capital and tax rates. These estimates, includes the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill and tradename impairment.
38.2. | Basis of consolidation |
The Group evaluates arrangements with special purpose vehicles in accordance with of IFRS 10 – Consolidated Financial Statements to establish how transactions with such entities should be accounted for. This requires a judgment over control such that it is exposed, or has rights, to variable returns and can influence the returns attached to the arrangements.
The Group is required to identify and assess the useful life of intangible assets and determine their income generating life. Judgment is required in determining this and then providing an amortization rate to match this life as well as considering the recoverability or conversion of advances made in respect of securing film content or the services of talent associated with film production.
Accounting for the film content requires Management’s judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each film or its license period, whichever is the shorter. These judgments are used to determine the amortization of capitalized film content costs. The Group uses a stepped method of amortization on first release film content writing off more in year one which recognizes initial income flows and then the balance over a period of up to nine years. In the case of film content that is acquired by the Group after its initial exploitation, commonly referred to as Library, amortization is spread evenly over the lesser of 10 years or the license period. Management’s policy is based upon factors such as historical performance of similar films, the star power of the lead actors and actresses and others. Management regularly reviews, and revises when necessary, its estimates, which may result in a change in the rate of amortization and/or a write down of the asset to the recoverable amount.
The Group tests annually whether intangible assets have suffered any impairment, in accordance with the accounting policy. These calculations require judgmentsterms of an Agreement and estimatesPlan of Merger, dated as of April 17, 2020 (as amended, restated or otherwise modified from time to time).
Although Eros legally acquired the Company, the merger is intended to be made, and,accounted for as with Goodwill, ina reverse acquisition, whereby the event of an unforeseen event these judgments and assumptions would need toCompany will be reviseddeemed the accounting acquiror and the valueassets and liabilities of the intangible assets could be affected. There may be instances where the useful life of an asset is shortened to reflect the uncertainty of its estimated income generating life. This is particularly the case when acquiring assets in markets that the Group has not previously exploited.
38.4. | Allowances for doubtful accounts |
The Group extends credit to customers and other parties in the normal course of business and maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. The Group bases such estimates on historical experience, existing economic conditions, and any specific customer collection issues the Group has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding balance or when the Group determines that the balance will not be collected. The allowance for doubtful accounts as of March 31, 2017 and March 31, 2016, was $1,260 and $1,315 respectively.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
38.5. | Valuation of available-for-sale financial assets |
The Group follows the guidance of IAS 39 – Financial Instruments: Recognition and Measurement to determine, where possible, the fair value of its available-for-sale financial assets. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less or more than its cost; the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.
38.6. | Income taxes and deferred taxation |
The Group is subject to income taxes in various jurisdictions. Judgment is required in determining the worldwide provision for income taxes. We are subject to tax assessment in certain jurisdictions. Significant judgment is involved in determining the provision for income taxes including judgment on whether the tax positions are probable of being sustained in tax assessments.
Judgment is also required when determining whether the Group should recognize a deferred tax asset, based on whether Management considers there is sufficient certainty in future earnings to justify the carry forward of assets created by tax losses and tax credits. Judgment is also required when determining whether the Group should recognize a deferred tax liability on undistributed earnings of subsidiaries. Where the ultimate outcome is different than that which was initially recorded thereEros will be an impact on the income tax and deferred tax provisions.
38.7. | Share-based payments |
The Group is required to evaluate the terms to determine whether share based payment is equity settled or cash settled. Judgment is required to do this evaluation. Further, the Group is required to measure the fair value of equity settled transactions with employees at the grant date of the equity instruments. The fair value is determined principally by using the Black Scholes model and/or Monte Carlo Simulation Models which require assumptions regarding risk free interest rates, share price volatility, the expected term and other variables. The basis and assumptions used in these calculations are disclosed within Note 26. The aforementioned inputs entered in to the option valuation model that we use to determine the fair value of our share awards are subjective estimates and changes to these estimates will cause the fair value of our share-based awards and related share- based compensations expense we record to vary.
38.8. Business combinations
Business combinations are accounted for using the acquisition method under the provisions of IFRS 3 (Revised), “Business Combinations”.
The cost of an acquisition is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred at the date of acquisition. The cost of the acquisition also includes the fair value of any contingent consideration. Identifiable tangible and intangible assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initiallyrecorded at their fair valuevalues on the date of acquisition. Significant estimates are required to be made in determiningIn connection with the valuemerger, all outstanding stock options and restricted share units of contingent consideration and intangible assets.
39 | ADOPTION OF NEW AND REVISED STANDARDS |
| Standards, Interpretations and Amendments to Published Standards that are not yet effective |
IFRS 15 Revenue from Contracts with Customersthe Company were canceled.
i) In May 2014,Paycheck Protection Program
On April 4, 2020, The Company was granted a loan from JPMorgan Chase Bank, N.A. in the IASB issued IFRS 15 Revenue from Contractsaggregate amount of $2.9 million at an interest rate of 0.98% per annum, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses. The Company intends to use the entire loan amount for purposes consistent with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue.PPP.
JPMorgan Credit Facility
The five stepsCorporate Credit Facility was amended on April 17, 2020, which resulted in the model under IFRS 15 are : (i) identifydecrease of the contract withfacility from $400 million to $350 million and an increase from $200 million to $250 million the customer; (ii) identifyCompany’s ability to increase the performance obligationsborrowings, subject to certain conditions, as set forth in the contract; (iii) determinecredit agreement. The incremental amounts will be issued on the transaction price; (iv) allocatesame terms as the transaction price to the performance obligations in the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSexisting Corporate Credit Facility.
