Securities registered or to be registered pursuant
to Section 12(b) of the Act.
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act
Indicate the number of outstanding shares of each
of the issuer’s classes of capital or common stock as of the close of the period covered by the transition report.
At March 31, 2020, 127,116,702 ‘A’
ordinary shares and 19,899,085 ‘B’ ordinary shares, each at par value GBP 0.30 per share, were issued and outstanding.
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☐
Yes ☑ No
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.☐ Yes ☑
No
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.☑ Yes ☐
No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).☑
Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company that prepares its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response
to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: ☐
Item 17 ☐ Item 18
If this report is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐
Yes ☐ No
On August 4, 2020, Eros submitted a Report of
Foreign Private Issuer on Form 6-K to the Securities and Exchange Commission the (“SEC”), announcing the completion
of the merger between Eros International Plc, an Isle of Man company limited by shares (“Eros”) and STX Filmworks,
Inc., a Delaware Corporation (“STX”), in accordance with the terms of an Agreement and Plan of Merger, dated as of
April 17, 2020 (as amended, restated or otherwise modified from time to time, the “Merger Agreement”) by and among
Eros, STX, England Holdings 2, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Eros (“England Holdings
2”) and England Merger 1 Corp., a Delaware corporation and direct wholly owned subsidiary of England Holdings 2 (“Merger
Sub”). On July 30, 2020, pursuant to the Merger Agreement, Merger Sub merged with and into STX, with STX surviving as the
surviving corporation and a direct wholly owned subsidiary of England Holdings 2 (the “Merger”). Following the Merger,
we changed our name to Eros STX Global Corporation.
Pursuant to the Merger Agreement, at the effective
time of the Merger, each share of STX preferred stock converted into the right to receive a number of contractual contingent value
rights (“CVRs”) and each STX stock option and restricted stock unit award issued and outstanding as of immediately
prior to the effective time of the Merger was cancelled. Such CVRs in turn entitle the holder thereof to receive, on the
date (the “Settlement Date”) that is the earlier to occur of (1) the first time that the A ordinary shares issuable
pursuant to the CVRs have been registered for resale pursuant to an effective registration statement under the Exchange Act and
(2) February 26, 2021, a number of our A ordinary shares to be calculated in accordance with certain agreements governing the CVRs
entered into concurrently with the consummation of the Merger.
It is estimated that we will ultimately issue
approximately 211,912,291 further A ordinary shares in connection with the Merger, comprised of up to 40,000,000 management plan
equity awards and 171,912,291 A ordinary shares to be issued pursuant to the CVRs.
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 (in all subsequent financial statements that reflect the Merger)
are those of STX. Following the Merger, Eros will maintain its fiscal year-end of March 31, however, prior to the Merger, STX had
a fiscal year-end of September 30. We are filing this Transition Report on Form 20-F (as set forth in Section 12240.4 of the SEC’s
Division of Corporate Finance Financial Reporting Manual, which covers situations involving reverse acquisitions where the registrant
elects to maintain the fiscal year of the legal acquirer/registrant) to provide the financial information of STX as accounting
acquirer for the transition period from September 30, 2019, the end of STX’s most recently completed financial year, to March
31, 2020, the end of Eros’ most recently completed fiscal year.
When we refer to a fiscal year, such as fiscal
year 2020, fiscal 2020 or FY 2020, in all sections of this transition report other than Part I—Item 5—Operating
and Financial Review and Prospects and Part I—Item 11—Quantitative and Qualitative Disclosures about Market Risk, we
are referring to the fiscal year ended on March 31 of that year.
Unless otherwise indicated or required by the
context, as used in this Transition Report on Form 20-F, or “transition report,” the terms “Eros STX,”
“we,” “us,” the “Group,” “our,” the “combined company” and the “Company”
refer to Eros STX Global Corporation and all its subsidiaries, including STX, that are consolidated under generally accepted accounting
principles in the U.S., or U.S. GAAP, as issued by the Financial Accounting Standards Board, or FASB. We use the term “Eros”
to refer to Eros International Plc prior to the Merger and the Eros business. We use the term “STX” to refer to STX
Filmworks, Inc. and the STX business. The “Founders Group” refers to Beech Investments Limited and Kishore Lulla and
his descendants, Sunil Lulla and other Lulla family entities.
“High budget” films refer to Hindi
films with direct production costs in excess of $8.5 million and regional 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 $1.0 million in direct production costs, in each case translated at the
historical average exchange rate for the applicable fiscal year. “Medium budget” films refer to Hindi, Tamil, Telugu
and other regional language films within the remaining range of direct production costs. With respect to low budget films, references
to “film releases” refer to theatrical releases or, for films that we did not theatrically release, to our initial
DVD, digital or other non- theatrical exhibition. “Ultimate” refers to the revenue that a film will generate over its
lifetime.
The consolidated financial statement data as
at March 31, 2020 and September 30, 2019 and 2018 and for the six months ended March 31, 2020 and the years ended September 30,
2019, 2018 and 2017 have been derived from the consolidated financial statements of STX, as presented elsewhere in this transition
report, which have been prepared in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP, as issued
by FASB. The selected consolidated statement of operations data for the six months ended March 31, 2019 has been derived
from the unaudited consolidated financial statements of STX included elsewhere in this transition report. All references in this
transition report to “$” and “dollar” are to U.S. dollars.
This transition report contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Exchange Act, and such statements are subject to the safe harbors created thereby. Generally, these forward-looking
statements can be identified by the use of forward-looking terminology such as “aim,” “approximately,”
“anticipate,” “believe,” “estimate,” “continue,” “could,” “expect,”
“forecast,” “future,” “going forward,” “intend,” “is/are likely to”
“may,” “objective,” “ought to,” “outlook,” “plan,” “potential,”
“predict,” “project,” “schedules,” “seek,” “should,” “target,”
“will” and similar expressions. Those statements include, among other things, the discussions of our business strategy
and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources, tax
assessment orders and future capital expenditures. All of our forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially from those that we are expecting, including, without limitation:
These and other factors are more fully discussed
in “Part I — Item 3. Key Information — D. Risk Factors” and in “Part I — Item 5. Operating
and Financial Review and Prospects” in this transition report. The forward-looking statements contained in this transition
report are based on historical performance and management’s current plans, estimates and expectations in light of information
currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments
affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes
in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are
beyond our control. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove to be
incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking
statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement
made by us in this transition report speaks only as of the date on which we make it. Factors or events that could cause our actual
results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation
to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except
as may be required by applicable securities laws.
PART I
ITEM 1. IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
|
|
A.
|
Selected Financial Data
|
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 presented in the tables below are those of STX.
The
following tables present our historical selected consolidated financial data. The selected consolidated statement of operations
data for the years ended September 30, 2017, 2018 and 2019 and the six months ended March 31, 2020 and the selected balance sheet
data as of September 30, 2018 and 2019 and March 31, 2020 are derived from the audited consolidated financial statements that
are included elsewhere in this transition report. The selected consolidated statement of operations data for the six months ended
March 31, 2019 has been derived from the unaudited consolidated financial statements included elsewhere in this transition
report. The unaudited interim consolidated financial information has been prepared on the same basis as the audited consolidated
financial information and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly our results of operations for the six months ended March 31, 2019.
These
historical results are not necessarily indicative of the results that may be expected in the future and interim results are
not necessarily indicative of results to be expected for the full year. You should read the selected historical financial data
below in conjunction with the section titled “Part I—Item 5—Operating and Financial Review and Prospects”
and the financial statements and related notes included elsewhere in this transition report.
Statement
of Operations Data
|
|
|
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
|
|
|
Distributing 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 (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
116
|
|
|
|
99
|
|
|
|
213
|
|
|
|
51
|
|
|
|
43
|
|
|
Interest expenses
|
|
|
(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
|
)
|
Selected
Balance Sheet Data
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
|
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
167,869
|
|
|
$
|
17,874
|
|
|
$
|
25,705
|
|
|
Film and TV costs, net
|
|
$
|
157,805
|
|
|
$
|
141,952
|
|
|
$
|
97,308
|
|
|
Total assets
|
|
$
|
451,385
|
|
|
$
|
356,453
|
|
|
$
|
292,762
|
|
|
Total debt, net(1)
|
|
$
|
310,590
|
|
|
$
|
267,948
|
|
|
$
|
268,081
|
|
|
Total liabilities
|
|
$
|
638,233
|
|
|
$
|
587,600
|
|
|
$
|
565,207
|
|
|
Convertible, redeemable preferred stock
|
|
$
|
355,849
|
|
|
$
|
501,977
|
|
|
$
|
520,001
|
|
|
Total stockholders’ deficit
|
|
$
|
(542,697
|
)
|
|
$
|
(733,124
|
)
|
|
$
|
(792,446
|
)
|
|
Total liabilities, convertible, redeemable preferred stock and stockholders’
deficit
|
|
$
|
451,385
|
|
|
$
|
356,453
|
|
|
$
|
292,762
|
|
(1)
Includes (in each case net of discounts and debt issuance costs, if applicable): (i) the Senior Credit Facility (as defined herein),
(ii) the five-and-a-half-year $30 million senior secured revolving credit facility with Seer Capital Master Fund, LP as the administrative
agent (as amended, supplemented or otherwise modified) (the “Prints and Advertising Facility”), which was repaid
in full and terminated in January 2020, (iii) the Mezzanine Facility (as defined herein), and (iv) the one-and-a-half-year
term loan agreement for a total commitment of approximately $4.7 million (the “Aperture Term Loan”), which was
terminated and repaid in full on May 10, 2019.
Selected
Consolidated Statement of Cash Flows
|
|
|
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
|
|
|
Net cash (used in) investing activities
|
|
|
(1,713
|
)
|
|
|
(2,757
|
)
|
|
|
(354
|
)
|
|
|
(428
|
)
|
|
|
(475
|
)
|
|
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/period
|
|
|
88,449
|
|
|
|
78,225
|
|
|
|
168,844
|
|
|
|
168,844
|
|
|
|
17,874
|
|
|
Cash, cash equivalents and restricted cash at the end of year/period
|
|
$
|
78,225
|
|
|
$
|
168,844
|
|
|
$
|
17,874
|
|
|
$
|
130,778
|
|
|
$
|
25,705
|
|
|
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
|
C.
|
Reason for the Offer and the Use
of Proceeds
|
Not Applicable.
Risks Relating to the Merger and the Combined
Company
Uncertainties associated with the Merger
may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations
of the combined company.
Both Eros and STX are dependent on the experience
and industry knowledge of officers and other key employees to execute their business plans and the business plan of the combined
company. The combined company’s success going forward depends in part upon the ability of the combined company to retain
certain key management personnel and employees of Eros and STX. No assurance can be given that the combined company will continue
to be able to attract or retain key management personnel and other key employees to the same extent that Eros and STX have previously
been able to attract or retain their own employees.
Following the Merger, the composition
of the combined company Board of Directors is different than the composition of the previous Eros Board of Directors.
The Eros Board of Directors previously consisted
of seven directors. Following the completion of the Merger, the Board of Directors of the combined company (the “Board”)
consists of eight directors, including four directors who were selected by the Founders Group (one of whom must be an independent
director) and four directors who were selected by STX (one of whom must be an independent director). The ninth director seat is
currently vacant. This composition of the Board may affect the future decisions of the combined company.
The combined company may be unable to
successfully integrate Eros and STX and realize the anticipated benefits of the Merger.
The success of the Merger depends, in part,
on the combined company’s ability to successfully combine and integrate Eros and STX, and realize the anticipated benefits,
including synergies, cost savings, innovation and strategic growth opportunities and operational efficiencies from the Merger in
a manner that does not materially disrupt existing customer, supplier, talent, producer, distributor, employee and other industry
relations and does not result in decreased revenues due to losses of, or decreases in purchase and/or viewership of its content
and service offerings by, subscribers and other counterparties. If the combined company is unable to achieve these objectives within
the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize
than expected, and the value of the combined company’s A ordinary shares may decline. The combined company may fail to realize
some or all of the anticipated benefits of the Merger if the integration process takes longer than expected or is more costly than
expected.
The integration of the two companies may result
in material challenges, including, without limitation:
|
|
·
|
managing a larger, more complex combined business;
|
|
|
·
|
maintaining employee morale and retaining key management and other employees;
|
|
|
·
|
retaining existing business and operational relationships, including customers, suppliers, distributors,
employees and other counterparties, and attracting new business and operational relationships;
|
|
|
·
|
consolidating corporate and administrative infrastructures and eliminating duplicative operations,
including unanticipated issues in integrating information technology, communications and other systems;
|
|
|
·
|
coordinating geographically separate organizations; and
|
|
|
·
|
unforeseen expenses or delays associated with the Merger.
|
Many of these factors will be outside of the
combined company’s control, and any one of them could result in delays, increased costs, decreases in the amount of expected
revenues and other adverse impacts, which could materially affect the combined company’s financial position, results of operations
and cash flows.
The ongoing integration may result in additional
and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all.
In addition, the combined company’s ability
to successfully integrate and manage its expanded business and achieve the anticipated benefits of the Merger may be materially
and adversely effected by the ongoing COVID-19 pandemic, which is discussed in greater detail below. The ability of the combined
company to generate revenues from the monetization of film content in various distribution channels, including through agreements
with commercial theater operators, has been and may continue to be adversely effected by the COVID-19 pandemic. The full extent
and scope of the impact of the pandemic on national, regional and global markets and economies, and therefore the combined company’s
business and industry and efforts to integrate its expanded business and organization and realize anticipated benefits of the Merger,
is highly uncertain and cannot be predicted.
The future results of the combined company
may be adversely impacted if the combined company does not effectively manage its complex operations following the completion of
the Merger.
Following the completion of the Merger, the
size of the combined company’s business is significantly larger than the previous respective sizes of either Eros’
business or STX’s business. Our ability to successfully manage this expanded business depends, in part, upon management’s
ability to design and implement strategic initiatives that address not only the integration of Eros and STX, but also the increased
scale and scope of our business with its associated increased costs and complexity. There can be no assurances that we will be
successful in integrating the businesses or that it will realize the expected operating efficiencies, cost savings, strategic growth
opportunities and other benefits currently anticipated from the Merger.
Pursuant to an Investors’ Rights
Agreement and the Amended Articles of Association, the Founders Group and certain significant stockholders of STX have rights relating
to our governance that are different from shareholders generally.
As described in “Part I—Item 7.
Major Shareholders and Related Party Transactions—B. Related Party Transactions,” of this transition report, the Founders
Group and certain significant stockholders of STX (the “STX Parties”) entered into an Investors’ Rights Agreement
at the effective time of the Merger, which was amended by Amendment No. 1 to the Investors’ Rights Agreement, dated as of
July 30, 2020 (as amended, the “Investors’ Rights Agreement”). In addition, as required by the Merger Agreement,
we convened an extraordinary general meeting of our shareholders on June 29, 2020 at which the requisite percentage of our shareholders
approved the Amended Articles of Association, key provisions of which are also described in “Part I—Item 10. Additional
Information—B. Memorandum and Articles of Association” of this transition report. By virtue of the Investors’
Rights Agreement and the Amended Articles of Association, for a period lasting up to three years following the consummation of
the Merger, the Founders Group has the right to nominate four out of nine directors on our Board of Directors and certain of the
STX Parties affiliated with Hony Capital (“Hony”) have the right to nominate four out of nine directors on our Board
of Directors. In addition, during this period, our Board of Directors will not be permitted to take certain significant corporate
actions, including (i) hiring or terminating any of our chief executive officer, chief financial officer or president (or co-presidents),
(ii) adopting our annual business plan and budget and (iii) entering into any agreement increasing our available debt for borrowed
money to an amount greater than the greater of (A) $552 million and (B) an amount that would cause the net debt to be greater
than five times adjusted EBITDA for the most recent four consecutive fiscal quarters for which financial statements are available,
without the approval of at least two thirds of the directors on our Board of Directors. In exercising their rights under the Investors’
Rights Agreement and the Amended Articles of Association, the Founders Group and STX Parties may have interests that are different
from or in addition to the interests of the combined company’s other shareholders.
We expect to incur substantial expenses
related to the integration of Eros and STX.
We incurred substantial expenses in connection
with the completion of the Merger and we expect to incur substantial expenses to integrate a large number of processes, policies,
procedures, operations, technologies and systems of Eros and STX in connection with the Merger. The substantial majority of these
costs will be non-recurring expenses related to the transactions and facilities and systems consolidation costs. We may incur additional
costs or suffer loss of business under third-party contracts that are terminated or that contain change in control or other provisions
that may be triggered by the completion of the transactions, and/or losses of, or decreases in transactions by, customers and business
partners of Eros and STX, and may also incur costs to retain certain key management personnel and employees. We will also continue
to incur transaction fees and costs related to formulating integration plans for the combined business, and the execution of these
plans may lead to additional unanticipated costs and time delays. These incremental transaction-related costs may exceed the savings
we expect to achieve from the elimination of duplicative costs and the realization of other efficiencies related to the integration
of the businesses, particularly in the near term and in the event there are material unanticipated costs. Factors beyond our control
could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately.
The market price of our A ordinary shares
declined following the consummation of the Merger and may further decline in the future.
The market price of our A ordinary shares declined
following the consummation of the Merger and may further decline in the future. In addition, sales of our ordinary shares following
the completion of the Merger may cause the market price of such shares to decrease. It is estimated that we will ultimately issue
approximately 211,912,291 further A ordinary shares in connection with the merger, comprised of up to 40,000,000 management plan
equity awards and 171,912,291 A ordinary shares to be issued pursuant to the CVRs. While former STX stockholders who did not purchase
shares pursuant to the PIPE Subscription Agreement described in “Part I–Item 7. Major Shareholders and Related Party
Transactions–B. Related Party Transactions” of this transition report are subject to a contractual 18-month lockup
period following the settlement date during which they may not sell our A ordinary shares they received in the Merger, those STX
stockholders who purchased A ordinary shares pursuant to the PIPE Subscription Agreement were subject only to a 75-day lockup period
following the closing date of the Merger (with respect to both the A ordinary shares they received in the Merger and the A ordinary
shares they purchased in the PIPE Subscription Agreement), which period has expired. It is possible that such STX stockholders
who purchased A ordinary shares in the PIPE Subscription Agreement may not continue to hold the shares of our common stock they
received in the Merger. In addition, previous Eros shareholders may not continue to hold their A ordinary shares. Such sales of
our A ordinary shares could have the effect of depressing the market price for the combined company’s A ordinary shares.
On a fully diluted basis, the number of shares
of our common stock outstanding following the completion of all Merger-related issuances is expected to be approximately
399.6 million A ordinary shares, and 21.7 million B ordinary shares for a total of 421.3 million A and B ordinary shares.
Any of these events may make it more difficult for us to sell equity or equity-related securities, dilute your ownership interest
and have an adverse impact on the price of our A ordinary shares.
If certain U.S. federal income tax rules
regarding ‘‘inversion transactions’’ apply to us as a result of the Merger, such rules could result in
adverse U.S. federal income tax consequences.
Under section 7874 of the U.S. Internal Revenue
Code of 1986, as amended (“Code”), a foreign corporation is treated as a “surrogate foreign corporation”
if, pursuant to a plan (or a series of related transactions) (1) the foreign corporation completes the direct or indirect acquisition
of substantially all of the properties held, directly or indirectly, by a U.S. corporation, (2) after the acquisition at least
60% of the stock (by vote or value) of the foreign corporation is held by former shareholders and certain creditors of the U.S.
corporation by reason of their holding stock or debt obligations of the U.S. corporation (such percentage held by such persons
being the “Section 7874 Percentage”), and (3) after the acquisition, the “expanded affiliated group” (within
the meaning of section 7874 of the Code) that includes the foreign corporation does not have substantial business activities in
the foreign country in which, or under the law of which, the foreign corporation is created or organized, relative to the total
business activities of such expanded affiliated group.
If the Section 7874 Percentage is at least 60%
but less than 80% and a foreign corporation is a surrogate foreign corporation with respect to a U.S. corporation, several limitations
apply to the U.S. corporation, including, but not limited to, the prohibition, for a period of ten years, of the use of net operating
losses, foreign tax credits and other tax attributes to offset the income or gain recognized by reason of transfer of any property
to a foreign related person or to offset any income received or accrued during such period by reason of a license of any property
to a foreign related person and an additional minimum tax under Section 59A of the Code on certain “base eroding” payments
to members of the expanded affiliated group that are foreign corporations. In addition, under section 4985 of the Code and the
rules related thereto, an excise tax at a rate of currently 20% is imposed on the value of certain share compensation held directly
or indirectly by certain “disqualified individuals” (including certain of officers and directors). Further, shareholders
of the foreign corporation that are U.S. persons for U.S. federal income tax purposes may not be eligible for reduced rates on
dividends paid by the foreign corporation.
If the Section 7874 Percentage is at least 80%
and a foreign corporation is a surrogate foreign corporation with respect to a U.S. corporation, the foreign corporation will be
treated as a U.S. corporation, regardless of the fact that such corporation is also incorporated in a foreign country. If the foreign
corporation were treated as a U.S. corporation, the entire net income of the foreign corporation would be subject to U.S. federal
income tax on a net income basis and would be determined under U.S. federal income tax principles.
Based on the
facts as of the date hereof, we expect that, after the consummation of the Merger, the Section 7874 Percentage with respect to
former STX stockholders and creditors will be less than 60% and therefore we do not expect to be treated as a “surrogate
foreign corporation” within the meaning of section 7874 of the Code. Determining the Section 7874 Percentage, however, is
complex and subject to legal and factual uncertainties. As a result, there can be no assurance that the Section 7874 Percentage
is less than 60%. Holders are urged to consult their own tax advisors regarding the potential application of section 7874 of the
Code to the Merger and its potential tax consequences. A determination that we are a surrogate foreign corporation for the purposes
of section 7874 of the Code may have material adverse effects on the business, financial condition, results of operations and prospects
of the combined company following the Merger.
Risks Related to Our Business
The COVID-19 pandemic and other adverse
public health developments has adversely affected our business and results of operations.
The COVID-19 outbreak has caused significant
disruptions, the outbreak has spread globally to 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 and availability of content, including delayed, or
in some cases, shortened or cancelled theatrical releases. 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 our ability to generate
revenues from the monetization of film content in various distribution channels through agreements with commercial theater operators,
and may continue to do so unless and until the pandemic subsides or an effective treatment or vaccine is discovered. The extent
of the adverse impact on our financial and operational results will be dictated by the length of time that such disruptions continue,
which will, in turn, depend on the currently unknowable duration of COVID-19 and among other things, the impact of governmental
actions imposed in response to the 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 also delayed in production schedule. For example, some areas may not re-open movie theaters or, if they do, some
individuals may not feel comfortable gathering in public places such as movie theaters.