IFRS 15 replaces the following standards and interpretations:
| · | IAS 11 Construction Contracts |
| · | IFRIC 13 Customer Loyalty Programmes |
| · | IFRIC 15 Agreements for the Construction of Real Estate |
| · | IFRIC 18 Transfers of Assets from Customers |
| · | SIC-31 Revenue - Barter Transactions Involving Advertising Services |
When first applying IFRS 15, it should be applied in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows an option to either:
| · | apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or |
| · | retain prior period figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). |
In April 2016, the IASB issued amendments to IFRS 15, clarifying some requirements and providing additional transitional relief for companies. The amendments do not change the underlying principles of IFRS 15 but clarify how those principles should be applied. The amendments clarify how to:
| · | identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract; |
| · | determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and |
| · | determine whether the revenue from granting a license should be recognized at a point in time or over time. |
IFRS 15 is effective for fiscal years beginning on or after January 1, 2018. Earlier application is permitted. The Group expects to apply this standard retrospectively with the cumulative effect of initially applying this standard recognized at April 1, 2018 (i.e. the date of initial application in accordance with this standard). The Group is currently evaluating the impact that this new standard will have on its consolidated financial statements.
IFRS 9 Financial Instruments: In July 2014, the IASB finalized and issued IFRS 9 – Financial Instruments. IFRS 9 replaces IAS 39 “Financial instruments: recognition and measurement, the previous Standard which dealt with the recognition and measurement of financial instruments in its entirety upon the former’s effective date.
The Key requirements of IFRS 9:
Replaces IAS 39’s measurement categories with the following three categories:
| · | fair value through profit or loss |
| · | fair value through other comprehensive income |
Eliminates the requirement for separation of embedded derivatives from hybrid financial assets, the classification requirements to be applied to the hybrid financial asset in its entirety.
Requires an entity to present the amount of change in fair value due to change in entity’s own credit risk in other comprehensive income.
Introduces new impairment model, under which the “expected” credit loss are required to be recognized as compared to the existing “incurred” credit loss model of IAS 39.
Fundamental changes in hedge accounting by introduction of new general hedge accounting model which:
| · | Increases the eligibility of hedged item and hedging instruments; |
| · | Introduces a more principles–based approach to assess hedge effectiveness. |
IFRS 9 is effective for annual periods beginning on or after January 1, 2018.
Earlier application is permitted provided that all the requirements in the Standard are applied at the same time with two exceptions:
| · | The requirement to present changes in the fair value of a liability due to changes in own credit risk may be applied early in isolation; |
| · | Entity may choose as its accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of new general hedge accounting model as provided in IFRS 9. |
EROS INTERNATIONAL PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Group is currently evaluating the impact of this new standard on its consolidated financial statements.
IFRS 16 Leases: On January 13, 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related Interpretations. The Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e., the lessee and the lessor. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the statement of comprehensive income. The Standard also contains enhanced disclosure requirements for lessees. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, though early adoption is permitted for companies applying IFRS 15 Revenue from Contracts with Customers. The Group is yet to evaluate the requirements of IFRS 16 and the impact on the consolidated financial statements.
IFRIC 22, Foreign currency transactions and Advance consideration: On December 8, 2016, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 22, Foreign currency transactions and Advance consideration which clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, when an entity has received or paid advance consideration in a foreign currency. The effective date for adoption of IFRIC 22 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group is currently evaluating the effect of IFRIC 22 on the consolidated financial statements.
IFRIC 23, Uncertainty over Income Tax Treatments: In June 2017, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 23 — Uncertainty over Income Tax Treatments which is to be applied while performing the determination of taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. According to IFRIC 23, companies need to determine the probability of the relevant tax authority accepting each tax treatment, or group of tax treatments, that the companies have used or plan to use in their income tax filing which has to be considered to compute the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.
The standard permits two possible methods of transition:
Full retrospective approach – Under this approach, IFRIC 23 will be applied retrospectively to each prior reporting period presented in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Retrospectively with cumulative effect of initially applying IFRIC 23 recognized by adjusting equity on initial application, without adjusting comparativesF-33
The effective date for adoption of IFRIC 23 is annual periods beginning on or after January 1, 2019, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.
Amendments to IAS 7, Statement of cash flows: In January 2016, the International Accounting Standards Board issued the amendments to IAS 7, requiring the entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, to meet the disclosure requirement. The effective date for adoption of the amendments to IAS 7 is annual reporting periods beginning on or after January 1, 2017, though early adoption is permitted.The Group does not believe that this amendment will have a material impact on its consolidated financial statements.
Amendments to IFRS 2, Share-based payment: In June 2016, the International Accounting Standards Board issued the amendments to IFRS 2, providing specific guidance for measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. It clarifies that the fair value of cash-settled awards is determined on a basis consistent with that used for equity-settled awards. Market-based performance conditions and non-vesting conditions are reflected in the ‘fair values’, but non-market performance conditions and service vesting conditions are reflected in the estimate of the number of awards expected to vest. Also, the amendment clarifies that if the terms and conditions of a cash-settled share-based payment transaction are modified with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as such from the date of the modification. Further, the amendment requires the award that includes a net settlement feature in respect of withholding taxes to be treated as equity-settled in its entirety. The cash payment to the tax authority is treated as if it was part of an equity settlement. The effective date for adoption of the amendments to IFRS 2 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.