The continued spread of COVID-19 has adversely
affected many industries, as well as the economies and financial markets of many countries, including many of the countries in
which we distribute content, resulting in a significant deceleration of economic activity. This slowdown has, among other things,
reduced production, decreased the level of trade, and led to widespread corporate downsizing, causing a sharp increase in unemployment.
We have also seen significant disruption of, and extreme volatility in, the global capital markets, which could increase the cost
of, or entirely restrict our access to, capital. This volatility and uncertainty have adversely affected our stock price and may
continue to do so. As a result, to the extent we determine it is in our best interests to access the capital markets or refinance
some or all of our indebtedness, we may not be able to do so on terms that are acceptable to us, or at all. The impact of COVID-19
and the governmental responses thereto on global, national and local economies is still uncertain and, unless the outbreak is contained,
these adverse impacts could worsen, impacting all segments of the global economy, and result in a significant recession or worse.
Considerable uncertainty still surrounds COVID-19 and its potential effects, and the extent of and effectiveness of any responses
taken on a local, national and global level. Infections may become more widespread and that could accelerate or magnify one or
more of the risks described above. While we expect the pandemic and related events will have a negative effect on our business,
the full extent and scope of the impact on national, regional and global markets and economies, and therefore our business and
industry, is highly uncertain and cannot be predicted. Accordingly, our ability to conduct our business in the manner and on the
timelines presently planned could be materially and negatively affected, any of which could have a material adverse impact on our
business and our results of operation and financial condition.
Additionally, on March 27, 2020, the U.S. government
enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which contains provisions intended
to mitigate the adverse economic effects of the COVID-19 pandemic, and from which both Eros and STX. It is uncertain whether, or
how much, we may benefit any other subsequent legislation or government action intended to provide financial relief or assistance,
either in the U.S. or abroad.
We are monitoring the rapidly evolving situation
and its potential impacts on our financial position, results of operations, liquidity, and cash flows.
The financial statements for STX that
are included in this transition report on Form 20-F have been prepared assuming that STX will continue on a going concern basis,
but there is no assurance that STX will continue as a going concern.
Ernst & Young LLP, the independent registered public accounting firm of STX, has included an explanatory paragraph in
their opinion that accompanies the STX audited consolidated financial statements included in this transition report. The explanatory
paragraph is related to the maturity of the Senior Credit Facility, which matures on October 7, 2021 and which maturity falls
within the twelve-month period following the issuance of the March 31, 2020 STX financial statements. We believe that we
have adequate liquidity to fund our operations up until the maturity of the Senior Credit Facility. However, absent a refinancing
with cash from operations, asset sales or a combination of the foregoing, we do not currently expect to have sufficient liquidity
to repay the full amount of the Senior Credit Facility upon maturity and there can be no assurance that we will succeed in refinancing
the Senior Credit Facility. Based on continuing discussions with existing and potential lenders, we are cautiously optimistic
that we will be able to successfully implement our plan to address our debt maturities. Accordingly, unless additional funding
through a refinancing is obtained, the going concern assumption may have to change. Our financial statements have been prepared
on the basis that we will continue as a going concern and do not include any adjustments that might result from the uncertainty
regarding our ability to continue in business. If we are unable to obtain adequate additional financing, we may be required
to curtail operations and investors could lose part or all of their investment in the Company. For additional information,
see Note 1 to the audited Consolidated Financial Statements included in this transition report.
We may fail to source adequate film
content on favorable terms or at all through acquisitions or co-productions, which could have a material and adverse impact on
our business.
We generate a portion of our revenues by monetizing
Indian film content that we co-produce or acquire from third parties, and then distribute through various channels. Our ability
to successfully enter into co-productions and to acquire content depends on, among other things, our ability to maintain existing
relationships, and form new ones, with talent and other industry participants.
The pool of quality talent is limited and, as
a result, there is significant competition to secure the services of certain actors, directors, composers and producers, among
others. Competition can increase the cost of such talent, and hence the cost of film content. These costs may continue to increase,
making it more difficult for us to access content cost-effectively and reducing our ability to sustain our margins and maximize
revenues from distribution and monetization. Further, we may be unable to successfully maintain our long-standing relationships
with certain industry participants and continue to have access to content and/or creative talent and may be unable to establish
similar relationships with new leading creative talent. This is also dependent on relationships with various writers and talent
and has execution risks associated with it. If any such relationships are adversely affected, or we are unable to form new relationships,
or if any party fails to perform under its agreements or arrangements with us, our business, prospects, financial condition, liquidity
and results of operations could be materially adversely affected.
Our business involves substantial capital
requirements, and our inability to maintain or raise sufficient capital could materially adversely affect our business.
Our business requires a substantial investment
of capital for the production, acquisition and distribution of films and a significant amount of time may elapse between our expenditure
of funds and the receipt of revenues from our films. This may require us to fund a significant portion of our capital requirements
from our credit facilities or other financing sources. Any capital shortfall could have a material adverse effect on our business,
prospects, financial condition, results of operations and liquidity. For additional information, please see “Part I—Operating
and Financial Review and Prospects—B. Liquidity and Capital Resources” in this transition report and Note 3 to the
audited Consolidated Financial Statements contained elsewhere in this transition report.
Delays, cost overruns, cancellation
or abandonment of the completion or release of films may have a material adverse effect on our business.
There are substantial financial risks relating
to film production, completion and release. Actual film costs may exceed their budgets, and factors such as labor disputes, unavailability
of a star performer, equipment shortages, disputes with production teams or adverse weather conditions may cause cost overruns
and delay or hamper film completion. When a film we have contracted to acquire from a third-party experiences delays or fails to
be completed, we may not recover advance monies paid for the proposed acquisition. When we enter into co-productions, we are typically
responsible for paying all production costs in accordance with an agreed upon budget and while we typically cap budgets in our
contracts with our co-producer, given the importance of ongoing relationships in our industry, longer-term commercial considerations
may in certain circumstances override strict contractual rights and we may feel obliged to fund cost over-runs where there is no
contractual obligation requiring us to do so.
Production delays, failure to complete projects
or cost overruns could result in us not recovering our costs and could have a material adverse effect on our business, prospects,
financial condition and results of operations.
The popularity and commercial success
of our films are subject to numerous factors, over which we may have limited or no control.
The popularity and commercial success of our
films depends on many factors including, but not limited to, the key talent involved, the timing of release, the promotion and
marketing of the film, the quality and acceptance of other competing programs released into the marketplace at or near the same
time, the availability of alternative forms of entertainment, general economic conditions, the genre and specific subject matter
of the film, its critical acclaim and the breadth, timing and format of its initial release. We cannot predict the impact of such
factors on any film, and many are factors that are beyond our control. As a result of these factors and many others, our films
may not be as successful as we anticipate, and as a result, our results of operations may suffer.
The success of our business depends
on our ability to consistently create and distribute filmed entertainment that meets the changing preferences of the broad consumer
market both within India, the U.S. and internationally.
Changing consumer tastes affect our ability
to predict which films will be popular with audiences in India and internationally. As we invest in a portfolio of films across
a wide variety of genres, stars and directors, it is highly likely that at least some of the films in which we invest will not
appeal to Indian or international audiences. Further, where we sell rights prior to release of a film, any failure to accurately
predict the likely commercial success of a film may cause us to underestimate the value of such rights. If we are unable to co-produce
and acquire rights to films that appeal to Indian and international film audiences or to accurately judge audience acceptance of
our film content, the costs of such films could exceed revenues generated and anticipated profits may not be realized. Our failure
to realize anticipated profits could have a material adverse effect on our business, prospects, financial condition and results
of operations.
Our ability to monetize our content
is limited to the rights that we acquire from third parties or otherwise own.
We have acquired our film content through contracts
with third parties, which are primarily fixed-term contracts that may be subject to expiration or early termination. Upon expiration
or termination of these arrangements, content may be unavailable to us on acceptable terms or at all, including with respect to
technical matters such as encryption, territorial limitation and copy protection. In addition, if any of our competitors offer
better terms, we will be required to spend more money or grant better terms, or both, to acquire or extend the rights we previously
held. If we are unable to renew the rights to our film library on commercially favorable terms and to continue monetizing the existing
films in our library or other content, it could have a material adverse effect on our business, prospects, financial condition
and results of operations.
In addition, we typically only own certain rights
for the monetization of content, which limits our ability to monetize content in certain media formats. In particular, we do not
own the audio music rights to the majority of the films in our library and to certain new releases. To the extent we do not own
the music or other media rights in respect of a particular film, we may only monetize content through those channels to which we
do own rights, which could have an adverse effect on our ability to generate revenue from a film and recover our costs from acquiring
or producing content.
We may face claims from third parties
that our films may be infringing on their intellectual property.
Third parties may claim that certain of our
films misappropriate or infringe such third parties’ intellectual property rights with respect to previously developed films,
stories, characters, other entertainment or intellectual property. Any such assertions or claims may impact our rights to monetize
the related films. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and
diversion of resources in defending against them. If any claims or actions are asserted against us, we may seek to settle such
claim by obtaining a license from the plaintiff covering the disputed intellectual property rights. We cannot provide any assurances,
however, that under such circumstances a license, or any other form of settlement, would be available on reasonable terms or at
all. Any of these occurrences could have a material adverse effect on our business, prospects, financial condition and results
of operations.
We were historically and are currently,
party to class action lawsuits in the U.S. and may be subject to similar or additional claims in the future, and an adverse ruling
on any such future claims could have a material adverse effect on our business, financial condition and results of operations and
could negatively impact the market price of our A ordinary shares.
Beginning on November 13, 2015, Eros 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 Eros. On May 17, 2016, the putative class actions filed in New Jersey were transferred to the U.S. District Court
for the Southern District of New York where they were subsequently consolidated with the other two actions. The Court-appointed
lead plaintiffs filed a single consolidated complaint on July 14, 2016 and amended on October 10, 2016. The amended consolidated
complaint alleged that Eros and certain individual defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), but did not assert certain claims that had been asserted in prior complaints.
The remaining claims were primarily focused on whether Eros and individual defendants made material misrepresentations concerning
the Company’s film library and materially misstated the usage and functionality of Eros 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 and Order dismissing
the putative class action with prejudice. 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.
Beginning on June 21, 2019, Eros was named a
defendant in three substantially similar putative class action lawsuits filed in federal courts in California and New Jersey by
purported shareholders of Eros. The lawsuits allege that Eros and certain individual defendants violated Sections 10(b) and 20(a)
of the Exchange Act by making false and/or misleading statements regarding Eros’ 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.
Eros filed a motion to dismiss on August 28, 2020. On October 14, 2020, the lead plaintiff filed an opposition to the Company’s
motion to dismiss. The Company expects to file a reply brief, which is due on or before November 13th, 2020.
We have incurred, and will continue to incur,
significant costs to defend our position in the above-mentioned class action lawsuits. We are unable to predict whether we will
be subject to similar or additional claims in the future. If we become subject to class action lawsuits or any other related lawsuits
or investigations or proceedings by regulators in the future, or if the current actions are not resolved in our favor, it could
result in a diversion of management resources, time and energy, significant costs, a material decline in the market price for our
A ordinary shares, increased share price volatility and increased directors and officers liability insurance premiums and could
have a material adverse effect upon our business, prospects, financial condition, results of operations and ability to access the
capital markets.
Anonymous letters to regulators or business
associates or anonymous allegations on social media regarding our business practices, accounting practices and/or officers and
directors could have a resultant material adverse effect on our business, financial condition and results of operations and could
negatively impact the market price for our A ordinary shares.
We have been, are currently and in the future
may be, the target of anonymous letters sent to regulators or business associates or anonymous allegations posted on social media
or circulated in short selling reports regarding our accounting practices, business practices and/or officers and directors. Every
time we have received such allegations, we have undertaken what we believe to be a reasonably prudent review, including extensive
due diligence to investigate the allegations, and where necessary our Board of Directors has engaged third-party professional firms
to report directly to the Company’s Audit Committee. Having conducted these investigations, in each instance we found the
allegations were without merit. However, the public dissemination of these allegations has adversely affected our reputation, business
and the market price of our A ordinary shares and required us to spend significant management time and incur substantial costs
to address them.
If anonymous allegations are made in the future,
or if the current allegations continue, it could result in a diversion of management resources, time and energy, significant costs,
a material decline in the market price for our A Ordinary Shares, increased share price volatility and increased directors and
officers liability insurance premiums and could have a material adverse effect upon our business, prospects, financial condition,
results of operations and ability to access the capital markets.
Our business involves risks of liability
claims for media content.
As a producer and distributor of media content,
we may face potential liability for:
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copyright or trademark infringement; and
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other claims based on the nature and content of the materials distributed.
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These types of claims have been brought, sometimes
successfully, against producers and/or distributors of media content. Any imposition of liability that is not covered by insurance
or is in excess of insurance coverage could have a material adverse effect on our business and financial condition.
Eros India depends on the Indian box
office success of our Hindi and high budget Tamil and Telugu films from which we derive a significant portion of our revenues.
In India, a relatively high percentage of a
film’s overall revenues are derived from theater box office sales and, in particular, from such sales in the first week of
a film’s release. Indian domestic box office receipts are also an indicator of a film’s expected success in other Indian
and international distribution channels. As such, poor box office receipts in India for our films, even for those films for which
we obtain only international distribution rights, could have a significant adverse impact on our results of operations in both
the year of release of the relevant films and in the future for revenues expected to be earned through other distribution channels.
In particular, we depend on the Indian box office success of our Hindi films and high budget Tamil and Telugu films.
We may not be paid the full amount of
box office revenues to which we are entitled.
We derive revenues from theatrical exhibition
of our films by collecting a specified percentage of box office receipts from multiplex and single screen theater operators. The
Indian film industry continues to lack full exhibitor transparency. There is limited independent monitoring of such data in India
or the Middle East, unlike the monitoring services provided by comScore in the United Kingdom and the U.S. We therefore rely on
theater operators and our sub-distributors to report relevant information to us in an accurate and timely manner.
While multiplex and single-screen operators
have now moved to a digital distribution model that provides greater clarity on the number of screenings given to our films, many
still do not have computerized tracking systems for box office receipts which can be tracked independently by a third-party
and we are reliant on box office reports generated internally by these multiplex and single screen operators which may not
be entirely accurate or transparent.
Because we do not have a reliable system to
determine if our box office receipts are underreported, box office receipts and sub-distribution revenues may be inadvertently
or purposefully misreported or delayed, which could prevent us from being compensated appropriately for exhibition of our films.
If we are not properly compensated, our business, prospects, financial condition and results of operations could be negatively
impacted.
We depend on our relationships with
theater operators and other industry participants to monetize our film content. Any disputes with multiplex operators in India
or elsewhere could have a material adverse effect on our ability or willingness to release our films as scheduled.
We generate revenues from the monetization of
Indian and other film content in various distribution channels through agreements with commercial theater operators, in particular
multiplex operators, and with retailers, television operators, telecommunications companies and others. Our failure to maintain
these relationships, or to establish and capitalize on new relationships, could harm our business or prevent our business from
growing, which could have a material adverse effect on our business, prospects, financial condition and results of operations.
We have had disputes with multiplex operators
in India that required us to delay our film releases and disrupted our marketing schedule for future films. These disputes were
subsequently settled pursuant to settlement agreements that expired in June 2011. We now enter into agreements on a film-by-film
and exhibitor-by-exhibitor basis instead of entering into long-term agreements. To date, our film-by-film agreements have been
on commercial terms that are no less favorable than the terms of the prior settlement agreements; however, we cannot guarantee
such terms can always be obtained. Accordingly, without a long-term commitment from multiplex operators, we may be at risk of losing
a substantial portion of our revenues derived from our theatrical business. We may also have similar future disruptions in our
relationship with multiplex operators, the operators of single-screen theaters or other industry participants, which could have
a material adverse effect on our business, prospects, financial condition and results of operations. Further, the theater industry
in India is rapidly growing and evolving and we cannot assure you that we will be able to establish relationships with new commercial
theater operators.
Eros Now, our digital OTT entertainment
service accessible via internet-enabled devices, may not achieve the desired growth rate.
Eros Now was soft launched in 2012 and as of
June 30, 2020, Eros Now catered to 33.8 million paying subscribers and had garnered 205.8 million registered users across global
digital distribution platforms. We must continue to grow and retain subscribers in India (one of our key markets) where consumers
also use traditional Pay-TV and broadcast channels for content consumption, as well as grow our subscriber base in markets outside
of India. Our ability to attract and retain subscribers will depend in part on our ability to consistently provide our subscribers
a high-quality experience with respect to content and features and on the quality of data connectivity (either Wi-Fi, broadband,
3G or 4G mobile data) in India.
To achieve and sustain the desired growth rate
from Eros Now, we must accomplish numerous objectives, including substantially increasing the number of paid subscribers to our
service and retaining them, without which our revenues from digital stream will be adversely affected. We cannot assure you that
we will be able to achieve these objectives due to any of the factors listed below, among other factors:
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our ability to maintain an adequate content offering;
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our ability to maintain, upgrade and develop our service offering on an ongoing basis;
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our ability to successfully distribute our service across multiple mobile, internet and cable platforms
worldwide;
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our ability to secure and retain distribution across various platforms including telecom operators
and original equipment manufacturers;
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our ability to convert free registered users into paid subscribers and retain them;
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our ability to compete effectively against other Indian and foreign OTT services;
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our ability to manage technical glitches or disruptions;
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our ability to attract and retain our employees;
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any changes in government regulations and policies; and
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any changes in the general economic conditions specific to the internet and the movie industry.
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Eros Now faces and will continue to
face competition for subscriber time.
We compete for the time and attention of our
Eros Now subscribers with other content providers on the basis of a number of factors, including quality of experience, relevance,
diversity of content, ease of use, price, accessibility, perception of advertising load, brand awareness, and reputation.
We compete with providers of on-demand Indian
language entertainment, which is purchased or available for free and playable on mobile devices and in the home. We face increasing
competition for subscribers from a growing variety of businesses, including other subscription services around the world, many
of which offer services that deliver Indian entertainment content over the internet, through mobile phones, and through other wireless
devices.
Many of our current or future competitors are
already entrenched or may have significant brand recognition in a particular region or market in which we seek to penetrate.
We believe that companies with a combination
of technical expertise, brand recognition, financial resources, and digital media experience also pose a significant threat of
developing competing on-demand distribution technologies. In particular, if known incumbents in the digital media space such as
Facebook choose to offer competing services, they may devote greater resources than we have available, have a more accelerated
time frame for deployment, and leverage their existing user base and proprietary technologies to provide services that our subscribers
and advertisers may view as superior. Furthermore, Amazon Prime, Netflix, Hotstar and others have competing services, which may
negatively impact our business, operating results and financial condition. Our current and future competitors may have higher brand
recognition, more established relationships with talent and other content licensors and mobile device manufacturers, greater financial,
technical, and other resources, more sophisticated technologies, and/or more experience in the markets in which we compete. In
addition, Apple and Google also own application store platforms and are charging in-application purchase fees, which are not being
levied on their own applications, thus creating a competitive advantage for themselves against us. As the market for on-demand
music on the internet and mobile and connected devices increases, new competitors, business models, and solutions are likely to
emerge.
We also compete for subscribers based on our
presence and visibility as compared with other businesses and platforms that deliver entertainment content through the internet
and mobile devices. We face significant competition for subscribers from companies promoting their own digital content online or
through application stores, including several large, well-funded and seasoned participants in the digital media market. Mobile
device application stores often offer users the ability to browse applications by various criteria, such as the number of downloads
in a given time period, the length of time since a mobile application was released or updated, or the category in which the application
is placed. The websites and mobile applications of our competitors may rank higher than our website and our Eros Now mobile application,
and our application may be difficult to locate in mobile device application stores, which could draw potential subscribers away
from our platform and towards those of our competitors. If we are unable to compete successfully for subscribers against other
digital media providers by maintaining and increasing our presence and visibility online, on mobile devices and in application
stores, our number of subscribers and content streamed on our platform may fail to increase or may decline, and our subscription
fees and advertising sales may suffer.
Our subscriber metrics and other estimates
are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively
affect our reputation and our business.
We regularly review key metrics related to
the operation of our business, including, but not limited to, our subscribers, key performance indicators and monthly active users,
to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal
company data as well as other sources. At times, data may not have been validated by an independent third-party. While
these numbers are based on what we believe to be reasonable estimates of our subscriber base for the applicable period of measurement,
there are inherent challenges in measuring how our service is used across large populations globally. For example, we believe
that there are individuals who have multiple Eros Now accounts, which can result in an overstatement of key performance indicators.
Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies. For instance, if
a significant understatement or overstatement of monthly active users were to occur, we may expend resources to implement unnecessary
business measures or fail to take required actions to attract a sufficient number of users to satisfy our growth strategies.
In addition, advertisers generally rely on third-party
measurement services to calculate our metrics, and these third-party measurement services may not reflect our true audience. Some
of our demographic data also may be incomplete or inaccurate because subscribers self-report their names and dates of birth. Consequently,
the personal data we have may differ from our subscribers’ actual names and ages. If advertisers, partners, or investors
do not perceive our subscriber, geographic, or other demographic metrics to be accurate representations of our subscribers base,
or if we discover material inaccuracies in our subscriber, geographic, or other demographic metrics, our reputation may be seriously
harmed.
Changes in how we market our service
could adversely affect our marketing expenses and subscriber levels may be adversely affected.
We utilize a broad mix of marketing and public
relations programs, including social media sites, to promote our service to potential new subscribers. We may limit or discontinue
use or support of certain marketing sources or activities if advertising rates increase or if we become concerned that subscribers
or potential subscribers deem certain marketing practices intrusive or damaging to our brand. If the available marketing channels
are curtailed, our ability to attract new subscribers may be adversely affected. Companies that promote our service may decide
that we negatively impact their business or may make business decisions that in turn negatively impact us. For example, if they
decide that they want to compete more directly with us, enter a similar business or exclusively support our competitors, we may
no longer have access to their marketing channels. If we are unable to maintain or replace our sources of subscribers with similarly
effective sources, or if the cost of our existing sources increases, our subscriber levels and marketing expenses may be adversely
affected.
Privacy concerns could limit our ability
to collect and leverage our subscriber data and disclosure of membership data could adversely impact our business and reputation.
In the ordinary course of business and in particular
in connection with content acquisition and delivering our service to our members, we collect and utilize data supplied by our subscribers.
Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other
information to data collected on the internet regarding users’ browsing and other habits. Increased regulation of data utilization
practices, including self-regulation or findings under existing laws that limit our ability to collect, transfer and use data,
could have an adverse effect on our business. In addition, if we were to disclose data about our subscribers in a manner that was
objectionable to them, our business reputation could be adversely affected, and we could face potential legal claims that could
impact our operating results. Outside of India, we may become subject to additional and/or more stringent legal obligations concerning
our treatment of customer and other personal information, such as laws regarding data localization and/or restrictions on data
export. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business
model or practices to adapt to these obligations, we could incur additional expenses.
Any
significant disruption in our computer systems or those of third-parties that we utilize in our operations could result
in a loss or degradation of service and could adversely impact our business.
Our reputation and ability to attract, retain
and serve our subscribers is underpinned by the reliable performance and security of our computer systems and those of third parties
that we work with. These systems may be subject to damage or interruption from many external factors including, inter alia:
adverse weather conditions, natural disasters, terrorist attacks, power loss, telecommunications failures, and cybersecurity risks.
Interruptions in these systems, or with the internet in general, could make our service unavailable or degraded or otherwise hinder
our ability to deliver streaming content. Service interruptions, errors in our software or the unavailability of computer systems
used in our operations could diminish the overall attractiveness of our membership service to existing and potential members.
We rely upon a number of partners to
make our service available on their devices.
We currently offer subscribers the ability to
receive streaming content through a host of internet-connected screens, including TVs, digital video players, television set-top
boxes and mobile devices. We have agreements with various cable, satellite and mobile telecommunications operators to make our
service available to subscribers. In many instances, our agreements also include provisions by which the partner bills consumers
directly or otherwise offer services or products in connection with offering our service. We intend to continue to broaden our
relationships with existing partners and to increase our capability to stream content to other platforms and partners over time.
If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing,
regulatory, business or other impediments to delivering our streaming content to our subscribers via these devices, our ability
to retain subscribers and grow our business could be adversely impacted. Our agreements with our partners are typically multi-year
in duration and our business could be adversely affected if, upon expiration, a number of our partners do not continue to provide
access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility
and prominence of our service. Furthermore, devices are manufactured and sold by entities other than Eros Now and while these entities
should be responsible for the devices’ performance, the connection between these devices and Eros Now may nonetheless result
in consumer dissatisfaction towards Eros Now and such dissatisfaction could result in claims against us or otherwise adversely
impact our business. In addition, technology changes to our streaming functionality may require that partners update their devices.
If partners do not update or otherwise modify their devices, our service and our members’ use and enjoyment could be negatively
impacted.
Changes in how network operators handle
and charge for access to data that travel across their networks could adversely impact our business.
We rely upon the ability of subscribers to access
our service through the internet. If network operators block, restrict or otherwise impair access to our service over their networks,
our service and business could be negatively affected. To the extent that network operators implement usage-based pricing, including
meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating
expenses and our membership acquisition and retention could be negatively impacted. Furthermore, to the extent network operators
create tiers of internet access service and either charge us for or prohibit us from being available through these tiers, our business
could be negatively impacted.
We rely upon third-party “cloud”
computing services to operate certain aspects of our service and any disruption of or interference with our use of the third-party
“cloud” computing operations would impact our operations and our business would be adversely impacted.
The third-party “cloud” computing
service operator provides a distributed computing infrastructure platform for business operations, or what is commonly referred
to as a “cloud” computing service. We have architected our software and computer systems so as to utilize data processing,
storage capabilities and other services provided by third-party “cloud” computing operator. Currently, we run a material
amount of our computing on the third-party “cloud” computing services. Given this, along with the fact that we cannot
easily switch our third-party “cloud” computing operations to another cloud provider, any disruption of or interference
with our use of third-party “cloud” computing services would impact our operations and our business would be adversely
impacted.
We incur significant costs to protect electronically
stored data and if our data is compromised despite this protection, we may incur additional costs, business interruption, lost
opportunities and damage to our reputation.
We collect and maintain information and data
necessary for conducting our business operations, which information includes proprietary and confidential data and personal information
of our customers and employees. Such information is often maintained electronically, which includes risks of intrusion, tampering,
manipulation and misappropriation. We implement and maintain systems to protect our digital data and obtaining and maintaining
these systems is costly and usually requires continuous monitoring and updating for technological advances and change. Additionally,
we sometimes provide confidential, proprietary and personal information to third parties when required in connection with certain
business and commercial transactions. For instance, we have entered into an agreement with a third-party vendor to assist in processing
employee payroll, and they receive and maintain confidential personal information regarding our employees. We take precautions
to try to ensure that such third parties will protect this information, but there remains a risk that the confidentiality of any
data held by third parties may be compromised. If our data systems, or those of our third-party vendors and partners, are compromised,
there may be negative effects on our business, including a loss of business opportunities or disclosure of trade secrets. If the
personal information we maintain is tampered with or misappropriated, our reputation and relationships with our partners and customers
may be adversely affected, and we may incur significant costs to remediate the problem and prevent future occurrences.
Any significant disruption in or unauthorized
access to our computer systems or those of third parties that we utilize in our operations, including those relating to cybersecurity
or arising from cyber-attacks, could result in a loss or degradation of service, unauthorized disclosure of data, including member
and corporate information, or theft of intellectual property, including digital content assets, which could adversely impact our
business.
Our reputation and ability to attract, retain
and serve consumers is dependent upon the reliable performance and security of our computer systems and those of third parties
that we utilize in our operations. These systems may be subject to damage or interruption from earthquakes, adverse weather conditions,
other natural disasters, terrorist attacks, power loss, telecommunications failures, and cybersecurity risks. Interruptions or
malfunctions (including those due to equipment damage, power outages, computer viruses and a range of other hardware, software
and network problems) in these systems, or with the internet in general, could make our service unavailable or degraded or otherwise
hinder our ability to deliver streaming content. Service interruptions, errors in our software or the unavailability of computer
systems used in our operations could diminish the overall attractiveness of our service to existing and potential subscribers.
Our computer systems and those of third parties we use in our operations are vulnerable to cybersecurity risks, including cyber-attacks,
both from state-sponsored and individual activity, such as computer viruses, denial of service attacks, physical or electronic
break-ins and similar disruptions. These systems periodically experience directed attacks intended to lead to interruptions and
delays in our service and operations as well as loss, misuse or theft of data or intellectual property. Any attempt by hackers
to obtain our data (including subscriber and corporate information) or intellectual property (including digital content assets),
disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could harm our business,
be expensive to remedy and damage our reputation.
We have devoted and will continue to devote
significant resources to the security of our computer systems; however, we cannot guarantee that we will not experience such malfunctions,
attacks or interruptions in the future. A significant or large-scale malfunction, attack or interruption of one or more of our
computer or database systems could adversely affect our ability to keep our operations running efficiently. Our insurance does
not cover expenses related to such disruptions or unauthorized access. Efforts to prevent hackers from disrupting our service or
otherwise accessing our systems are expensive to implement and may limit the functionality of or otherwise negatively impact our
service offering and systems. Any significant disruption to our service or access to our systems could result in a loss of subscribers
and adversely affect our business and results of operation. We utilize our own communications and computer hardware systems located
either in our facilities or in that of a third-party web hosting provider. In addition, we utilize third-party “cloud”
computing services in connection with our business operations. We also utilize our own and third-party content delivery networks
to help us stream content in high volume to subscribers over the internet. Problems faced by us or our third-party web hosting,
“cloud” computing, or other network providers, including technological or business-related disruptions, as well as
cybersecurity threats, could adversely impact the experience of our members.
A downturn in the Indian, U.S. and/or
global economies or instability in financial markets, including a decreased growth rate and increased Indian price inflation, could
materially and adversely affect our results of operations and financial condition.
Global economic conditions may negatively impact
consumer spending. Prolonged negative trends in the global or local economies can adversely affect consumer spending and demand
for our films and may shift consumer demand away from the entertainment we offer.
According to the International Monetary Fund’s
World Economic Outlook Database, published in April 2020, the GDP growth rate of India is projected to increase from 7.26% in 2019
to approximately 7.49% in 2020 and 7.43% in 2021. The Economic Survey 2019-20 has estimated that the growth rate in GDP for the
year ended March 31, 2020 to grow at 4.2% with headwinds of COVID-19.
A decline in attendance at theaters may reduce
the revenues we generate from this channel, from which a significant proportion of our revenues are derived.
If a general economic downturn continues to
affect the countries in which we distribute our films, discretionary consumer spending may be adversely affected, which would have
an adverse impact on demand for our theater, television and digital distribution channels. Economic instability and a continuing
weak economy in India may negatively impact the Indian box office success of our Hindi, Tamil and Telugu films, on which we depend
for a significant portion of our revenues.
Further, a sustained decline in economic conditions
could result in closure or downsizing by, or otherwise adversely impact, industry participants on whom we rely for content sourcing
and distribution. Any decline in demand for our content could have a material adverse effect on our business, prospects, financial
condition and results of operations. In addition, global financial uncertainty has negatively affected the Indian financial markets.
Continued financial disruptions may limit our
ability to obtain financing for our films. For example, any adverse revisions to India’s credit ratings for domestic and
international debt by domestic or international rating agencies may adversely impact our ability to raise additional financing
and the interest rates and other commercial terms at which such additional financing is available. Any such event could have a
material adverse effect on our business, prospects, financial condition and results of operations. India has recently experienced
fluctuating wholesale price inflation compared to historical levels. An increase in inflation in India could cause a rise in the
price of wages, particularly for Indian film talent, or any other expenses that we incur. If this trend continues, we may be unable
to accurately estimate or control our costs of production. Because it is unlikely we would be able to pass all of our increased
costs on to our customers, this could have a material adverse effect on our business, prospects, financial condition and results
of operations.
Fluctuation in the value of the Indian
rupee and U.S. dollar against foreign currencies could materially and adversely affect our results of operations, financial condition
and ability to service our debt.
While a significant portion of our revenues
are denominated in Indian rupees, certain contracts for our film content are or may be denominated in foreign currencies. Additionally,
we report our financial results in U.S. dollars and most of our debt is denominated in U.S. dollars. We expect that the continued
volatility in the value of the Indian rupee against foreign currency will continue to have an impact on our business. The Indian
rupee experienced an approximately 8.3% decrease in value as compared to the U.S. dollar in the fiscal year 2020. The Indian rupee
experienced an approximately 5.9% decrease in value as compared to the U.S. dollar in the fiscal year 2019. The Indian rupee experienced
an approximately 0.4% decrease in value as compared to the U.S. dollar in the fiscal year 2018. Changes in the growth of the Indian
economy and the continued volatility of the Indian rupee, may adversely affect our business, results of operations and financial
condition.
Although we have not historically done so, we
may, from time to time, seek to reduce the effect of exchange rate fluctuations on our operating results by purchasing derivative
instruments such as foreign exchange forward contracts to cover our intercompany indebtedness or outstanding receivables. However,
we may not be able to purchase contracts to insulate ourselves adequately from foreign currency exchange risks. In addition, any
such contracts may not perform effectively as a hedging mechanism. See “Part I—Item 11. Qualitative and Quantitative
Disclosures about Market Risk—Foreign Currency Risk” in this transition report for further information.
We face competition with other films
for movie screens, and our inability to obtain sufficient distribution of our films could have a material adverse effect on our
business.
A substantial majority of the theater screens
in India and elsewhere are typically committed at any one time to a limited number of films, and we compete directly against other
producers and distributors of Indian films in each of our distribution channels. If the number of films released increases it could
create excess supply in the market, in particular at peak theater release times such as school and national holidays and during
festivals, which would make it more difficult for our films to succeed. We face similar competition for a limited number of theater
screens in the U.S. and in other markets in which we distribute our films.
Where we are unable to maximize screenings in
the first week of a film’s release, it may have an adverse impact on our revenues. Further, failure to release during peak
periods, or the inability to book sufficient screens, could cause us to miss potentially higher gross box-office receipts and/or
affect subsequent revenue streams, which could have a material adverse effect on our business, prospects, financial condition and
results of operations.
We face substantial competition in all
aspects of our business.
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We are smaller and less diversified than many of our competitors.
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Walt Disney Pictures, Warner
Bros., Universal Studios, Sony Pictures and Paramount Pictures (the “major studios”) are part of large diversified
corporate groups with a variety of other operations that can provide both the means of distributing their products and stable sources
of earnings that may allow them to better offset fluctuations
in the financial performance of their film and TV operations. Furthermore, the major studios have more resources with which to
compete for ideas, storylines and scripts created by third parties as well as for actors, directors and other personnel required
for production.
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Trends in theatrical exhibition and increased throughput from competitors could limit the number
of screens available for distribution of our films or impact timing of release of our films.
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Competition
with tentpole films could limit our ability to distribute our films to the optimal theater locations and our target number of screens.
Changes in the theatrical exhibition industry, including reorganizations and consolidations could also decrease the number of screens
available to us. If the number of film screens decreases, we may experience a decrease in box office receipts, and the correlating
future revenue streams, such as from home entertainment and pay and free TV. Moreover, we cannot guarantee that we can release
all of our films when they are otherwise scheduled due to production or other delays, or a change in the schedule of a major studio
tentpole releases. Any such change could adversely impact a film’s financial performance.
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Post-theatrical distribution is highly competitive and impacted by the availability of content
in other media outlets.
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Universal
Home Entertainment serves as an agent for the distribution of our films on DVD and Blu-ray in the U.S. We compete with all studios
which distribute content on DVD and Blu-ray for disc shelf space placement at retailers and other distributors.
Our post-theatrical
revenues from distribution of our films on streaming platforms, DVD, Blu-ray and pay and free TV are also impacted by the variety
of choices consumers have to view entertainment content, including free and pay TV, online services, mobile services, radio, print
media, movie theaters and other sources of information and entertainment. The increasing availability of content from these varying
media outlets may reduce our home entertainment and other post-theatrical revenue in the future, particularly during difficult
economic conditions.
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There is substantial competition for talent, and a failure to attract key talent, including
stars, producers, writers and directors, could disrupt our business and adversely affect our revenues.
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Our business
depends upon the continued efforts, abilities and expertise of the various creative talent and entertainment personalities with
whom we work. For example, we produce films with highly regarded directors, producers, writers, actors and other talent. These
individuals are important to achieving the success of our films, TV programs and other content. There can be no assurance that
these individuals will continue to work with us or will retain their current appeal, or that the costs associated with attracting
talent will be reasonable. If we fail to attract talent on favorable terms or if talent with whom we work lose their current appeal,
our revenues and profitability could be adversely affected.
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There is substantial competition for creative production and technical personnel, and the cost
of production is dependent on the market for skilled labor and may be impacted by guild and union relationships with major studios.
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Many of
these personnel that STX utilizes are union members who are essential to the production of STX films and content. A strike by,
or a lockout of, one or more of the unions that provide personnel essential to the production of films or TV content could delay
or halt ongoing production activities, or could cause a delay or interruption in our release of new films and TV content. A strike
or a change in industry-wide collective bargaining arrangements may result in increased costs and decreased revenue for STX, which
could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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We may fail to source adequate film content on favorable terms or at all through acquisitions
or co-productions, which could have a material and adverse impact on our business.
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We generate a portion of
our revenues by monetizing film content that we co-produce or acquire from third parties, and then distribute through various channels.
Our ability to successfully enter into co-productions and to acquire content depends on, among other things, our ability to maintain
existing relationships, and form new ones, with talent and other industry participants.
The pool of quality talent
is limited and, as a result, there is significant competition to secure the services of certain actors, directors, composers and
producers, among others. Competition can increase the cost of such talent, and hence the cost of film content. These costs may
continue to increase, making it more difficult for us to access content cost-effectively and reducing our ability to sustain our
margins and maximize revenues from distribution and monetization. Further, we may be unable to successfully maintain our long-standing
relationships with certain industry participants and continue to have access to content and/or creative talent and may be unable
to establish similar relationships with new leading creative talent. This is also dependent on relationships with various writers
and talent and has execution risks associated with it. If any such relationships are adversely affected, or we are unable to form
new relationships, or if any party fails to perform under its agreements or arrangements with us, our business, prospects, financial
condition, liquidity and results of operations could be materially adversely affected.
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We face increasing competition from other forms of entertainment, which could have a material
adverse effect on our business.
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We also compete with all
other sources of entertainment and information delivery, including television, mobile devices, the internet and sporting events
such as the Indian Premier League for cricket. Technological advancements such as video-on-demand (“VOD”), mobile and
internet streaming and downloading have increased the number of entertainment and information delivery choices available to consumers
and have intensified the challenges posed by audience fragmentation. The increasing number of choices available to audiences, including
crossover from our Eros Now online entertainment service, could negatively impact consumer demand for our films, and there can
be no assurance that attendance rates at theaters or demand for our other distribution channels will not fall.
Piracy of our content, including digital
and internet piracy, may adversely impact our revenues and business.
Our business depends in part on the adequacy,
enforceability and maintenance of intellectual property rights in the entertainment products and services we create. Motion picture
piracy is extensive in many parts of the world and is made easier by technological advances and the conversion of motion pictures
into digital formats. This trend facilitates the creation, transmission and sharing of high-quality unauthorized copies of motion
pictures in theatrical release on DVDs, CDs and Blu-ray discs, from pay-per-view through set top boxes and other devices and through
unlicensed broadcasts on free television and the internet.
Although DVD and CD sales represent a relatively
small portion of Indian film and music industry revenues, the proliferation of unauthorized copies of these products results in
lost revenue and significantly reduced pricing power, which could have a material adverse effect on our business, prospects, financial
condition and results of operations. In particular, unauthorized copying and piracy are prevalent in countries outside of the U.S.,
Canada and Western Europe, including India, whose legal systems may make it difficult for us to enforce our intellectual property
rights and in which consumer awareness of the individual and industry consequences of piracy is lower. With broadband connectivity
improving, 3G internet penetration increasing and with the advent of 4G in India and other markets, digital piracy of our content
is an increasing risk.
In addition, the prevalence of third-party hosting
sites and a large number of links to potentially pirated content make it difficult to effectively monitor and prevent digital piracy
of our content. Existing copyright and trademark laws in India afford only limited practical protection and the lack of internet-specific
legislation relating to trademark and copyright protection creates a further challenge for us to protect our content delivered
through such media. Additionally, we may seek to implement elaborate and costly security and anti-piracy measures, which could
result in significant expenses and revenue losses. Even the highest levels of security and anti-piracy measures may fail to prevent
piracy.
Litigation may also be necessary in the future
to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity. Regardless of the legitimacy or the success of these
claims, we could incur costs and diversion of resources in enforcing our intellectual property rights or in defending against such
claims, which could have a material adverse effect on our business, prospects, financial condition and results of operations.
We may be unable to adequately protect
or continue to use our intellectual property. Failure to protect such intellectual property may negatively impact our business.
We rely on a combination of copyrights, trademarks,
service marks and similar intellectual property rights to protect the Eros, STX and Eros STX names and branded products and to
protect the entertainment products and services we create. The success of our business, in part, depends on our continued ability
to use this intellectual property in order to increase awareness of our name. We typically attempt to protect these intellectual
property rights through available copyright and trademark laws and through a combination of employee, third-party assignments and
nondisclosure agreements, other contractual restrictions, technological measures, and other methods. Despite these
precautions, existing copyright and trademark laws afford only limited practical protection in certain countries, and the actions
taken by us may be inadequate to prevent imitation by others of our names and other intellectual property. Despite our efforts
to protect our intellectual property rights and trade secrets, unauthorized parties may attempt to copy aspects of our song recommendation
technology or other technology or obtain and use our trade secrets and other confidential information. Moreover, policing our intellectual
property rights is difficult and time consuming. We cannot assure you that we would have adequate resources to protect and police
our intellectual property rights, and we cannot assure you that the steps we take to do so will always be effective. In addition,
if the applicable laws in these countries are drafted or interpreted in ways that limit the extent or duration of our rights, or
if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining
and maintaining rights may increase. We could lose both the ability to assert our intellectual property rights against, or to license
our technology to, others and the ability to collect royalties or other payments.
Further, many existing laws governing property
ownership, copyright and other intellectual property issues were adopted before the advent of the internet and do not address the
unique issues associated with the internet, personal entertainment devices and related technologies, and new interpretations of
these laws in response to emerging digital platforms may increase our digital distribution costs, require us to change business
practices relating to digital distribution or otherwise harm our business. We also distribute our branded products in some countries
in which there is no copyright or trademark protection. As a result, it may be possible for unauthorized third parties to copy
and distribute our branded products or certain portions or applications of our branded products, which could have a material adverse
effect on our business, prospects, results of operations and financial condition. If we fail to register the appropriate copyrights,
patents, trademarks or our other efforts to protect relevant intellectual property prove to be inadequate, the value of our brand
could be harmed, which could adversely affect our business and results of operations.
We may be unable to continue to use
the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on,
are similar to or otherwise decrease the value of our brand or our trademarks or service marks.
We have several domain names for websites that
we use in our business, such as erosstx.com, erosplc.com, erosentertainment.com, erosnow.com, stxentertainment.com
and although our Indian subsidiaries currently own over 120 registered trademarks and STX currently owns over 200 registered
trademarks, we have not obtained a registered trademark for any of our domain names. If we lose the ability to use a domain name,
whether due to trademark claims, failure to renew the applicable registration or any other cause, we may be forced to market our
products under a new domain name, which could cause us to lose users of our websites, or to incur significant expense in order
to purchase rights to such a domain name. In addition, our competitors and others could attempt to capitalize on our brand recognition
by using domain names similar to ours. Domain names similar to ours have been registered in the U.S. of America, India and elsewhere.
We may be unable to prevent third parties from
acquiring and using domain names that infringe on, are similar to or otherwise decrease the value of our brand, trademarks or service
marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs
and diversion of management’s attention.
Litigation may be necessary to enforce
our intellectual property rights or to determine the validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Regardless of the validity or the success of the assertion of any claims, we could incur
significant costs and diversion of resources in enforcing our intellectual property rights or in defending against such claims,
which could have a material adverse effect on our business and results of operations. Our services and products could infringe
upon the intellectual property rights of third parties.
Litigation or proceedings before governmental
authorities and administrative bodies may be necessary in the future to enforce our intellectual property rights, to protect our
patent rights, trademarks, trade secrets, and domain names and to determine the validity and scope of the proprietary rights of
others. Our efforts to enforce or protect our proprietary rights may be ineffective and could result in substantial costs and diversion
of resources and management time, each of which could substantially harm our operating results.
Other parties, including our competitors, may
hold or obtain patents, trademarks, copyright protection or other proprietary rights with respect to their previously developed
films, characters, stories, themes and concepts or other entertainment, technology and software or other intellectual property
of which we are unaware. In addition, the creative talent that we hire or use in our productions may not own all or any of the
intellectual property that they represent they do, which may instead be held by third parties. Consequently, the film content that
we produce and distribute or the software and technology we use may infringe the intellectual property rights of third parties,
and we frequently have infringement claims asserted against us. Any claims or litigation, justified or not, could be time-consuming
and costly, harm our reputation, require us to enter into royalty or licensing arrangements that may not be available on acceptable
terms or at all or require us to undertake creative changes to our film content or source alternative content, software or technology.
Where it is not possible to do so, claims may prevent us from producing and/or distributing certain film content and/or using certain
technology or software in our operations. Any of the foregoing could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Our ability to remain competitive may
be adversely affected by rapid technological changes and by our inability to access such technology.
The U.S. and Indian film entertainment industries
continue to undergo significant technological developments, including the ongoing transition from film to digital media. We may
be unsuccessful in adopting new digital distribution methods or may lose market share to our competitors if the methods that we
adopt are not as technologically sound, user-friendly, widely accessible or appealing to consumers as those adopted by our competitors.
For example, our on-demand entertainment portal accessible via internet-enabled devices, Eros Now, may not achieve the desired
growth rate.
Further, advances in technologies or alternative
methods of product delivery or storage, or changes in consumer behavior driven by these or other technologies, could have a negative
effect on our home entertainment market in India. If we fail to successfully monetize digital and other emerging technologies,
it could have a material adverse effect on our business, prospects, financial condition and results of operations.
Our financial condition and results
of operations fluctuate from period to period due to film release schedules and other factors and may not be indicative of results
for future periods.
Our financial condition and results of operations
for any period fluctuate due to film release schedules in that period, none of which we can predict with reasonable certainty.
Theater attendance in India and elsewhere has traditionally been highest during school holidays, national holidays and during festivals,
and we typically aim to release big-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, among other factors. The
U.S. also experiences highly seasonal film attendance fluctuation. As a result, our quarterly results can vary from one year to
the next, and the results of one quarter are not necessarily indicative of results for the next or any future quarter. Additionally,
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. Further shortening of these periods could
adversely impact our revenues if consumers opt to view a film on one distribution platform over another, resulting in the cannibalizing
of revenues across distribution platforms. Additionally, because our revenue and operating results are seasonal in nature due to
the impact of the timing of new releases, our revenue and operating results may fluctuate from period to period, and which could
have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.
Ineffective system of internal control
over financial reporting, can reduce our ability to accurately and timely report our financial results or prevent fraud may be
adversely affected.
We ceased to qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012 on March 31, 2019, and as a result, we are subject
to additional requirements under the Sarbanes-Oxley Act (the “SOX Act”), including Section 404(b) of the SOX Act which
requires our independent registered public accounting firm to attest to and report on management’s assessment of the effectiveness
of our internal control over financial reporting in our annual reports on Form 20-F, starting from our annual report for the fiscal
year ending March 31, 2019. As discussed in Item 15. “Controls and Procedures,” in our Annual Report on Form 20-F
for the fiscal year 2020, submitted to the SEC on July 30, 2020, upon an evaluation of the effectiveness of the design and operation
of our internal controls, we concluded that there were material weaknesses such that our internal controls over financial reporting
need to be reviewed and updated, a process that we are currently undertaking for the combined company. Although we have
instituted remedial measures to address the material weakness identified and will continually review and evaluate the internal
control systems of the combined company to allow management to report on the sufficiency of our internal controls, we cannot
assure you that we will be able to adequately remediate all the existing material weaknesses or not discover additional weaknesses
in the internal controls over financial reporting of the combined company that need to be reviewed and updated,
a process that we are currently undertaking. Further, management continually improves, simplifies and rationalizes the combined
company’s internal control framework where possible within the constraints of existing IT systems. However, any additional
weaknesses or failure to adequately remediate the existing weakness could materially and adversely affect our financial condition
or results of operations.
Our revenue is subject to significant
variation based on the timing of certain licenses and contracts we enter into that may account for a large portion of our revenue
in the period in which it is completed, which could adversely affect our operating results.
From time to time, we license film content rights
to a group of films pursuant to a single license that constitutes a large portion of our revenue for the fiscal year in which the
revenue from the license is recognized. The timing and size of such licenses subjects our revenue to uncertainties and variability
from period to period, which could adversely affect our operating results. We expect that we will continue to enter into licenses
with customers that may represent a significant concentration of our revenues for the applicable period and we cannot guarantee
that these revenues will recur.
We have entered into certain related
party transactions and may continue to rely on our founders for certain key development and support activities.
We have entered, and may continue to enter,
into transactions with related parties. We also rely on the Founders Group, which consists of Beech Investments Limited and Kishore
Lulla and associates and enterprises controlled by certain of our directors and key management personnel for certain key development
and support activities. While we believe that the Founders Group’s interests are aligned with our own, such transactions
may not have been entered into on an arm’s-length basis, and we may have achieved more favorable terms had such transactions
been entered into with unrelated parties. If future transactions with related parties are not entered into on an arm’s-length
basis, our business may be materially harmed.
Further, because certain members of the Founders
Group have significant influence on both us and our related parties, conflicts of interest may arise in relation to dealings between
us and our related parties and may not be resolved in our favor. For further information, see “Part I—Item 7—Major
Shareholders and Related Party Transactions.”
We may encounter operational and other
problems relating to the operations of our subsidiaries, including as a result of restrictions in our current shareholder agreements.
We operate several of our businesses through
subsidiaries. Our financial condition and results of operations significantly depend on the performance of our subsidiaries and
the income we receive from them. Our business may be adversely affected if our ability to exercise effective control over our non-wholly
owned subsidiaries is diminished in any way. Although we control these subsidiaries through direct or indirect ownership of a majority
equity interest or the ability to appoint the majority of the directors on the boards of such companies, unanimous board approval
is required for major decisions relating to certain of these subsidiaries. To the extent there are disagreements between us and
our various minority shareholders regarding the business and operations of our non-wholly owned subsidiaries, we may be unable
to resolve them in a manner that will be satisfactory to us. Our minority shareholders may:
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be unable or unwilling to fulfill their obligations, whether of a financial nature or otherwise;
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have economic or business interests or goals that are inconsistent with ours;
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take actions contrary to our instructions, policies or objectives;
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take actions that are not acceptable to regulatory authorities;
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have financial difficulties; or
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Any of these actions could have a material adverse
effect on our business, prospects, financial condition and results of operations.
Eros International Media Limited (“Eros
India”) has entered into shareholder agreements with third-party shareholders of its non-wholly owned subsidiaries, including
Big Screen Entertainment Private Limited and a binding term sheet for a joint venture with Colour Yellow Productions Private Limited.
These arrangements contain various restrictions on our rights in relation to these entities, including restrictions in relation
to the transfer of shares, rights of first refusal, reserved board matters and non-solicitation of employees by us. We may also
face operational limitations due to restrictive covenants in such shareholder agreements. In addition, under the terms of our shareholder
agreement in relation to Big Screen Entertainment Private Limited, disputes between partners are required to be submitted to arbitration
in Mumbai, India. These restrictions in our current shareholder agreements, and any restrictions of a similar or more onerous nature
in any new or amended agreements into which we may enter, may limit our control of the relevant subsidiary or our ability to achieve
our business objectives, as well as limiting our ability to realize value from our equity interests, any of which could have a
material adverse effect on our business, prospects, financial condition and results of operations.
The interests of the other shareholders with
respect to the operation of Big Screen Entertainment Private Limited, Colour Yellow Productions Private Limited and Mr. V. Vijayendra
Prasad, may not be aligned with our interests. As a result, although we own a majority of the ownership interest in Big Screen
Entertainment Private Limited, and 50% of the shareholding of Colour Yellow Productions Private Limited, taking actions that require
approval of the minority shareholders (or their representative directors), such as entering into related party transactions, selling
material assets and entering into material contracts, may be more difficult to accomplish.
Additionally, 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 (as defined below) 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.
See “Part I.—Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions—Investors’ Rights Agreement” below.
We depend on the services of senior management.
We have, over time, built a strong team of experienced
professionals on whom we depend to oversee the operations and growth of our businesses. We believe that our success substantially
depends on the experience and expertise of, and the longstanding relationships with key talent and other industry participants
built by, our senior management. Any loss of our senior management, any conflict of interest that may arise for such management
or the inability to recruit further senior managers could impede our growth by impairing our day-to-day operations and hindering
development of our business and our ability to develop, maintain and expand relationships, which would have a material adverse
effect on our business, prospects, financial condition and results of operations.
In connection with the Merger, we have experienced
additions to our senior management team, and our success depends in part on our ability to successfully integrate these new employees
into our organization. We anticipate the need to hire additional members in senior management in connection with the integration
of the combined company and the expansion of our digital business. While some members of our senior management have entered into
employment agreements that contain non-competition and non- solicitation provisions, these agreements may not be enforceable in
the Isle of Man, India or the United Kingdom, whose laws govern these agreements or where our members of senior management reside.
Even if enforceable, these non-competition and non-solicitation provisions are for limited time periods.
To be successful, we need to attract and
retain qualified personnel.
Our success continues to depend to a significant
extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel.
Competition for the caliber of talent required to produce and distribute our films continues to increase. We cannot assure you
that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we were
unable to hire, assimilate and retain qualified personnel in the future, such inability would have a material adverse effect on
our business and financial condition.
We are currently completing the integration
of various supporting modules to an SAP ERP operating system, which could disrupt our business, and our failure to successfully
integrate our IT systems across our international operations could result in additional costs and diversion of resources and management
attention.
We have completed the accounting portion of
the migration in India and significant locations outside India, and are in the process of completing the rest of the migration.
For instance, we have not yet integrated supporting modules into the SAP ERP system, such as a module to manage our film library
across the globe. This integration and migration may lead to unforeseen complications and expenses, and our failure to efficiently
integrate and migrate our IT systems could substantially disrupt our business.
Negative media coverage could adversely
affect our business and some viewers or civil society organizations may find our film content objectionable.
We receive a high degree of media coverage around
the world. Unfavorable publicity regarding, for example, payments to talent, third-party content providers, publishers, artists,
and other copyright owners, our privacy practices, terms of service, service changes, service quality, litigation or regulatory
activity, government surveillance, the actions of our advertisers, the actions of our developers, the use of our OTT platform for
illicit, objectionable, or illegal ends, the actions of our subscribers, the quality and integrity of content shared on our OTT
platform, or the actions of other companies that provide similar services to us, could materially adversely affect our reputation.
Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our subscriber base and result
in decreased revenue, which could materially adversely affect our business, operating results and financial condition.
Some viewers or civil society organizations
in India or other countries may object to film content produced or distributed by us based on religious, political, ideological
or any other positions held by such viewers. This applies in particular to content that is graphic in nature, including violent
or romantic scenes and films that are politically oriented or targeted at a segment of the film audience. Viewers or civil society
organizations, including interest groups, political parties, religious or other organizations may assert legal claims, seek to
ban the exhibition of our films, protest against us or our films or object in a variety of other ways. Any of the foregoing could
harm our reputation and could have a material adverse effect on our business, prospects, financial condition and results of operations.
The film content that we produce and distribute could result in claims being asserted, prosecuted or threatened against us based
on a variety of grounds, including defamation, offending religious sentiments, invasion of privacy, negligence, obscenity or facilitating
illegal activities, any of which could have a material adverse effect on our business, prospects, financial condition or results
of operations.
Certain of our films are required to
be certified in India by the Central Board of Film Certification.
Pursuant to the Indian Cinematograph Act, 1952,
(the “Cinematograph Act”), films must be certified for adult viewing or general viewing in India by the Central Board
of Film Certification (“CBFC”), which looks at factors such as the interest of sovereignty, integrity and security
of the relevant country, friendly relations with foreign states, public order and morality. There may be similar requirements in
the United Kingdom, Canada, China and Australia, among other jurisdictions. We may be unable to obtain the desired certification
for each of our films and we may have to modify the title, content, characters, storylines, themes or concepts of a given film
in order to obtain any certification or a desired certification for broadcast release that will facilitate distribution and monetization
of the film. Any modification could result in substantial costs and/or receipt of an undesirable certification could reduce the
appeal of any affected film to our target audience and reduce our revenues from that film, which could have a material adverse
effect on our business, prospects, financial condition and results of operations.
Litigation and negative claims about
us or the Indian film entertainment industry generally could have a material adverse impact on our reputation, our relationship
with distributors and co-producers and our business operations.
We and certain of our directors and officers
are subject to various legal civil and criminal proceedings in India. As of March 31, 2020, Eros was subject to certain tax proceedings
in India, including service tax claims aggregating to approximately $56 million, value added tax (“VAT”) and sales
tax claims aggregating to approximately $3 million for the period between April 1, 2005 to March 31, 2015. As our success in the
Indian film industry partially depends on our ability to maintain our brand image and corporate reputation, in particular in relation
to our dealings with creative talent, co-producers, distributors and exhibitors, any such proceedings or allegations, public or
private, whether or not routine or justified, could tarnish our reputation and cause creative talent, co-producers, distributors
and exhibitors not to work with us. See “Part I—Item 4. Information on the Company—B. Business Overview—
Litigation” in this transition report for further details.
In addition, the nature of our business and
our reliance on intellectual property and other proprietary rights subjects us to the risk of significant litigation. Litigation,
or even the threat of litigation, can be expensive, lengthy and disruptive to normal business operations, and the results of litigation
are inherently uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments
that may, individually or in the aggregate, have a material adverse effect on our business, prospects, financial condition or results
of operations.
Eros India’s performance in India
is linked to the stability of the country’s policies, including taxation policy, and the political situation.
The role of Indian central and state governments
in the Indian economy has been and remains significant. Since 1991, India’s government has pursued policies of economic liberalization,
including significantly relaxing restrictions on the private sector. The rate of economic liberalization could change, and specific
laws and policies affecting companies in the media and entertainment sector, foreign investment, currency exchange rates and other
matters affecting investment in our securities could change as well. A significant change in India’s economic liberalization
and deregulation policies, and in particular, policies in relation to the film industry, could disrupt business and economic conditions
in India and thereby affect Eros India’s business.
Previously, taxes generally were levied on a
state-by-state basis for the Indian film industry. However, with effect from July 1, 2017, goods and services tax (“GST”)
was implemented in India, which combines taxes and levies by the Government of India and state governments into a unified rate
structure, and replaces indirect taxes on goods and services such as central excise duty, service tax, central sales tax, entertainment
tax, state VATs and surcharge and excise that were being collected by the Government of India and state governments. Initially,
under the GST regime, movie exhibition fell under the highest tax bracket of 28% (for tickets above 100 rupee). However, with effect
from January 1, 2019, the GST rate has been reduced to 12% for tickets under 100 rupee and 18% for tickets above 100 rupees. Further,
under the state-by-state tax regime in India, the state governments were levying entertainment tax on the exhibition of films in
cinemas, including multiplexes. With the implementation of GST, the entertainment tax levied by the state governments was subsumed
under GST. However, certain local government bodies levy local body entertainment tax, in addition to GST, within their state.
Any future increases or amendments may affect the overall tax efficiency of companies operating in India and may result in significant
additional taxes becoming payable. If, as a result of a particular tax risk materializing, the tax costs associated with certain
transactions are greater than anticipated, it could affect the profitability of such transactions.
Separately, there are certain deductions available
to film producers for expenditures on production of feature films released during a given year. These tax benefits may be discontinued
and impact current and deferred tax liabilities. In addition, the government of India has issued and may continue to issue tariff
orders setting ceiling prices for distribution of content on cable television service charges in India.
Other changes in the Indian law and policy environment
which may have an impact on Eros India’s business, results of operations and prospects, to the extent that we are unable
to suitably respond to and comply with any such changes in applicable law and policy include the following:
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Under the (Indian) Income-tax Act, 1961 (“IT Act”), the General Anti Avoidance Rules
(“GAAR”) have come into effect from April 1, 2017. The tax consequences of the GAAR provisions if 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.
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As per the Finance Act 2020, Dividend Distribution Tax (‘DDT’) of 20.56 percent levied
on the 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 taxes on such dividends.
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As per the provisions of the IT Act, income arising directly or indirectly through transfer of
a capital asset, being 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. Value shall be substantially derived from assets located 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.
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The Organization of Economic Co-operation and Development released the final package of all Action
Plans of the Base Erosion and Profit Shifting (“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 those measures which required implementation through changes to bilateral treaties, it was
felt that a Multilateral Instrument (“MLI”) to modify the existing bilateral treaty network would be preferable as
it would ensure speed and consistency in implementation. Accordingly, MLI was introduced to inter-alia incorporate treaty related
measures identified as part of the final BEPS measures in relation to:
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Preventing the granting of treaty benefits in inappropriate circumstances;
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Preventing the artificial avoidance of permanent establishment status; and
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Making dispute resolution mechanisms more effective.
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India signed the MLI to implement tax treaty related measures to prevent BEPS on June 7, 2017.
On June 25, 2019, India has deposited the instrument of ratification for MLI with OECD along with a list of reservations and notifications.
As a result, MLI will enter into force for India on October 1, 2019 and its provisions will have effect on India’s tax treaties
from financial year 2020-21 onwards where the other country has also deposited its instrument of ratification with OECD. The interplay
between GAAR (under the IT Act) and the modification of the existing tax treaties by way of the MLI remains to be seen.
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An equalization levy (“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 payments towards “specified services”
(in excess of Indian rupees 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
by the Indian government. Deduction of EL at the rate of six percent (on a gross basis) is the responsibility of Indian residents
or non-residents having a permanent establishment, 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.
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Further,
the Finance Act, 2020, has expanded the scope of EL by covering e-commerce transactions.
E-commerce supply or services include online sale of goods, online provision of
services or both owned or provided by an e-commerce operator. However, EL shall
not be charged in case sales, turnover or gross receipts of the E-commerce operator is
less than INR 20 million.
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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. If a non-resident
(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.
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Currently, consideration for the sale, distribution or exhibition of cinematographic films is specifically
excluded from the definition of Royalty. However, as per Finance Act 2020, the definition of Royalty will be rationalized to include
consideration for the sale, distribution or exhibition of cinematographic films (w.e.f. April 1, 2021).
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The concept of Place of Effective Management (“POEM”) was introduced for the purpose
of determining tax residence of foreign companies in India, effective April 1, 2016. The POEM is defined as the place where key
management and commercial decisions that are necessary for the conduct of the business of an entity 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, such company becomes tax resident in India and consequently its global income would be taxable in India
(even if it is not earned in India).
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Based on the report of OECD on BEPS Action Plan 1, an amendment was made vide Finance Act 2018
whereby concept of significant economic presence (“SEP”) was introduced under the Indian domestic tax law to cover
within the tax ambit transactions in digitized businesses. SEP shall be constituted in cases where:
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Transaction in respect of any goods, services or property are carried out by a non-resident in India
(including provision of download of data or software in India);
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Non-residents engage in systematic and continuous soliciting of business activities or engaging in
interaction with users, in India through digital means;
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if certain prescribed thresholds are breached.
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Further, if SEP is constituted, attribution shall be restricted to such aforesaid transactions
and/or business activities/users in India.
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The threshold of payments received and number of users (mentioned in the aforesaid conditions)
shall be prescribed by the Central Board of Direct Taxes in due course after which one will be able to gauge the impact of this
expansion in the provision.
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In addition, unless corresponding modifications to PE rules are made in tax treaties, the existing
treaty rules will apply. Accordingly, the above provisions would need to be separately evaluated under the tax treaty scenario.
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Further, 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.
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The definition of “business connection” was expanded vide Finance Act 2018. Earlier
if non-residents carried on business in India through an agent and such an agent had an authority to conclude contracts on behalf
of the non-residents, business connection was constituted. After the amendment, business connection will be constituted even if
the agent plays a principal role in conclusion of the contracts by the non-residents. The contracts referred herein should be:
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in the name of the non-resident; or
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for the transfer of the ownership of, or for the granting of the right to use, property owned by that
non-resident or that non-resident has the right to use; or
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for the provision of services by the non-resident.
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Our business and financial performance could be adversely affected by unfavorable changes in or
applications or interpretations of existing, or the promulgation of new, laws, rules and regulations applicable to us and our business.
Such unfavorable changes could decrease demand for our products, increase costs and/or subject us to additional liabilities.
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Tax increases could place pricing pressures on cable television service providers and broadcasters,
which may, among other things, restrict the ability and willingness of cable television broadcasters in India to pay for content
acquisition, including for our films. Any of the foregoing could have a material adverse effect on our business, prospects, financial
condition and results of operations.
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Natural disasters, epidemics, terrorist
attacks and other acts of violence or war could adversely affect the financial markets, result in a loss of business confidence
and adversely affect our business, prospects, financial condition and results of operations.
Numerous countries where we operate, including
India and the U.S., have experienced community disturbances, strikes, terrorist attacks, riots, epidemics and natural disasters.
These acts and occurrences may result in a loss of business confidence and could cause a temporary suspension of our operations,
if, for example, local authorities close theaters and could have an adverse effect on the financial markets and economies of India,
the U.S. and other countries where we operate. Such closures have previously, and could in the future, impact our ability to exhibit
our films and have a material adverse effect on our business, prospects, financial condition and results of operations. In addition,
travel restrictions as a result of such events may interrupt our marketing and distribution efforts and have an adverse impact
on our ability to operate effectively.
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 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 and we may lose our ability to control its activities.
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 shares 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, 2020, we owned approximately 62.31% of Eros India.
Over time, we may lose control over its activities and, consequently, lose our ability to consolidate its revenues.
Dividend distributions by our subsidiaries
are subject to certain limitations under local laws, including Indian and United Arab Emirates law (including laws of Dubai) and
other contractual restrictions.
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 and restrictive covenants of their borrowing arrangements. For example, under Indian law, dividends
are only permitted to be paid out of the 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. As per the Finance Act 2020, the
DDT of 20.56 percent 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 taxes on such dividends.
The Relationship Agreement with certain
of our subsidiaries may not reflect market standard terms that would have resulted from arm’s-length negotiations among unaffiliated
third parties and may include terms that may not be obtained from future negotiations with unaffiliated third parties.
The 2009 Relationship Agreement was last renewed
with the execution of the 2016 Relationship Agreement between Eros India, Eros Worldwide and us (the “Relationship Agreement”).
The Relationship Agreement, exclusively assigns to Eros Worldwide certain intellectual property rights and all distribution rights
(including global digital distribution rights) for films (other than Tamil films), held by Eros India and any of its subsidiaries
(the “Eros India Group”), in all territories other than India, Nepal, and 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 pre-approved distribution expenses in connection with such film, plus an amount equal to 20%
thereon as markup. In addition, 15% of the gross proceeds received by Eros International Group from monetization of such films,
after certain amounts are retained by the Eros International Group, are payable over to Eros India Group.
The Relationship Agreement may not reflect terms
that would have resulted from arm’s-length negotiations among unaffiliated third parties, and Eros’s future operating
results may be negatively affected if it does not receive terms as favorable in future negotiations with unaffiliated third parties.
Further, as Eros does not have complete control of Eros India, it may lose control over its activities and, consequently, its ability
to ensure its continued performance under the Relationship Agreement.
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.
As of March 31, 2020, Eros had $179.4 million
of borrowings outstanding of which $117.1 million is repayable on or before March 31, 2021 and, as of March 31, 2020, STX had
$273.0 million of borrowing outstanding of which $3.0 million is repayable on or before March 31, 2021. We may also incur
substantial additional indebtedness. Our indebtedness could have important consequences, including the following:
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we could have difficulty satisfying our interest commitments, debt obligations, and if we fail
to comply with these requirements, an event of default could result;
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we may be required to dedicate a substantial portion of our cash flow from operations to required
payments on indebtedness, thereby reducing the cash flow available to fund working capital, capital expenditures and other general
corporate activities or to pay dividends;
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in order to manage our debt and cash flows, we may increase our short-term indebtedness and decrease
our long-term indebtedness which may not achieve the desired results;
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we may be required to dedicate a substantial portion of our cash flow from operations to required
payments on indebtedness, thereby reducing the cash flow available to fund working capital, capital expenditures and other general
corporate activities or to pay dividends;
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in order to manage our debt and cash flows, we may increase our short-term indebtedness and decrease
our long-term indebtedness which may not achieve the desired results;
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covenants relating to our indebtedness may restrict our ability to make distributions to our shareholders;
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covenants relating to our indebtedness may limit our ability to obtain additional financing for
working capital, capital expenditures and other general corporate activities, which may limit our flexibility in planning for,
or reacting to, changes in our business and the industry in which we operate;
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each of Eros India and Eros International Limited may be required to repay the secured loans prior
to their maturity, which as of March 31, 2020, represented $71.9 million of the outstanding indebtedness of Eros India and $22.1
million of the outstanding indebtedness of Eros International Limited. Further, in the event we decide to prepay certain lenders
of Eros India, we will be required to obtain their prior approval and/or prior notice of up to 30 days and this may also involve
levy of prepayment charges of up to 2%;
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certain Eros India loans are subject to annual renewal, and until these renewals are obtained,
the lenders under these loans may at any time require repayment of amounts outstanding. As of March 31, 2020, short-term loans
amounting to $5.75 million were pending annual renewal and the Group expects the renewal to complete in due course;
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we may be more vulnerable to general adverse economic and industry conditions;
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we may be placed at a competitive disadvantage compared to our competitors with less debt; and
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we may have difficulty repaying or refinancing our obligations under our debt facilities on their
respective maturity dates.
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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.
A downgrade in our credit ratings could
increase our future borrowing costs and adversely affect the availability of new financing.
There can be no assurance that any of our credit
ratings will remain unchanged for any given period of time or that a rating will not be lowered if, in that rating agency’s
judgment, future circumstances relating to the basis of the rating so warrant. If, among other things, we are unable to maintain
our outstanding debt and financial ratios at levels acceptable to the credit rating agencies, if we default on any indebtedness
or if our business prospects or financial results deteriorate, our ratings could be downgraded by the rating agencies. Our credit
ratings have been subject to change over time, and the Eros India credit rating was subject to a downgrade in June 2019. We cannot
make assurances regarding how long these ratings will remain unchanged or regarding the outcome of the rating agencies future reviews
of new or existing indebtedness. Such downgrade by the rating agencies could adversely affect the value of our outstanding securities,
our existing debt and our ability to obtain new financing on favorable terms, if at all, and increase our borrowing costs, any
of which could have a material adverse effect on business, financial condition and our results of operations.
Covenants in the instruments governing
our and our subsidiaries’ existing indebtedness may limit our operational flexibility, including our ability to incur additional
debt.
The terms of the instruments governing our existing
indebtedness require us to comply with certain customary financial and other covenants. These covenants and requirements could
limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness and engaging in various
types of transactions, including mergers, acquisitions and sales of assets. These covenants could place us at a disadvantage compared
to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers
and acquisitions or other opportunities.
We are highly leveraged. Our substantial
indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain
additional financing, if necessary.
As of March 31, 2020, Eros had outstanding
$7.5 million under its senior credit facility, which was repaid and terminated in July 2020 in connection with the Merger, and
$62.3 million aggregate principal amount of the GBP denominated London Stock Exchange listed bond (“U.K. Retail Bond”),
which remains outstanding following the Merger. As of March 31, 2020, STX had $169.6 million available under its $400
million revolving Senior Credit Facility (which was amended on April 17, 2020, resulting in the decrease of the Senior
Credit Facility from $400 million to $350 million) and $35.2 million outstanding under the Mezzanine Facility. Each
of the Senior Credit Facility and Mezzanine Facility remain in place following the Merger. Our ability to satisfy our debt obligations
will depend upon, among other things:
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our future financial and operating performance, which will be affected by prevailing economic conditions
and financial, business, regulatory and other factors, many of which are beyond our control;
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our ability to refinance our debt as it becomes due, which will be affected by the cost and availability
of credit; and
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our future ability to borrow under our revolving credit facilities, the availability of which depends
on, among other things, our compliance with the covenants in our revolving credit facilities.
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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.
As at March 31, 2020, STX’s trade accounts
receivables were $102.4 million. If the cash flow, working capital, financial condition or results of operations of our customers
deteriorate, they may be unable, or they may otherwise be unwilling, to pay trade account receivables owed to us promptly or at
all. In addition, from time to time, we have significant concentrations of credit risk in relation to our trade account receivables
as a result of individual theatrical releases, television syndication deals or music licenses. Although we use contractual terms
to stagger receipts, de-recognition of financial assets and/or the release or airing of content, as of March 31, 2020, 7.37% of
STX trade account receivables were represented by its top five debtors. Any substantial defaults or delays by our customers
could materially and adversely affect our cash flows, and we could be required to terminate our relationships with customers,
which could adversely affect our business, prospects, financial condition and results of operations.
We face risks relating to the international
distribution of our films and related products.
We derive a significant percentage of our revenues
fiscal year 2020 from the monetization of our films in territories outside of India and the U.S. We do not track revenues by geographical
region other than based on our Company or customer domicile and not necessarily the country where the rights have been monetized
or licensed. As a result, revenue by customer location may not be reflective of the potential of any given market. As a result
of changes in the location of our customers, our revenues by customer location may vary year to year.
Our business is subject to risks inherent in
international trade, many of which are beyond our control. These risks include:
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the impact of the elimination of the London Interbank Offered Rate (“LIBOR”)
on our operating results;
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fluctuating foreign exchange rates;
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laws and policies affecting trade, investment and taxes, including laws and policies relating to
the repatriation of funds and withholding taxes and changes in these laws;
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differing cultural tastes and attitudes, including varied censorship laws;
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differing degrees of protection for intellectual property;
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financial instability and increased market concentration of buyers in other markets;
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higher past due debtor days and difficulty of collecting trade receivables across multiple jurisdictions;
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the instability of other economies and governments; and
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war and acts of terrorism.
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Events or developments related to these and
other risks associated with international trade could adversely affect our revenues from foreign sources, which could have a material
adverse effect on our business, prospects, financial condition and results of operations.
We may pursue acquisition opportunities,
which could subject us to considerable business and financial risk, divert management’s attention and otherwise disrupt our
operations and harm our operating results. We may fail to acquire companies whose market power or technology could be important
to the future success of our business.
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-term dilution of earnings, including potentially dilutive issuances of equity securities
or issuances of debt. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:
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diverting of financial and management resources from existing operations;
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incurring indebtedness and assuming additional liabilities, known and unknown, including liabilities
relating to the use of intellectual property we acquire, including costs or liabilities arising from the acquired companies’
failure to comply with intellectual property laws and licensing obligations they are subject to;
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incurring significant additional capital expenditures, transaction and operating expenses and non-recurring
acquisition-related charges;
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experiencing an adverse impact on our earnings from the amortization or impairment of acquired
goodwill and other intangible assets;
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failing to successfully integrate the operations and personnel of the acquired businesses;
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entering new markets or marketing new products with which we are not entirely familiar;
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failing to retain key personnel of, vendors to and clients of the acquired businesses;
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harm to our existing business relationships with business partners and advertisers as a result
of the acquisition;
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harm to our brand and reputation; and
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use of resources that are needed in other parts of our business.
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In addition, a significant portion of the purchase
price of companies we acquire may be allocated to acquired goodwill, which must be assessed for impairment at least annually. In
the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based
on this impairment assessment process. Acquisitions also could result in dilutive issuances of equity securities or the incurrence
of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations,
our operating results, business and financial condition may suffer.
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.
We may require additional capital to support
business growth and objectives, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to
support our business growth and may require additional funds to respond to business challenges, including the need to develop new
features or enhance our existing services, expand into additional markets around the world, improve our infrastructure, or acquire
complementary businesses and technologies. Accordingly, we may need to engage, and have engaged, in equity and debt financings
to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing shareholders could suffer additional significant dilution, and any new equity securities we issue could have rights, preferences,
and privileges superior to those of holders of our Ordinary Shares. Any debt financing we secure in the future, including pursuant
to the unwind described above, also could contain restrictive covenants relating to our capital raising activities and other financial
and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities,
including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we
are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth, acquire or retain consumers and subscribers, and to respond to business challenges could be significantly
impaired, and our business may be harmed.
Risks Related to our A Ordinary Shares
Our A ordinary share price has been
and may be highly volatile and, as a result, shareholders could lose a significant portion or all of their investment or we could
become subject to securities class action litigation.
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 in 2013.
The trading price of our ordinary shares on the NYSE has been highly volatile. 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 October 23, 2020,
was $37.60 per share and the lowest closing price was $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:
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attacks from short sellers;
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variations in our quarterly operating results;
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adverse media report about us or our directors and officers;
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changes in financial estimates or publication of research reports by analysts regarding our A ordinary
shares, other comparable companies or our industry generally;
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volatility in our industry, the industries of our customers and the global securities markets;
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risks relating to our business and industry, including those discussed above;
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strategic actions by us or our competitors;
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adverse judgments or settlements obligating us to pay damages;
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actual or expected changes in our growth rates or our competitors’ growth rates;
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investor perception of us, the industry in which we operate, the investment opportunity associated
with the A ordinary shares and our future performance;
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additions or departures of our executive officers;
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trading volume of our A ordinary shares;
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sales of our ordinary shares by us or our shareholders; or
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domestic and international economic, legal and regulatory factors unrelated to our performance.
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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. A putative securities class
action 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.
Additional equity issuances will dilute
your holdings, and sales by the Founders Group could adversely affect the market price of our A ordinary shares.
Sales of a large number of our ordinary shares
by the Founders Group could adversely affect the market price of our A ordinary shares. Similarly, the perception that any such
primary or secondary sale may occur; could adversely affect the market price of our A ordinary shares. Any future issuance of our
A ordinary shares by us may dilute the holdings of our existing shareholders, causing the market price of our A ordinary shares
to decline. In addition, any perception by potential investors that such issuances or sales might occur could also affect the trading
price of our A ordinary shares.
We will continue to incur substantial
costs as a result of being a U.S. public company.
We became a U.S. public company in November
2013. As a U.S. public company, we incur significant legal, accounting and other 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 Board of Directors or as executive
officers.
As a foreign private issuer, we are
subject to different U.S. securities laws and NYSE governance standards than domestic U.S. issuers. This may afford less protection
to holders of our A ordinary shares, and you may not receive corporate and Company information and disclosure that you are accustomed
to receiving or in a manner in which you are accustomed to receiving it.
As a foreign private issuer, the rules governing
the information that we disclose differ from those governing U.S. corporations pursuant to the Securities Act of 1933, as amended,
or the Exchange Act. Although we intend to report quarterly performance 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 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—Item 10. Additional
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 Board of Directors consist of independent directors. Although we are in compliance with the current NYSE corporate
governance requirements imposed on U.S. issuers, 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.
You may be subject to Indian taxes on
income arising through the sale of our A ordinary shares.
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.”
We are an Isle of Man company and, because
judicial precedent regarding the rights of shareholders is more limited under Isle of Man law than under U.S. law, you may have
less protection of your shareholder rights than you would under U.S. law.
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 I—Item 4. Information on the Company—B. Business Overview—Government 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 U.S. In particular,
the Isle of Man has a less developed body of securities laws than the 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 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 or controlling shareholders than they would as shareholders of a U.S. company.
Judgments obtained against us by our
shareholders may not be enforceable.
We are an Isle of Man company and substantially
all of our assets are located outside of the 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 U.S. and we believe
that a substantial portion of the assets of these persons may be located outside the U.S. As a result, it may be difficult for
you to effect service of process within the U.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 U.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 U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including remedies available under the
U.S. federal securities laws, may not be allowed in Indian courts if contrary to public policy in India. Since judgments of U.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 U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.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 U.S. or any state.
If securities or industry analysts do
not publish research or publish unfavorable or inaccurate research about our business, our share price and trading volume could
decline.
The trading market for our A ordinary shares
depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We may be
unable to sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities
or industry analysts maintain coverage of our company, or if these securities or industry analysts are not widely respected within
the general investment community, the trading price for our A ordinary shares would be negatively impacted. In the event we obtain
securities or industry analyst coverage, if one or more of the analysts who cover us downgrade our A ordinary shares or publish
inaccurate or unfavorable research about our business, our share price would likely decline. We have experienced such downgrade
from two of our analysts in fiscal year 2016 during the period of anonymous short seller attacks on our stock. If one or more of
these analysts cease coverage of our company or fail to publish reports on us regularly, or fail to maintain a favorable outlook
on the company, it may cause investor sentiment to be weak, demand for our A ordinary shares could decrease, which might cause
our share price and trading volume to decline.
We do not currently intend to pay dividends
on our ordinary shares. Our ability to pay dividends in the future will depend upon satisfaction of the 2006 Act solvency test,
future earnings, financial condition, cash flows, working capital requirements and capital expenditures.
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 Act, our future earnings, financial condition, cash flows, working
capital requirements and capital expenditures. The 2006 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.
We may be classified as a passive foreign
investment company, or “PFIC,” under U.S. tax law, which could result in adverse U.S. federal income tax consequences
to U.S. investors.
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, 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 U.S. federal income tax purposes if either:
|
|
·
|
75% or more of our gross income in a taxable year is passive income, or
|
|
|
·
|
50% or more of the average quarterly value of our gross assets in a taxable year is attributable
to assets that produce passive income or are held for the production of passive income.
|
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 previous 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—E. Taxation”) may be subject to
burdensome reporting requirements and may incur significantly increased U.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 U.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 U.S. federal income tax consequences
of acquiring, holding and disposing of shares if we are or become classified as a PFIC. See “Part I—Item 10. Additional
Information—E. Taxation.” for a more detailed description of the PFIC rules.
If the fair market value of our ordinary
shares fluctuates unpredictably and significantly on a quarterly basis, the social costs we accrue for share-based compensation
may fluctuate unpredictably and significantly, which could result in our failing to meet our expectations or investor expectations
for quarterly financial performance. This could negatively impact investor sentiment for the Company, and as a result, adversely
impact the price of our ordinary shares.
Social costs are payroll taxes associated with
employee salaries and benefits, including share-based compensation that we are subject to in various countries in which we operate.
When the fair market value of our ordinary shares
increases on a quarter to quarter basis, the accrued expense for social costs will increase, and when the fair market value of
ordinary shares falls, the accrued expense will become a reduction in social costs expense, all other things being equal, including
the number of vested stock options and exercise price remains constant. The trading price of our A ordinary share price can be
highly volatile. See “—Risks Related to our A Ordinary Shares—Our A ordinary share price may be highly volatile
and, as a result, shareholders could lose a significant portion or all of their investment or we could become subject to securities
class action litigation.” As a result, the accrued expense for social costs may fluctuate unpredictably and significantly,
from quarter to quarter, which could result in our failing to meet our expectations or investor expectations for quarterly financial
performance. This could negatively impact investor sentiment for the company, and as a result, the price for our ordinary shares.
Failure to comply with anti-bribery,
anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices
Act of 1977, as amended (“FCPA”), the U.K. Bribery Act of 2010, as amended (the “U.K. Bribery Act”) and
other anti-bribery, anti-corruption and anti-money laundering laws in various jurisdictions around the world. The FCPA, the U.K.
Bribery Act and similar applicable laws generally prohibit companies, as well as their officers, directors, employees and third-party
intermediaries, business partners and agents, from making improper payments or providing other improper things of value to government
officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees
of government agencies or state owned or affiliated entities and other third parties where we may be held liable for corrupt or
other illegal activities, even if we do not explicitly authorize them. While we have policies and procedures and internal controls
to address compliance with such laws, we cannot assure you that all of our employees and third-party intermediaries, business partners
and agents will not take actions in violation of such policies and laws, for which we may be ultimately held responsible. To the
extent that we learn that any of our employees or third-party intermediaries, business partners or agents do not adhere to our
policies, procedures or internal controls, we are committed to taking appropriate remedial action. In the event that we believe
or have reason to believe that our directors, officers, employees or third-party intermediaries, agents or business partners have
or may have violated such laws, we may be required to investigate or to have outside counsel investigate the relevant facts and
circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion
of time, resources and attention from senior management. Any violation of the FCPA, the U.K. Bribery Act or other applicable anti-bribery,
anti-corruption and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations,
loss of export privileges, and criminal or civil sanctions, penalties and fines, any of which could adversely affect our business
and financial condition.
ITEM 4. INFORMATION ON THE COMPANY
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|
A.
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History and Development of our Company
|
Eros STX Global Corporation is a company limited by
shares incorporated in the Isle of Man, company number 007466V. We maintain our registered office at First Names House, Victoria
Road, Douglas, Isle of Man IM2 4DF, British Isles, and our principal executive office in the U.S. is at 3900 West Alameda Avenue,
32nd Floor, Burbank, California 91505, and our telephone number is +1(818) 524-7000. We maintain a website at www.ErosSTX.com.
Information contained in our website is not a part of, and is not incorporated by reference into, this transition report.
Overview
We are a global entertainment company headquartered
in Burbank, California (the former headquarters of STX), with Eros India operations headquartered in Mumbai, India (the former
headquarters of Eros). We produce, market and distribute content to audiences around the world across traditional and digital media
platforms. Prior to the Merger, Eros was founded in 1977 and was one of the oldest companies in the Indian film industry to focus
on international markets and STX was founded in 2011 and was a leading independent Hollywood studio focused on producing, marketing,
owning and distributing film and television content for global audiences across traditional and digital media platforms. On July
30, 2020, we completed the Merger with STX, a transaction that has further scaled our global operations and diversified our global
sources of revenue and consumers. Following the Merger, we changed our name to Eros STX Global Corporation. Our A Ordinary Shares
are listed on the NYSE; symbol “ESGC”.
We believe we are pioneers in our business. Our success
is built on the relationships we have cultivated with leading talent, producers, exhibitors and other key participants in the entertainment
industry in the U.S. and India and with our partners 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.
We believe the Merger will drive long-term growth in
diversified markets and provide a consistent revenue profile for our Company. Our digital platform, Eros Now, is the largest Indian-content
OTT entertainment service network and an important part of our global strategy of delivering quality content direct to consumers
around the world.
Recent Developments
As previously disclosed, on July 30, 2020, our
subsidiary England Holdings 2, Inc. merged with and into STX, with STX remaining as the surviving corporation and a wholly owned
subsidiary of Eros. 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 (in all subsequent financial statements that reflect the Merger) are those of STX.
STX Business
STX was built to: (1) compete with major studios
at lower overhead cost, (2) bridge the U.S. and Asian entertainment markets, (3) capitalize on modern movie viewing habits and
(4) scale the film and television production process efficiently. The Merger has transformed the STX business, providing the scale
and global reach needed to compete more effectively with other global entertainment companies.
STX produces and distributes
films, TV shows and digital content across a variety of platforms for direct distribution in English-language markets and distribution
by third parties in foreign territories around the world. STX monetizes content across various distribution media channels over
the economic lifecycle typical for such productions. Typically, STX sells or licenses the rights to distribute its films, TV shows
or digital content to its business partners who disseminate it through their distribution channels and remit a fee and/or a portion
of the receipts to STX. STX strives to develop its IP in more than one format to increase the economic life and value of its productions.
STX seeks to take advantage of every available revenue opportunity for its films, TV shows and digital content through a variety
of economic arrangements that are summarized below.
STX Films
STX’s global distribution and integrated
development pipeline allow us to utilize a wide range of financing techniques which minimize capital at risk. When practicable,
STX plans film production to qualify for tax incentives that offset production costs. STX also structures arrangements with co-financing
partners to invest a percentage of the budget for a film or films in return for a percentage of net receipts and a percentage
of production fees with third-party financiers to share the costs of production not covered by international distribution
license fees and tax incentives. In some cases these third-party financers have rights across the majority of our films
for a fixed period of time and in other cases they have rights to interests in a single film property. In addition, the
Senior Credit Facility (as defined below), allows STX to borrow against tax incentives, minimum guarantees from international
film distributors, other contracted amounts and future anticipated cash flows in the form of forecasted profit and loss statements
of a film’s performance over its initial life cycle.
STX’s film marketing strategy is intended
to maximize the effectiveness of dollars spent by targeting the most likely audiences of mid-budget STX films. This strategy allows
STX to employ less print and advertising costs than other studios have traditionally spent on comparable films, while generating
comparable box office receipts to those of peer films. STX engages talent at the outset of each project to be fully aligned on
the marketing approach to minimize excessive and wasteful spending. STX’s strategy enables it to share risks with other parties
and to opportunistically acquire rights in projects at varying stages in the production process. Since its inception, STX has acquired,
produced, theatrically released or distributed the 48 films listed below. STX’s theatrical releases include films it produces
and distributes and distribution-only films.
|
Title
|
U.S. Release
|
Major Talent
|
STX Distribution
Rights
|
|
1.
|
The Gift (1)
|
August 2015
|
Jason Bateman
Joel Edgerton
|
Worldwide
|
|
2.
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Secret in their Eyes
|
November 2015
|
Julia Roberts
Nicole Kidman
Chiwetel Ejiofor
|
U.S.
|
|
3.
|
The Boy (1)
|
January 2016
|
Lauren Cohen
William Brent Bell
|
U.S.
|
|
4.
|
Hardcore Henry (1)
|
April 2016
|
Timur Bekmambetov
|
Worldwide
|
|
5.
|
Free State of Jones (1)
|
June 2016
|
Matthew McConaughey
Mahershala Ali
|
Worldwide
|
|
6.
|
Bad Moms (1)
|
July 2016
|
Mila Kunis
Kristen Bell
Kathryn Hahn
|
Worldwide
|
|
7.
|
Desierto
|
October 2016
|
Gael Garcia Bernal
|
U.S. and Canada
|
|
8.
|
The Edge of Seventeen (1)
|
November 2016
|
Hailee Steinfeld
Woody Harrelson
|
Worldwide
|
|
9.
|
The Bye Bye Man (1)
|
January 2017
|
Carrie Ann Moss
|
Worldwide
|
|
10.
|
The Space Between Us (1)
|
February 2017
|
Gary Oldman
Asa Butterfield
Britt Robertson
|
Worldwide
|
|
11.
|
Their Finest
|
April 2017
|
Gemma Arterton
Sam Claflin
|
U.S.
|
|
12.
|
The Circle
|
April 2017
|
Tom Hanks
Emma Watson
|
U.S.
|
|
13.
|
Valerian and the City of a Thousand Planets
|
July 2017
|
Luc Besson
Cara Delevigne
Dane DeHaan
|
U.S.
|
|
Title
|
U.S. Release
|
Major Talent
|
STX Distribution
Rights
|
|
14.
|
Wind River
|
August 2017
|
Jeremy Renner
Elizabeth Olsen
Peter Berg
|
United Kingdom and Ireland
|
|
15.
|
Home Again
|
September 2017
|
Reese Witherspoon
|
United Kingdom and Ireland
|
|
16.
|
Breathe
|
October 2017
|
Andrew Garfield
Claire Foy
|
United Kingdom and Ireland
|
|
17.
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The Foreigner (1)
|
October 2017
|
Jackie Chan
Pierce Brosnan
|
U.S. and certain international
|
|
18.
|
A Bad Moms Christmas (1)
|
November 2017
|
Mila Kunis
Kristen Bell
Kathryn Hahn
|
Worldwide
|
|
19.
|
Molly’s Game
|
December 2017
|
Jessica Chastain
Idris Elba
Aaron Sorkin
|
U.S. and China
|
|
20.
|
All the Money in the World
|
December 2017
|
Mark Wahlberg
Michelle Williams
Christopher Plummer
Ridley Scott
|
Worldwide except U.S., Canada, United Kingdom and Ireland
|
|
21.
|
Den of Thieves
|
January 2018
|
Curtis “50 Cent” Jackson
Gerard Butler
|
Worldwide
|
|
22.
|
Gringo
|
March 2018
|
Charlize Theron
Joel Edgerton
|
Worldwide
|
|
23.
|
I Feel Pretty
|
April 2018
|
Amy Schumer
Michelle Williams
|
U.S., United Kingdom and Ireland
|
|
24.
|
Adrift (1)
|
June 2018
|
Shailene Woodley
Sam Claflin
|
Worldwide
|
|
25.
|
American Animals
|
June 2018
|
Evan Peters
|
United Kingdom and Ireland
|
|
26.
|
Mile 22 (1)
|
August 2018
|
Mark Wahlberg
|
Worldwide
|
|
27.
|
The Happytime Murders (1)
|
August 2018
|
Melissa McCarthy
|
Worldwide
|
|
28.
|
Peppermint (1)
|
September 2018
|
Jennifer Garner
|
Worldwide
|
|
29.
|
Second Act (1)
|
December 2018
|
Jennifer Lopez
|
Worldwide
|
|
30.
|
The Upside
|
January 2019
|
Kevin Hart
Bryan Cranston
Nicole Kidman
|
Worldwide
|
|
31.
|
Peppa The Pig: Peppa Celebrates Chinese New Year
|
February 2019
|
Morwenna Banks
|
U.S.
|
|
32.
|
The Best of Enemies
|
April 2019
|
Taraji P. Henson
Sam Rockwell
|
Worldwide
|
|
33.
|
UglyDolls (1)
|
May 2019
|
Pitbull
Blake Shelton
Nick Jonas
Janelle Monáe
Kelly Clarkson
|
Worldwide except China
|
|
Title
|
U.S. Release
|
Major Talent
|
STX Distribution
Rights
|
|
34.
|
Poms
|
May 2019
|
Diane Keaton
Pam Grier
|
Worldwide
|
|
35.
|
Hustlers (1)
|
September 2019
|
Constance Wu
Jennifer Lopez
|
Worldwide
|
|
36.
|
Countdown (1)
|
October 2019
|
Elizabeth Lail
|
Worldwide
|
|
37.
|
21 Bridges (1)
|
November 2019
|
Chadwick Boseman
|
Worldwide
|
|
38.
|
Playmobil: The Movie
|
December 2019
|
Anya Taylor-Joy
Jim Gaffigan
Gabriel Bateman
|
U.S.
|
|
39.
|
The Gentlemen
|
January 2020
|
Matthew McConaughey
Charlie Hunnam
Henry Golding
Colin Farrell
Guy Richie
|
Worldwide
|
|
40.
|
Brahms: The Boy II (1)
|
February 2020
|
Katie Holmes
|
Worldwide
|
|
41.
|
My Spy (1)
|
June 2020
|
Dave Bautista
|
Worldwide
|
|
42.
|
The Secret Garden
|
August 2020
|
Colin Firth
Julie Walters
|
U.S.
|
|
43.
|
Horizon Line (1)
|
TBD 2020
|
Alexander Dreymon
Allison Williams
|
Worldwide
|
|
44.
|
Greenland
|
TBD 2020
|
Gerard Butler
|
Worldwide
|
|
45.
|
Gunpowder Milkshake
|
TBD
|
Karen Gillan
Lena Headey
Angela Bassett
|
U.S., Canada, Latin America, China
|
|
46.
|
Untitled Kevin Macdonald Project
|
TBD
|
Jodie Foster
Tahar Rahim
Shailene Woodley
Benedict Cumberbatch
|
U.S., United Kingdom, Ireland
|
|
47.
|
Songbird
|
TBD
|
KJ Apa
Sofia Carson
|
North America, UK
|
|
48.
|
Run Rabbit Run
|
TBD
|
Elisabeth Moss
|
Worldwide
|
(1) STX films owned or licensed
in perpetuity.
STX TV and Other
STX develops,
produces and licenses scripted and unscripted TV programming and digital content. STX’s economic model for its TV and digital
business is to generate TV and digital revenue from production services fees and the licensing of programming to free TV, subscription-based
TV (which is described as “pay TV”), streaming and digital platforms. Whenever possible, STX leverages existing IP
to generate new series and experiences for its TV and digital content. 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 scripted
TV, the first linear TV network or streaming platform on which the show airs, known as the “first-run network,” serves
as the principal source of financing for the show and typically covers a portion of the show’s production budget on a per-episode
basis. STX aims to cover the remaining portion of the budget via tax incentives and international license revenues. Borrowing capacity
under the Senior Credit Facility is also available for STX’s TV production working capital needs. For unscripted TV, the
cost of production and its producer fee is typically fully paid by the first-run network. Unscripted programming is typically created
with the goal of retaining rights to the show’s format, which can be re-licensed for duplication by local producers in international
territories. Since 2016, STX has produced the following 18 TV and digital shows which are distributed across 12 networks and platforms
worldwide:
|
|
Title
|
|
Network
|
|
Actual or Anticipated Air Date
|
|
Type
|
|
Status
|
|
1..
|
Number One Surprise
|
|
China
|
|
2016
|
|
Unscripted
|
|
Aired
|
|
2.
|
True Life
|
|
MTV
|
|
2016
|
|
Unscripted
|
|
Aired
|
|
3.
|
A Little Too Far
|
|
Rated Red
|
|
2016
|
|
Unscripted
|
|
Aired
|
|
4.
|
Platinum Life
|
|
E!
|
|
2018
|
|
Unscripted
|
|
Aired
|
|
5.
|
Valley of the Boom
|
|
Nat Geo
|
|
2019
|
|
Hybrid
|
|
Aired
|
|
6.
|
Golden Globes Red Carpet Specials 2018 and 2019
|
|
Tencent
|
|
2018 and 2019
|
|
Unscripted
|
|
Aired
|
|
7.
|
Billboard Music Awards Red Carpet Specials 2018 and 2019
|
|
Tencent
|
|
2018 and 2019
|
|
Unscripted
|
|
Aired
|
|
8.
|
Texas Size Medium
|
|
Travel Channel
|
|
TBD
|
|
Unscripted
|
|
Delivered
|
|
9.
|
Flip it Like Disick
|
|
E!
|
|
2019
|
|
Unscripted
|
|
Aired
|
|
10.
|
Games People Play
|
|
BET
|
|
2020
|
|
Scripted
|
|
Aired
|
|
11.
|
Michael Jackson 5 part series
|
|
A&E
|
|
2019
|
|
Unscripted
|
|
Ordered
|
|
12.
|
Kid 90
|
|
Hulu
|
|
2020
|
|
Unscripted
|
|
Ordered
|
|
13.
|
Punkd Season 1
|
|
Quibi
|
|
2020
|
|
Unscripted
|
|
Aired
|
|
14.
|
Skrrt Season 1
|
|
Quibi
|
|
2020
|
|
Unscripted
|
|
Aired
|
|
15.
|
Maloof
|
|
Netflix
|
|
2021
|
|
Unscripted
|
|
Ordered
|
|
16.
|
Punkd Season 2
|
|
Quibi
|
|
2021
|
|
Unscripted
|
|
Delivered
|
|
17.
|
Rise of Empires: Ottoman (Season 1)
|
|
Netflix
|
|
2020
|
|
Hybrid
|
|
Aired
|
|
18.
|
Rise of Empires: Ottoman (Season 2)
|
|
Netflix
|
|
2022
|
|
Hybrid
|
|
Ordered
|
STX intends to expand its TV business internationally
through sales and licensing of original STX TV series. STX is also focused on continuing to expand its TV business through potential
joint ventures and investments.
Award winning content
Since its inception STX has produced critically acclaimed,
award-winning films. Of its 37 titles released in the U.S. thus far, 27 have been recipients of awards nominations or wins, including
an Academy Award nomination, a BAFTA nomination, and numerous Golden Globe nominations. To date, STX releases have received an
impressive 57 awards wins and 248 nominations.
STX’s blockbuster hit Hustlers (2019)
won 20 awards and received 72 nominations, including Golden Globe and Screen Actors Guild Awards nominations for Jennifer Lopez’s
supporting performance, as well as a Gotham Awards nomination for Best Feature. The film was hailed as one of the Top Films of
the Year by the New York Film Critics, Online.
The Edge of Seventeen (2016) won 8 awards and
received 28 nominations, including a Golden Globe nomination for Hailee Steinfeld’s leading performance and a nomination
for Outstanding Directorial Achievement in First-Time Feature Film from the Director’s Guild of America for Writer-Director
Kelly Fremon Craig, who also won Best First Film at the New York Film Critics Circle Awards.
Molly’s Game (2017) won 7 awards and
received 49 nominations, including Academy Award, Golden Globe, BAFTA, Directors Guild Awards, and Writers Guild Awards nominations
for Aaron Sorkin’s work. For her lead performance, Jessica Chastain was nominated for a Golden Globe, as well as numerous
regional film critics society awards.
Crowd-pleaser The Upside (2019) was nominated
for two People’s Choice Awards, for Favorite Comedy Movie Star (Kevin Hart) and Favorite Comedy Movie.
Notably, two STX features received recognition at the
2015 Toronto International Film Festival: Desierto, which won the Special Presentations FIPRESCI Prize (and became Mexico’s
official entry for Best Foreign Language Film at the Academy Awards) and Hardcore Henry, which received the People’s
Choice Award.
ErosSTX
International has garnered similar awards recognition for its international releases. Its critically acclaimed Wind River(2017)
won the Un Certain Regard – Best Director prize at Cannes and received nominations for the Golden Camera and Un Certain
Regard Awards at the festival. The film was praised as one of the Top Ten Independent Films of 2017 by the National Board of Review
(US) and won three prizes at the Dublin Film Critics Circle Awards.
Ridley
Scott’s All the Money in the World (2017) received an Academy Award nomination for Christopher Plummer’s
supporting performance, which also garnered Golden Globe and BAFTA nominations. The film also received two additional Golden Globe
nominations for Michelle Williams supporting performance and Ridley Scott’s direction.
American
Animals (2018) received 11 British Independent Film Awards nominations and received two wins for Best Editing and Best
Debut Screenwriter. The film was nominated for an Audience Award at SXSW and the Grand Jury Prize for Drama at Sundance.
Eros Business
Eros Films
During the twelve months ended March 31, 2020,
Eros released a total of 30 films, including two medium budget films and 28 low budget films. In the fiscal year 2019, Eros released
a total of 72 films, including seven medium budget films and 65 low budget films.
Eros Film Library
Eros currently owns or licenses rights to over
3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now is Eros’s subscription
based OTT platform and has rights to over 12,000 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 Eros believes
makes it one of the largest Indian movie offering platforms around the world. Eros’ film library has been built up over
more than 40 years and includes hits from across that time period, including, among others: Pati patni aur who, Andhadhun, Boyz
2, Newton, Munna Michael, Subh Mangal Saavadhan, Ki & Ka, Housefull 3, Dishoom, Baar Baar Dekho, Bajrangi Bhaijaan, Bajirao
Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas, Hum Dil De Chuke Sanam, Lage Raho Munna Bhai, Vicky Donor, English Vinglish,
and Goliyon Ki Raasleela: Ram-Leela. Eros has acquired most of its film content through fixed term contracts with third parties,
which may be subject to expiration or early termination. Eros owns the rights to the rest of its film content as co-producers
or sole producer of those films. Through such acquisition and co-production arrangements, Eros seeks to acquire rights to 40 to
50 additional films each year. While Eros typically holds rights to exploit its content through various distribution channels,
including theatrical, television and new media formats, it may not acquire rights to all distribution channels for its films.
In particular, Eros does not own or license the music rights to a majority of the films in its library. Eros expects to maintain
more than half of the rights it presently owns through at least December 31, 2025.
In an effort to reach a wide range of audiences,
Eros maintains rights to a diverse portfolio of films spanning various genres, generations and languages. More than 55% of the
films in Eros’ Hindi library are films produced in the last 15 years. Eros owns or licenses rights to films produced in several
regional languages, including Tamil, Telugu, Kannada, Marathi, Bengali, Malayalam, Kannada and Punjabi.
Eros treats its new releases as part of its
film library one year from the date of their initial theatrical release. Eros believe its extensive film library provides it with
unique opportunities for content exploitation, such as its dedicated Eros content channel carried by various cable companies outside
India. Eros’ extensive film library provides it with a reliable source of recurring cash flow after the theatrical release
period for a film has ended. In addition, because Eros’ film library is large and diversified, it believes that it can more
effectively leverage its library in many circumstances by licensing not just single films but multiple films.
Award winning content/franchise
Eros’ film releases frequently receive
awards and accolades. For instance, Eros’ Hindi release Newton was selected as India’s official entry for the Best
Foreign Film language category at the 2018 Academy Awards. It also received accolades at the Berlin Film Festival in 2018. Eros
won 218 awards in the fiscal years 2015, 2016, 2017, 2018 and 2019, including Studio of the Year at the ETC Bollywood Business
Awards 2015. Some of Eros’ films and original digital series from fiscal year 2018 and fiscal 2019 that won awards include
Side Hero, Smoke, Mukkabaaz, Newton, Shubh Mangal Savdhaan and Munna Michael.
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Side Hero won three awards including Best Web Series and Best Actor.
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Smoke received Best Launch of the Year at The ET Now - Stars of the Industry Awards.
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Mukkabaaz won three awards including Best Director and Best Actor.
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Newton won 13 awards including Best International Film.
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Shubh Mangal Savdhaan won four awards including Marketing Campaign of the Year.
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Munna Michael won two awards including Best Social Media Marketing Campaign.
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Bajrangi Bhaijaan won 37 awards including National Award for Popular Film.
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Bajirao Mastani won over 79 award titles including National Award for Best Director.
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Tanu Weds Manu Returns won 19 awards including National Award for Best Female Actor in a leading
role.
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Hero won seven awards and Badlapur won seven awards.
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The Malayalam film Pathemari had also won a national award for Best Malayalam Film.
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A significant
amount of commercial interest around Eros’ film business was generated with the release of Saif Ali Khan’s ‘Laal
Kaptaan” in October 2019, as well as the selection of Eros’s film ‘Rome Roam Main’ as the official
screening at Busan film festival and winner of the Asian Star Award in October 2019. Since the beginning of this fiscal year, Eros
Now has garnered 19 prestigious digital industry awards including: Marketing Campaign of the Year for Side Hero, Best Launch
of the Year for Smoke, Best Short Film on the Web for A Monsoon Date and Best entertaining Video Content for The
Investigation.
In
October 2020, Eros Now won two Gold Awards and one Silver Award for original content and marketing at the SCREENXX 2020 Awards
hosted by AdGully. The widely appreciated Eros Now original ‘Modi: Journey Of A Common Man’, an inspiring series
based on the life of India’s Prime Minister Narendra Damodardas Modi, earned two Gold Awards for 'Most Popular
Web Series' & 'Best Story for a Web Series' categories. Metro Park Season 1, a situational comedy revolving
around a Gujarati family based in suburban New Jersey, won the Silver Award for 'Best Use of Social Media by a Brand.'
Eros Now – the Largest Indian-Content
OTT Network
We believe Eros Now has the largest Indian language
movie content library worldwide with over 12,000 digital titles, out of which 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 marketing shorts. During the twelve months ended March 31, 2020, Eros Now digitally released a total of 630 films in 12 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 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 Amazon, 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 we 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 we believe results in the direct exploitation of our films without the
payment of significant commissions to sub-distributors.
Since its inception, STX has partnered with
leading Chinese investors and content providers across development, production, financing and distribution. We aim to create content
primarily for the U.S. market 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:
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theatrical distribution;
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television syndication; and
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digital distribution and ancillary products and services, including Eros Now.
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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 pre-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 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.
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 networks and streaming 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 also able to reach the large Indian diaspora globally.
Eros Theatrical Distribution Outside India:
Outside India, we distribute our 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 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. 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.
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 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 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 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 thousands 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 of 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 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 short form – as well as provide significant opportunities for content creators currently there are approximately
550 million television and smart 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 Eros’ historic presence in the market and numerous distribution 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 third 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 IP 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 disciplined capital allocation strategy.
Slate Profile
Eros
The success of Eros’ film distribution
business lies in our ability to acquire content. Each year, Eros focuses on co-production, acquisition and distribution of a diverse
portfolio of Indian language and themed films that Eros believes will have a wide audience appeal. Of the 30 films Eros released
during the twelve months ended March 31, 2020, eight were Hindi films, one was a Tamil film and 21 were regional films. Of the
72 films Eros released in fiscal year 2019, fifteen were Hindi films, seven was Tamil/Telugu films and fifty were regional films.
Eros’ 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 language. Eros’
most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) that it releases
globally each year. The remainder of the films (mainly Hindi but also Tamil and/or Telugu) included in each annual release slate
is built around films with various budgets to create a slate that will attract varying segments of the audience. The remainder
of the slate consists of Hindi, Tamil, Telugu and other language films of a lower budget.
Eros focuses on content driven films with appropriate
budgets in order to generate an attractive rate of return and seek to mitigate the risks associated with film budgets through the
use of its extensive pre-sale strategies. Eros has increased its focus on 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 have 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 substantially 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
Ireland 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 leads to maximum audience penetration, providing leading talent opportunities to
be globally relevant and maximizing box office receipts (which in turn drives to the correlating post-theatrical revenue streams).
Second, our international output agreements are structured to minimize at-risk capital, as described below. Our output arrangements
specify that the films we deliver pursuant to such 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 anticipate 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 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 means 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 a 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 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.
Production
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 ramping up its own productions and co-productions through key partnerships. These partnerships include its
partnership with Aanand L Rai (Colour Yellow Productions), which has released a range of films across budgets, genres and 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 expands its geographical
canvas for content monetization.
Regardless of the 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 for at least 20 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.
Regardless 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 production, 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.
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Acquisition
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Co-production
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Film Cost
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Negotiated “market value”
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Actual cost of production or capped budget and 10–15% production fee
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Rights
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10 years–20 years
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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
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Payment Terms
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10–30% upon signature
Balance upon delivery or in instalments between signing and delivery
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In accordance with film budget and production schedule
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Recoupment Waterfall
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“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
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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
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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 Eros 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 rights in perpetuity and secures exclusive global distribution rights for
all media for at least 20 years. After Eros recoups its expenses, Eros 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, 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, 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 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 execution. Eros normally has our
executive producer on the film to oversee the project.
Eros reduces financing risk for both 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 that 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:
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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;
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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
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pre-selling certain music rights, including for movie soundtracks and ringtones.
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From time to time Eros also acquires specific
rights to films that have already been released theatrically. 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 producers 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 international upfront license fees, tax incentives, co-financing and equity.
International License Fees
STX believe that the license
fees it receives under its output agreements described above appropriately mitigate its financial risk for its produced films.
Subject to the specific terms under each output and distribution agreement, the aggregate 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 prints and advertising costs of its films. STX’s schedule for repayment
of these borrowings 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 uncertain 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 form 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.
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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.
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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.
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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.
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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 film’s release (including the year of release),
which is referred to 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 its offices in Dubai, Singapore, the U.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 overall 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 utilizing 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 offices 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 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. 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 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,
music, music videos, clips and 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 capitalize on changes
in consumer demand through early adoption of new formats and services, which Eros believes enables them to generate a larger 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 Comcast, Cox Communications, Cablevision and Time Warner Cable.
Eros provides all programming for this film and music channel and share revenues with the cable providers. Eros also provides content
to Amazon Digital and participate in a revenue 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) and
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 plethora of connected devices.
Market opportunity
India: Eros’ distribution capabilities
enable it to target a majority of the 1.3 billion people in India. Recently, as demand for regional films and other media has increased
in India, Eros’ brand recognition in Hindi films has helped it to grow its non-Hindi film business by targeting regional
audiences in India and overseas. With Eros’ distribution network for Hindi, Tamil and Telugu films, Eros believes they are
well positioned to expand their offering of non-Hindi content.
Overseas: Depending on the film, the distribution
rights Eros 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 include Germany,
Poland, Russia, France, Italy, Spain, Indonesia, Malaysia, Japan, South Korea, China, the Middle East and Latin America among others.
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. Additionally, there
is a large established Indian diaspora in North America which has a strong interest in the content of the 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 Eros expects to release select films from our slate into China. Eros recently released Andhadhun in China
in collaboration with a leading Chinese film distributor Tang Media Partners. In March 2018, Eros released Bajrangi Bhaijan across
more than 8,000 screens, including in China, and collected over $45 million at the box office in 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 Chinese 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 overall 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 leading telecoms help boost the quality of digital infrastructure in India. Eros plans to take advantage
of this growth and continue to grow Eros Now’s paying user base in India and 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 leverages 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 205.8 million
registered users and 33.8 million paying users worldwide, compared to 166 million registered users and 21.1 million paying subscribers
as of June 30, 2019, representing increases of 24% and 60% respectively. Eros defines “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 mobile telecom provider in any given month, be it through a
daily, weekly or monthly billing pack. 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 users have
demonstrated some of the highest levels of engagement in the Indian OTT space. According to a report published by Counterpoint
in June 2019, 68% of Eros Now users indicated that they watch content daily as compared to 58% average in case of other OTT platforms.
According to the same report, Eros Now has the largest share (59%) of users in the 25-39 age bracket in Tier II/III cities, the
highest among Indian OTT platforms.
Eros believes Eros Now has the largest Indian
language movie content library worldwide with over 12,000 digital titles, out of which 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 marketing shorts. During the twelve months ended March 31, 2020, Eros Now digitally released a total of 630 films in 12 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 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 testament to the strength of our platform and breadth and depth of our offering.
To maximize the 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 Sri Lankan
market through a partnership with Dialog Axiata, Sri Lanka’s premier connectivity provider, and will be available on the
Dialog ViU app.
Eros Now is also available in the Apple 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 agnostic. Eros Now has over 60 distribution partners around the world including
Apple TV+, Amazon Channels, Virgin Media, Roku, Etisalat and xfinity.
Eros Now uses 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 Microsoft with the goal 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 ensure 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
Eros Now platform enhance and strengthen its reach across the globe and increase consumer engagement.
Eros Now has been increasingly focused on delivering
product features to further monetize its growing registered user base. For example, Eros has launched Eros Now Quickie, a platform
where viewers can access quality short stories to further supplement our existing vast digital content library.
The Eros Now platform also partners with leading
companies in 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 has partnerships with three major
electronic payment platforms: Paytm, CashKaro and Freecharge. Eros Now can have access and advertise its services to the 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 films and original episodic programs, some including: Flesh by Siddharth Anand; Halahal by Zeishan Qadri; Bhumi by Pavan
Kripalani; and a most awaited Season 2 of its well-known series Metro Park. Over the past few months, despite the COVID-19 pandemic,
Eros has released several pieces of original content on the Eros Now platform, A Viral Wedding, Metro Park (Quarantine Edition),
Date Gone Wrong (Quarantine Edition).
Music
Music is integral to our films, and when Eros
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 separately from the underlying film, both before and after the release of the related films.
In addition, Eros acts as a music publisher for third-party owned music rights within India. Through our internal resources
and network of licensees, Eros is able to provide its consumers with music content directly, through third-party platforms
or through licensing deals.
Eros also exploits the music publishing and
master rights they 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 monitors, collects and distributes royalties to its 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 Eros’s revenues are primarily generated
from commercial exploitation of its films and other audio and/or audio-visual content, its intellectual property rights are a critical
component of its 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 U.S. and certain other countries.
In order to fight against piracy, Eros participates directly and through industry organizations by way of actions including legal
claims against persons/entities who illegally pirate Eros content. Furthermore, Eros also deals with piracy issues by promoting
and marketing its 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 Eros’ OTT platform Eros Now to grow rapidly, 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, Eros has
adopted Digital Rights Management technology in order to ensure that its content is protected from unauthorized and illegal access
and copying.
Copyright Protection in India
The Copyright Act, 1957 (as amended from time
to time) (“Copyright Act”), prescribes provisions inter 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 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. 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.
The 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.
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 billion every year. In an effort to protect their Intellectual Property rights, filmmakers in India have started getting
orders typically known as “John Doe” orders from court which is a pre-infringement injunction remedy provided to protect
the intellectual property rights of the creator of artistic works, including movies and 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.
U.S. Intellectual Property Laws
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
others 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 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 protect our trade secrets are preserved by our own
efforts to maintain secrecy. Trade secret owners can bring an action against third parties for misappropriation if a third-party
obtains access to a trade secret by improper means.
Trademark Protection in India
We use a number of trademarks in our business,
all of which are owned by our subsidiaries. Our Indian subsidiaries currently own over 120 Indian registered trademarks and domain
names, which are used in their business, including the registered trademark “Eros,” “Eros International,”
“Eros Music,” and “Eros Now.” However, certain of our trademarks used in India are still under the process
of registration. 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 Trade Marks Act, 1999, (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 marks 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 was
amended by the Trade Marks (Amendment) Act 2010, or (the “Trademarks Amendment 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 Registrar 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 U.S.
In order to match the international standards
of trademark protection and enforcement, and to speed up the trademark registration process the Trademark Rules, 2002 were replaced
by the Trademark Rules, 2017. Some notable amendments were; reduction in the number of application forms; specific concessions
in filing fees to Start Ups, Individuals and Small Enterprises; expedited processing of trademark application; registration of
sound marks; etc.
Remedies for Infringement in Copyright Act
and Trademark 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
Eros
The Indian film industry 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.
Eros believe it 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 Eros’ direct competitors, such
as Disney, 20th Century Fox Pictures and Viacom Studio 18, have moved towards similar models in addition to their other business
lines within the Indian entertainment industry. Eros also faces 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. Eros’ primary competitors for Indian film content
in the markets outside of India are UTV, Fox, Viacom and Yash Raj Films. Eros believes its experience and understanding of the
Indian film market positions it well to compete with new and existing entrants to the Indian media and entertainment sector. Based
on gross collections reported by comScore, Eros’ market share as an average over the preceding seven calendar years to 2018
is 24% of all theatrically released Indian language films in the United Kingdom and the U.S. Competition within the industry is
based on relationships, distribution capabilities, reputation for quality and brand recognition.
STX
STX operates in a highly
competitive environment for creative talent and intellectual property, as well as audience and distribution 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 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 are essential to the success of our businesses.
In addition, STX films compete for audience
acceptance and exhibition outlets with films produced and 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.
Given this level of competition, STX attempts
to operate with a different 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 production and 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. On May 17, 2016, the putative class actions filed in New Jersey were transferred
to the U.S. District Court for the Southern District of New York where they were subsequently consolidated with the other two actions.
The Court-appointed lead plaintiffs filed a single consolidated complaint on July 14, 2016 and amended on October 10, 2016. The
amended consolidated complaint alleged that the Company and certain individual defendants violated Sections 10(b) and 20(a) of
the Exchange Act, but did not assert certain claims that had been asserted in prior complaints. The remaining claims were 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, 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 stock 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, 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.
Eros India and its subsidiaries received show
causes notices and assessment order from Service Tax Authorities in India levying amounts to be paid on account of several grounds
of non-compliance with the Service Tax Laws. An amount aggregating to $56 million (net of monies paid under protest $1.8 including
interest and penalty) for the periods under dispute on account of service tax arising on temporary transfer of copyright services
and certain other related matters have been considered contingent. Eros has filed an appeal against the said order before the authorities.
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 these matters as preliminary hearing is yet to begin.
Eros India and its subsidiaries received several
assessment orders and demand notices from VAT and sales tax authorities in India. Several revised orders have been received during
the year. Eros has considered an amount equal to $3 million (net of monies paid under protest $0.1 million and including interest
and penalty) for the periods under dispute as contingent. Eros has appealed against each of the orders outstanding, and such appeals
are pending before relevant tax authorities. Though, uncertainties are inherent in the final outcome of these matters, the Group
believes, based on assessment made after taking legal advice, that the final outcome of the matters will be favorable.
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 considered an amount equal to $0.1 million for the period under dispute as contingent.
Eros has contested the said cases and believes that there will not be any significant liability on the group as the misstatements
were bonafide and without any wrongful intentions and do not invite penalty. However, uncertainties are inherent in the final outcome
of these matters and hence, after taking appropriate legal advice, group has considered the 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 Bhoot Returns,
Goliyon Ki Rasleela-Ram-Leela, Munna Michael, Heer Ranjha (Ishak Di Misal), Sarkar 3, Bajrangi Bhaijaan, Welcome Back, and Housefull
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, certain civil proceedings had been initiated in various local courts in India in and around November
2013, 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 continue in some of these proceedings are pending, we have obtained stay orders
in our favor from the Supreme Court of India as well as certain of the local courts where such proceedings are being 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 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 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 updated and modernized Isle of
Man company law by introducing a new simplified corporate vehicle into Isle of Man law. The 2006 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:
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there are no prohibitions in relation to the company providing financial assistance for the purchase
of its own 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);
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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”;
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there are simple share offering/annual report requirements;
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there are reduced compulsory registry filings;
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the statutory accounting requirements are simplified; and
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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.
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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 International
regulations which may impact our business. In particular, the following regulations have a significant impact on our 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:
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is suitable for unrestricted public exhibition i.e. fit for “U” certificate; or
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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
i.e. fit for “UA” certificate; or
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is suitable for public exhibition restricted to adults i.e. fit for “A” certificate;
or
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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 i.e. fit for “S” certificate; or
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is suitable for grant of “U”, “UA” or “A” or “S”
certificate, as the case may be, if a specified portion or portions be excised or modified therefrom; or
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that the film is not suitable for unrestricted or restricted public exhibitions, or that the film
be refused a certificate.
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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.
There are several draft bills proposing to replace
and/or amend the Cinematograph Act which are awaiting approval.
Insolvency and Bankruptcy Code, 2016.
An act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership
firms and individuals in a time bound manner for maximization 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.
Labor Laws. Depending on the nature
of work and number of workers employed at any workplace, various labor related legislations may apply. Certain significant provisions
of such labor related laws are provided 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 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 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% 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:
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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.
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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.
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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.
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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.
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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.
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Isle of Man Law
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Delaware Law
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General Meetings
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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.
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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
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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.
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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
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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 Board of Directors 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.
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A typical certificate of incorporation and bylaws would provide that the number of directors on the Board of Directors will be fixed from time to time by a vote of the majority of the authorized directors. Under Delaware law, a Board of Directors can be divided into up to three classes.
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Isle of Man Law
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Delaware Law
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Removal of Directors
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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.
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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
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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.
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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
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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 Board of Directors. Our articles provide that no director may participate in approval of a transaction in which he or she is interested.
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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 Board of Directors 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
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Delaware Law
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Cumulative Voting
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There is no concept of cumulative voting under Isle of Man law.
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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
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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.
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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
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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.
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With certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a Delaware corporation must be approved by the Board of Directors 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
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Delaware Law
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Interested
Shareholders
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There are no equivalent provisions under Isle of Man law relating to interested shareholders.
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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.
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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
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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.
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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
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Delaware Law
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Indemnification of
Directors and Officers
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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.
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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-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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·
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.
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Isle of Man Law
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Delaware Law
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Appraisal Rights
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There is no concept of appraisal rights under Isle of Man law.
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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.
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Shareholder Suits
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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.
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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
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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.
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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.
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Isle of Man Law
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Delaware Law
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Amendment of Governing
Documents
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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.
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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 Board of Directors 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
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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.
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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.
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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.
Organizational Structure
We conduct our global operations through our
Indian and international subsidiaries, including STX our majority-owned subsidiary 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 U.S. is Noah Fogelson, located at 3900 West Alameda Avenue, 32nd Floor, Burbank, California 91505.
As of October 23, 2020, the Founders Group holds
approximately 12.9% of our issued share capital, which comprise all of our B ordinary shares and 5,080,188 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.
The following diagram summarizes the corporate
structure of our consolidated group of companies as of October 23, 2020:
Organizational Chart
Property and Equipment
Our properties consist primarily of studios,
office facilities, warehouses and distribution offices, most of which are located in Mumbai, 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, 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—Item 7. Major Shareholders
and Related Party Transactions” and “Part I—Item 3. Key Information—D. Risk Factors—We have
entered into certain related party transactions and may continue to rely on our founders for certain key development and support
activities” Property and equipment with a net carrying amount of approximately $8.2 million (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.
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Location
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Size
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Primary Use
|
Leased / Owned
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Mumbai, India
|
13,992 sq. ft.
|
Corporate Office
|
Owned
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Mumbai, India
|
2,750 sq. ft.
|
Studio Premises
|
Leased(1)
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Mumbai, India
|
8,094 sq. ft.
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Executive Accommodation
|
Leased(1)
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|
Mumbai, India
|
17,120 sq. ft.
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Office
|
Leased(1)
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Mumbai, India
|
1,000 sq. ft.
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Film Negatives Warehouse
|
Leased
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Mumbai, India
|
100 sq. ft.
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Film Prints Warehouse
|
Leased
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Mumbai, India
|
2,750 sq. ft.
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Corporate
|
Owned
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Mumbai, India
|
900 sq. ft.
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Film Prints Warehouse
|
Leased
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Mumbai, India
|
1200 sq. ft.
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Film Prints Warehouse
|
Leased
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Delhi, India
|
600 sq. ft.
|
Film Distribution Office
|
Leased
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Punjab, India
|
438 sq. ft.
|
Film Distribution Office
|
Leased
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Bihar, India
|
633 sq. ft
|
Film Distribution Office
|
Leased
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Chennai, India
|
841 sq. ft.
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Branch Office
|
Leased
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Mumbai, India
|
4,610 sq. ft.
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Executive Accommodation
|
Leased(1)
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Delhi, India
|
994 sq. ft.
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Branch Office
|
Leased
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Dubai, United Arab Emirates
|
2,473 sq. ft.
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Corporate Office
|
Leased
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Dubai, United Arab Emirates
|
2,473 sq. ft
|
Corporate Office
|
Leased
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London, England
|
7,549 sq. ft.
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DVD Warehouse
|
Owned
|
|
Secaucus, New Jersey, U.S.
|
900 sq. ft.
|
Corporate Office
|
Leased
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San Francisco, California, U.S.
|
2,315 sq. ft.
|
Digital Team
|
Leased
|
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Burbank, California, U.S.
|
18,980 sq. ft
|
Corporate Office
|
Leased
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Burbank, California, U.S.
|
19,097 sq. ft
|
Corporate Office
|
Leased
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Los Angeles, California, U.S.
|
18,500 sq. ft
|
Post-Production Facility
|
Leased
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London, England
|
2,857 sq. ft
|
Corporate Office
|
Leased
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London, England
|
1,578 sq. ft
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Corporate Office
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Leased
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(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.
Prior 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 following discussion
and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements
and related notes included elsewhere in this transition 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 incurred 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.
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For the Year ended
September 30,
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|
For the Six Months Ended
March 31,
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|
|
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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 accrual
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 standard 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 sets forth
our consolidated statements of operations for the periods indicated. This information should be read together with the
consolidated financial statements and related notes included elsewhere in this transition report. The results of operations for
our TV and other segment are not material to the trend of the 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 position of titles 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 free 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 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 indebtedness 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 assets. As of March 31, 2020, we are not in breach of any of the covenants of the loans.
As of March 31, 2020, we
had long-term borrowings of $268.1 million.
Other than in the ordinary
course of business as 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 of 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 credit facility maturity date. For additional information, see Note1 and Note 3 to the 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 material adverse effect on our revenues, income, profitability, liquidity or capital resources
to cause the disclosed financial information not to be necessarily indicative of future operating results or financial conditions.
E. Off-Balance
Sheet Arrangements
As of
March 31, 2020, we have not entered into any off-balance sheet arrangements.
F. Contractual
Obligations
|
|
|
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)
|
Other long-term liabilities include: Earnings due to Europa/Amazon for Valerian and Gringo, Series
D Exit, and Long-term lease liability.
|
G. Safe Harbor
See “Special Note Regarding Forward-Looking
Statements” included elsewhere in this transition report.
ITEM 6. DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
A. Directors and Executive Officers
Our board of directors presently consists of
eight directors.
The following table sets forth the name, age
(as at 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
|
|
59
|
|
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, Chairman of Audit Committee
|
|
Dhirendra Swarup(1)(2)(3)(4)
|
|
75
|
|
Director, Chairman of Remuneration Committee
|
|
Dilip Thakkar(1)(2)(3)(4)
|
|
83
|
|
Director
|
|
John Zhao(3)(4)
|
|
57
|
|
Director, Chairman of Nomination Committee
|
|
|
|
|
|
|
|
Senior Management
|
|
|
|
|
|
Andrew Warren
|
|
54
|
|
Chief Financial Officer
|
|
Mark Carbeck
|
|
48
|
|
Chief Corporate and Strategy Officer
|
|
Pradeep Dwivedi
|
|
49
|
|
Chief Executive Officer, Eros India
|
|
Adam Fogelson
|
|
53
|
|
Chairman, STX Motion Picture Group
|
|
Noah Fogelson
|
|
50
|
|
Co-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 Corporate Strategy
|
______________
|
|
(1)
|
Independent Director
|
|
|
(2)
|
Member of the Audit Committee
|
|
|
(3)
|
Member of the Remuneration Committee
|
|
|
(4)
|
Member of the Nomination Committee
|
Summarized below is relevant biographical information
for each of our directors and executive officers.
Directors
Mr. Kishore Lulla is our Executive Co-Chairman.
Mr. Lulla received a bachelor’s degree in arts from the Mumbai University. He has over 36 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 of 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 of the Year” at the GG2 Leadership and
Diversity Awards and in 2014, Forbes Asia featured Mr. Lulla in the list of ‘Best under a 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 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 and other international markets. 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., 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 ongoing production of oil and natural gas from shale formations in the U.S. Mr. Simonds holds a bachelor’s degree in
philosophy from Yale University.
Mr. Shailesh Rao has two decades of experience
in the technology sector, including involvement in the launch and early growth of significant consumer technology platforms and
as investor and mentor to technology companies including Moglix, BigSpring, and Omaze. He previously served as a Partner at TPG
and Head of the Growth Fund and Rise Fund for India and Southeast Asia from 2017 to 2019, Vice President 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 Google
India from 2005 to 2012. He has served on the board of Jones Lang LaSalle Incorporated, a Fortune 500 global real estate services
company, as a Senior Advisor to McKinsey & Company, and a member of the CEO Council of Lighthouse Funds, a private equity firm.
Mr. Rao holds an MBA from the Kellogg School of Management and dual degrees from the University of Pennsylvania, a B.S. in Economics
from the Wharton School of Business and a B.A. in History with Honors.
Mrs. Rishika Lulla Singh is an Executive Director and Co-President of 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 of Oriental and African Studies with a bachelor’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 OTT 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 named as “Young Entrepreneur of the Year”
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. Nicholas Stone is a 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 cousin of Mr. Shailendra Swarup
Swarup (i.e. son of the younger brother of the father of Mr. Shailendra Swarup). He has served as a director since July 2019.
Mr. Dilip Thakkar is an Independent Director
in our Company. Mr. Thakkar received bachelor’s a degree in commerce and in law from Mumbai University. A practicing-chartered
accountant since 1961, Mr. Thakkar has significant financial experience. He is a senior partner of Jayantilal Thakkar & 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 president of the Bombay Chartered Accountants’ Society and was then, the chairman of its International
Taxation Committee. Mr. Thakkar serves as an independent director of six public limited companies and five private limited companies
in India and sixteen foreign companies. He has served as a director since April 2006.
Mr. John Zhao, is the Chairman and Chief Executive
Officer 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 Kellogg
School of Management at Northwestern University, dual Master’s degrees in Electronic Engineering and Physics from Northern
Illinois University, and a Bachelor’s degree in Physics from Nanjing University.
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. Adam 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 Chief Content 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 was 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 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, Mr. 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 previously 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 a master’s degree in business administration from Columbia Business School. Mr. Parameswaran
also serves on the boards 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.
B. Compensation
Information regarding the compensation of our executive
officers and directors for the year ended March 31, 2020 is included in Item 6.B of our Annual Report on Form 20-F, submitted to
the SEC on July 30, 2020 and incorporated by 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 I, whose term will expire at the annual general meeting to be held in fiscal year 2021;
|
|
|
·
|
Class II, whose term will expire at the annual general meeting to be held in fiscal year 2022; and
|
|
|
·
|
Class III, whose term will expire at the annual general meeting to be held in fiscal year 2023.
|
Our directors for fiscal year 2020 are classified as
follows:
|
|
·
|
Class I: Dilip Thakkar and John Zhao;
|
|
|
·
|
Class II: Shailesh Rao, Nicholas Stone and Dhirendra Swarup; and
|
|
|
·
|
Class III: Kishore Lulla, Rishika Lulla Singh and Robert Bruce Simonds, Jr.
|
As more fully described below in “Part I—Item
7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” pursuant to the Merger, the Board
will have nine directors, of whom 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 Hony, and the remaining one director will
be jointly selected by the Founders Group and STX (the “Jointly Selected Director”). The Jointly Selected Director
has not been selected as of the date 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 the 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 the 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.
For so long as Kishore Lulla is our executive officer,
he will not receive compensation as a director.
On November 11, 2018, with effect from November 1,
2018, Kishore Lulla’s gross annual salary is amended and revised to $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 Sunil Lulla. The agreement contains a confidentiality provision that restricts Sunil Lulla during the term of his employment
and for a period of two years following termination and a non- competition provision that restricts him during the term of his
employment. Mr. Sunil Lulla is also entitled to salary of GBP 60,000 (w.e.f April 2019) and 1,191,000 A ordinary shares awards
in total, which will vest annually over the next three years.
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. On November 11, 2018 with effect from November 1, 2018, Mrs. Rishika Lulla Singh’s
gross annual salary is amended and revised to $480,000. Mrs. Rishika Lulla Singh is also entitled to 1,238,000 A ordinary shares
awards in total, which 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 $76,112 per 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 $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.
Mr. Prem Parameswaran, our Head of Corporate Strategy,
has entered into an amended employment agreement with us as 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 1,590,000 A ordinary shares awards in total as part of his employment agreement, which have
varying vesting periods over the next three years.
Mr. Mark Carbeck, our Chief Corporate and Strategy
Officer has entered into a service agreement with Eros International Limited to provide services to us and certain of our subsidiaries.
The service agreement 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 receives a basic gross annual salary and is entitled
to participate in any current bonus scheme applicable to his position. The agreement contains a confidentiality provision 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 Independent 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 erosstx.com. Information contained on our website is not a part of, and is not incorporated by reference
into, this transition report.
The current members of our Audit Committee are Shailesh
Rao, Nicholas Stone (Chair), Dhirendra Swarup and 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 erosstx.com. Information contained in our website is
not a part of, and is not incorporated by reference into, this transition report.
The current members of our Remuneration Committee are
Mr. Dhirendra Swarup (Chair) and Mr. Dilip Thakkar. The Remuneration Committee met five times during the year 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 erosstx.com. Information contained in our website is not a part of, and is not incorporated
by reference into, this transition report.
The current members of our Nomination Committee are
Nicholas Stone, Dhirendra Swarup, Dilip Thakkar and John Zhao (Chair). The Nomination Committee is an ad hoc committee and met
three times during the year 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 October 23, 2020, we had 502 employees, with
331 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 October 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 October 23, 2020 are based on an aggregate of 207,018,261 ordinary shares issued and outstanding
as at that date.
|
|
|
Number of A Ordinary Shares
Beneficially Owned
|
|
Number of B Ordinary Shares
Beneficially Owned
|
|
|
|
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'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 certain entities affiliated with Hony. Does 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 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)
|
Does 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 Settlement Date..
|
The Founders Group, including Kishore Lulla and his
direct descendants, by virtue of the B ordinary shares they own, have different voting rights 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 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.
The following table provides option details with respect
to the directors and officers as at October 23, 2020.
|
Name
|
|
Number of
‘A’ ordinary
Shares
Options
|
|
|
Date of
Grant
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Prem Parameswaran
|
|
300,000
|
|
|
Sep-15
|
|
|
$
|
18.30
|
|
|
Jun-21
|
|
Mark Carbeck
|
|
70,000
|
|
|
Feb-15
|
|
|
$
|
14.97
|
|
|
Mar-25
|
|
Ridhima Lulla
|
|
250,000
|
|
|
Sep-18
|
|
|
GBP
|
0.30
|
|
|
Mar-25
|
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 October 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 October 23, 2020.
The number of shares and percentage beneficial ownership
of ordinary shares below is based on 185,317,843 issued A ordinary shares and 21,700,418 issued B ordinary shares as of 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
|
|
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 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)
|
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 would 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)
|
Does 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 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..
|
|
(5)
|
Does not include 20,836,554 additional A ordinary shares estimated to be received by PCCW Media Limited 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..
|
The following summarizes the significant changes in
the percentage ownership held by our major shareholders during the past three years:
|
|
·
|
Kishore Lulla’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. Since July 30, 2019, Mr. Lulla’s aggregate ownership of
our A and B ordinary shares, through both direct and indirect ownership, has increased by 1,149,493 shares. The change in Mr. Lulla’s
ownership was driven by several 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.
|
|
|
·
|
In connection with the Merger, TPG Growth Oscars IV, L.P. acquired 7,965,334 of our A ordinary
shares.
|
|
|
·
|
In connection with the Merger, Marco Alliance Limited acquired 7,965,334 of our A ordinary shares.
|
|
|
·
|
In connection with the Merger, PCCW Media Limited acquired 2,705,207 of our A ordinary shares.
|
The Founders Group by virtue of the B ordinary shares
they own, have different voting rights 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 of association.
As of September 30, 2020, approximately 165,939,824
of our A ordinary shares, representing 89.5% of our outstanding A ordinary shares as of October 23, 2020, were held by a total
of 7 record holders with addresses in the U.S. The number of beneficial owners of our A ordinary shares in the U.S. is likely to
be much larger than the number of record holders of our A ordinary shares in the U.S. No B ordinary shares are held by individuals
with addresses in the U.S.
B. Related Party Transactions
Merger 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 the 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 17, 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 the STX Parties agreed to purchase newly issued A Ordinary Shares from Eros for an aggregate purchase price of
$75 million in a private 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 STX Party agreed not to, without our prior written consent, directly or indirectly transfer the A Ordinary
Shares issued to such STX Party in the PIPE 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 sales of the registered
A ordinary shares, subject to certain restrictions. In addition to the rights of the 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 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 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, was 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., he was the Honorary President of Eros
and a director of our subsidiary Eros Worldwide. Mrs. Manjula Lulla, the wife of Mr. Kishore Lulla, 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 Mr.
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, 2020, Eros India 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 for $4,000 per month. The lease was renewed on April 1, 2020 for a further period
of one year on the same terms.
Pursuant to a lease agreement that expires on September
30, 2021, Eros India leases property for use as executive accommodations, from Sunil Lulla for $4,000 per month.
Pursuant to a lease agreement that expired on January
4, 2020, Eros India leases offices for studio use at Supreme Chambers, 5th Floor, Andheri (W), Mumbai from Kishore and Sunil Lulla
for $82,000 per month.. The lease was renewed with effect from January 5, 2020 for a further period of five years on the same terms.
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. Ridhima Lulla and Mr. Swaneet
Singh.
The Group has engaged in transactions with NextGen
Films Private Limited, an entity owned by the husband of Puja Rajani, sister of Kishore Lulla and Sunil Lulla, and which ceased
to be a related party as of September 19, 2019. Each transaction involved the purchase and sale of film rights. In the period from
April 1, 2019 to September 19, 2019, NextGen Films Private Limited sold film rights of $393,000 to the Group. In the period from
April 1, 2019 to September 19, 2019 the Group advanced $2,113,000 to NextGen Films Private Limited for film co-production.
The Group also engaged in transactions with Everest
Entertainment 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 fiscal 2020, Everest Entertainment LLP sold film rights of $18,000 to the Group.
Mrs. Manjula Lulla, the wife of Kishore Lulla, is an
employee of Eros and is entitled to a salary of $147,000 per annum. Mrs. Krishika Lulla, the wife of Sunil Lulla, is an employee
of Eros India and is entitled to a salary of $121,000 per annum. Ms. Ridhima Lulla, the daughter of Kishore Lulla, is an employee
of Eros Digital FZ LLC and is entitled to a salary of $300,000 per annum, which is borne by Eros Worldwide LLC (“Eros Worldwide”).
All of the amounts outstanding are unsecured and will
be settled in cash.
The Group has engaged in transactions with Xfinite
Global Plc, a subsidiary of Eros Investment Limited on which it has significant influence. The Group has received $12,776 from
such transactions during fiscal 2020.
Relationship Agreement
We are party to the Relationship Agreement, which
was renewed in 2016. The Relationship Agreement, exclusively assigns to Eros Worldwide, certain intellectual property rights
and all distribution rights (including global digital distribution rights) for films (other than Tamil films), held by Eros India
or any of its subsidiary or the “Eros India” group, in all territories other than India, Nepal, and 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 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.
There have been no other related party transactions
since the beginning of our last full fiscal year that began on April 1, 2020 through the date of 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—Item 18. Financial
Statements” for a list of the financial statements filed as part of this Transition Report on Form 20-F.
ITEM 9. THE OFFER AND
LISTING
A. Offer and Listing Details
Our A ordinary shares have been trading on the
NYSE since November 13, 2013. Our A ordinary shares previously traded under the ticker “EROS.” On September 23, 2020,
we changed our ticker to “ESGC” in connection with the Merger and our subsequent corporate name change.
Our A ordinary shares previously traded on AIM,
a market operated by the London Stock Exchange plc, or AIM. We canceled the admission of our A ordinary shares to trading on AIM
on November 13, 2013, and our A ordinary shares are now traded exclusively on the NYSE.
B. Plan of Distribution
Not applicable.
C. Markets
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
We 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. Effective as of September 29, 2011, we 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 First Names
House, Victoria Road, Douglas, Isle of Man IM2 4DF, British Isles; our principal executive office in the U.S. is at 3900 West Alameda
Avenue, 32nd Floor, Burbank, California 91505.
At March 31, 2020, we had authorized share capital
of 180,100,915 A ordinary shares at a par value of GBP 0.30 per share, of which 127,116,702 was issued share capital, and authorized
share capital of 19,899,085 B ordinary shares at a par value of GBP 0.30 per share, of which 19,899,085 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 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, our registered office address and the name of our registered
agent, in 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—Item 19. Exhibits—Exhibit 1.1” and “Part
III—Item 19. 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. See “Part III — Item 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 is divided into three staggered classes
of directors of the same or nearly the same number. At each annual general meeting, a class of directors is 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 our powers
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 our 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 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. In certain circumstances, if checks, 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 the 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,
in 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 addition to any items 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 majority of our A Ordinary shares in 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;
|
|
|
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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;
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issue additional B Ordinary Shares (other than upon conversion of A Ordinary Shares) to any permitted
holder;
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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
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agree or otherwise commit (whether or not in writing) to take any of the foregoing actions.
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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
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 board of directors 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
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 articles 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. If the voting power of the B ordinary shares in issue is at any
time less than 2% of the voting power of all ordinary shares in issue, such B ordinary shares will, as soon as reasonably practicable,
be converted into an equivalent number of fully paid A ordinary shares.
Untraceable Shareholders
In 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 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 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.
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 Court 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
Merger 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
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.
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 Indenture and those made part of the 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 the terms of the Notes provided that they would not bear interest except upon the occurrence
of an event of default, in which 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 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 by 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 five-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 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 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 distributed in respect of ordinary shares will not be subject to any withholding or
deduction under the Indian income tax laws. As per the provisions of the Indian Income Tax Act, 1961, income arising directly or
indirectly through the transfer 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 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:
Dividend declared or distributed by an Indian company
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 taxes on such dividends. The withholding tax rate under local laws is
10% (excluding surcharge and 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 payment towards “specified
services” (in excess of INR 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 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 (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 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 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, it becomes tax resident in India, and consequently, its global income would be taxable in India (even if it is not earned
in India).
General Anti Avoidance Rules:
The General Anti Avoidance Rules (“GAAR”)
have come into effect from financial year 2017-18. The tax consequences of the GAAR provisions if 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.
Multilateral Instrument:
The Organization of Economic Co-operation and Development
(OECD) released the final package of all Action Plans of the 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. In order to implement the measures which entailed changes to bilateral tax treaties, Multi-lateral Instrument
(MLI) was introduced to modify the existing bilateral tax treaty network and ensure speed and consistency in implementation. MLI
inter-alia addresses following treaty related measures:
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Preventing the granting of treaty benefits in inappropriate circumstances;
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Preventing the artificial avoidance of Permanent Establishment status;
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Making dispute resolution mechanisms more effective.
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On June 07, 2017, India 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 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:
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Transactions in respect of any goods, services or property are carried out by a non-resident in India (including downloading of data or software);
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Non-residents engage in systematic and continuous soliciting of business activities or engaging with users in India, through digital means;
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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 Finance 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:
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advertisement which targets a customer who resides in India or a customer who accesses the advertisement
through internet protocol address located in India;
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(b)
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sale of data collected from a person who resides in India or from a person who uses internet protocol
address located in India; and
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(c)
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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
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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 be able to gauge 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 treaty scenario.
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 the 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 levy
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 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 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 Court. Currently the maximum fee, where the value of an estate exceeds £1,000,000 (US $1,300,000),
is £8,323.50 (US $10,800).
Summary of Material U.S. Federal Income Tax Considerations
The following summary describes the material U.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 U.S. federal income tax purposes. As used herein, the term “U.S.
Holder” means a beneficial owner of a share that is for U.S. federal income tax purposes:
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an individual citizen or resident of the U.S.;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created
or organized in or under the laws of the U.S., any state thereof or the District of Columbia;
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an estate the income of which is subject to U.S. federal income taxation regardless of its source;
or
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a trust if it (1) is subject to the primary supervision of a court within the U.S. and one or more
U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
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This summary does not describe all of the U.S. federal
income tax consequences applicable to you if you are subject to special treatment under the U.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 constructively, 5% or more, by voting power or value,
of our stock, a person holding our A ordinary shares in connection with a trade or business conducted outside of the U.S., a partnership
or other pass-through entity for U.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 U.S. federal income tax purposes is not the
U.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 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 U.S. federal income tax consequences different from those discussed below.
If a partnership (or other entity or arrangement treated
as a partnership for U.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 U.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 U.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-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 U.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 U.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 U.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 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 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 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 U.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 U.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 U.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:
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have held A ordinary shares for less than a specified minimum period during which you are not protected from risk of loss, or
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•
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are obligated to make certain payments related to the dividends.
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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 U.S. federal income tax purposes for the 2020 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-U.S. corporation will be treated
as a PFIC for U.S. federal income tax purposes for any taxable year in which:
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at least 75% of its gross income is passive income, or
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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.
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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:
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the excess distribution or gain will be allocated ratably over your holding period for your A ordinary shares,
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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
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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.
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The tax liability for amounts allocated to years prior
to the year of an “excess 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-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 U.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,
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 U.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 U.S. federal income tax purposes, you will recognize
taxable gain or loss on any sale or exchange or other taxable disposition of an 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 U.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 U.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 U.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 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 the 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 U.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 U.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 transition report may be inspected and copied at the public reference facilities maintained by the SEC
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 SEC’s principal office, 100 F Street, N.E., Washington D.C. 20549, after payment of fees at prescribed rates
The SEC 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 SEC using the EDGAR
system.
I. Subsidiary Information
For more information on our subsidiaries, please see
“Part I—Item 4. Information on the 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 market risks (such as interest rate risk and foreign currency risk), credit risk and 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.
Our policy is to manage our interest cost using
a mix of fixed and variable rate debts by analyzing our interest rate exposure 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 mix of fixed and variable 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 table also presents the cash flows of the principal amounts of
the financial instruments with the current year weighted average interest rates and the fair value of the instruments as of March 31, 2020:
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2020
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2021
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2022
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2023
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Total
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Fair Value
March 31,
2020
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(in thousands of dollars)
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Variable Rates
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Senior Credit Facility(1)
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$
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—
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$
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—
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$
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230,369
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$
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—
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$
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230,369
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$
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230,369
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Average Interest Rate
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5.53%
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Fixed Rates
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Mezzanine Facility(2)
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$
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—
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$
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—
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$
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—
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$
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42,640
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$
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42,640
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$
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44,817
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Average Interest Rate
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12.50%
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Total
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$
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—
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$
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—
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$
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230,369
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$
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42,640
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$
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273,009
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$
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275,186
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_______________
(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. We 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 cash and 2.0% in kind).
Assuming the Senior Credit Facility outstanding balance
and the applicable LIBOR in effect as of September 30, 2019, a quarter point change in interest rates would result in a $0.6 million
change in annual interest expense.
Foreign Currency Risk
We have transactional currency exposures.
Such exposures arise from sales or purchases by operating units in currencies other than the units’ functional currencies.
We began foreign operations in 2016.
Our foreign operations did not have sales until the fourth quarter of 2017. An immaterial amount of our sales were denominated
in currencies other than the functional currencies of the operating units making the sales during the year ended September 30,
2017. In the fiscal years ended September 30, 2017, 2018 and 2019, we recognized foreign currency translation loss of $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):
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Foreign Currency
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Foreign
Currency Amount
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US Dollar Amount
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Weighted Average
Exchange Rate Per $1 USD
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Canadian
Dollar
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C$9,376
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in
exchange for
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$7,018
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$1.33
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The loss capitalized to productions and loss recognized
in the consolidated statement of operations for the fiscal year ended September 30, 2019 related to foreign currency derivatives
was immaterial.
Liquidity Risk
We monitor our risk to a 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 maintain a balance between continuity of funding
and flexibility through the use of bank loans, and other 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.
1. Description
of Business, Basis of Presentation and Significant Accounting Policies
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 consolidated 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. As such, the accompanying consolidated financial 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.
The preparation of financial statements in conformity
with GAAP requires management 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 made by management in the preparation of the 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.
Amounts included in the consolidated financial
statements and accompanying footnotes as of March 31, 2019 and for the six-months then ended are unaudited.
Revenues 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.
Film costs represent the costs of films produced by
the Company, or for which the Company has acquired 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 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. During the years ended September 30, 2017, 2018 and 2019, interest of $860, $4,033
and $2,573, respectively, was capitalized to films 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.
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 books or original screenplays and costs to adapt such projects, as well
as the 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 earlier of the date 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 inventory cost associated with projects that have been selected 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 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
is recorded for the amount by which the unamortized capitalized costs exceeds the production’s fair value. The Company recorded
film impairments of $3,596 for the year 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 of its films, the Company
employs a discounted cash flows ("DCF") methodology that includes cash flow 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 the 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 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 management’s 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
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 initial release of the film.
Television costs primarily represent the costs the
Company has incurred to produce scripted and unscripted television programs for third parties. The capitalized costs will be expensed
to the statement 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:
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 next
12 months and 3 years, respectively.
The Company enters into agreements with third parties
to co-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 the 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, therefore, 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 or from the investors to Direct operating expense using
the individual film forecast method.
The Company has access to 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.
Cash and cash equivalents include cash held on deposit
and amounts invested in money market funds. Restricted cash represented collateral for letters of credit pursuant to the Company’s
Burbank office lease.
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 September 30, 2018 and 2019 and March 31, 2020 respectively, the allowance for doubtful
accounts was immaterial.
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 cash equivalents,
accounts receivable, prepaid expenses, and accounts payable and accrued expenses approximate fair value due to their short-term
maturities.
Other current assets on the consolidated balance sheets
includes amounts receivable from co-finance partners, tax credits or incentives from local government jurisdictions, physical inventory,
right of 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 are carried at cost less accumulated depreciation.
Depreciation is provided for on a straight-line basis over the following useful lives:
The Company periodically reviews and evaluates the recoverability of property
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 the carrying amount
is recorded.
The Company’s unamortized debt issuance costs
at September 30, 2018 and 2019 and March 31, 2020 were $9,095, $6,290 and $4,580 respectively. Unamortized debt issuance
costs are reflected in Revolving Credit Facilities and Term Loan Due to Related Party in the accompanying consolidated balance
sheets. Debt issuance costs are amortized using the straight-line method, which approximates the effective interest method, over
the related term of the Company’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 years ended September 30,
2017, 2018 and 2019 was $2,949, $3,005 and $3,178 respectively. Amortization of debt issuance costs for the six months ended March
31, 2019 and 2020 was $1,566 and $1,710, respectively. Amortization of debt discount costs for the years ended September 30, 2017,
2018 and 2019 was $155 for all three fiscal years. Amortization of the debt discount costs for the six months ended March 31,
2019 and 2020 was $78 for both periods. The amortization of the debt issuance and discount was reflected as interest expense in
the consolidated statements of operations. Any amounts that were paid to the debt issuer were treated as a reduction in the proceeds
received by the issuer and are considered a discount on the issuance and not an issuance cost. As of September 30, 2018 and
2019 and March 31, 2020, the total debt was reduced by $582, $427 and 349, respectively. The discount is being amortized
using the straight-line method, which approximates the effective interest method, over the term of the related debt.
In calculating the right-of-use asset and lease 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 instead recognizes rent expense on a straight-line
basis over the lease term.
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 operations.The 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).
Distribution and marketing expenses are expensed as
incurred. Distribution and marketing expenses for the years ended September 30, 2017, 2018 and 2019 were $72,554, $230,336
and $200,900. Distribution and marketing expenses for the six months ended March 31, 2019 and 2020 was $87,865 and $95,047.
The Company is treated as a corporation for income
tax purposes. The Company records 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 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. 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 tax 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 periods presented.
The functional currency of foreign subsidiaries is
the local currency. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rate
in effect at the balance sheet dates. Foreign revenues and expense items 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 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 inception of the contract.
The fair value of the forward exchange contracts are recorded on the consolidated balance sheets. Changes in the fair value 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.
In the ordinary course of business, the Company is subject to various routine
litigation matters. The Company establishes loss provisions for claims when the loss is both probable and can be reasonably estimated. If
either or both of the criteria are not 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.
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.
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 the new revenue framework is that
an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the
consideration the entity expects to receive for those goods or services. The Company determines revenue recognition through
the following five step model:
The adoption of the new accounting guidance did not
result in significant changes to the Company'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:
The impact on the Statement of Operations for fiscal
year 2019 due to the adoption of the new revenue guidance is as follows:
On 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 undrawn amounts. The effective interest rate is 5.56% as of September 30, 2019 and 5.03% as of March 31, 2020.
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”). The 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 P&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:
On March 3, 2014, the Company entered into a six-year
term loan agreement, as 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 total debt and the fair value of the 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 loan, net of debt issuance costs. Repayment of the principal,
and interest on the loan was made on May 10, 2019.
The following tables sets forth future annual contractual
principal payment commitments of debt as of March 31, 2020.
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:
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:
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 September 30, 2019 the restricted cash was converted to a security deposit with the lessor.
Right-of-use assets are recorded in non-current Other
assets in the accompanying consolidated balance sheet as of March 31, 2020. Lease liabilities are recorded in Accounts payable
and accrued expenses, and Other liabilities in the accompanying consolidated balance sheet as of March 31, 2020.
Dividend 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 sum of the Class liquidation
value thereof from and including the date of issuance to and 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 for distribution to its stockholders, before any payment
shall be made to the holders of common 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 paid 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 accompanying consolidated balance sheets.
The fair value of the 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 conversion 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 holder, at any time and from 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 determined 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.
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 initial 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 be 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 Company reclassified $15,372 from Class C convertible preferred stock to Accounts payable and accrued expenses
to reflect this obligation.
6. Stock Based
Compensation
In prior years, stock options were granted under the
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.
The following table summarizes stock option activity for the years ended
September 30, 2017, 2018 and 2019 and for the six months ended March 31, 2019 and 2020:
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 weighted-average remaining contractual term and the aggregate fair value of outstanding options
as of September 30, 2019 was 5.1 years and $114,926.
The weighted-average remaining contractual term and
the 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 granted 357,986, 801,690 and nil restricted
stock units during the years ended September 30, 2017, 2018 and 2019 respectively. The Company did not grant restricted stock awards
for the six months ended March 31, 2019 and 2020. The awards contain service-based and performance-based conditions to vest in
the underlying common stock. Most restricted stock units contain performance conditions that are satisfied only on consummation
of an initial public offering.
The performance measures are not considered probable
at September 30, 2017, 2018 or 2019 and March 31, 2019 and 2020. Accordingly, no compensation expense has been recorded for such
awards for the years ended September 30, 2017, 2018 and 2019 and for the six months ended March 31, 2019 and 2020.
The following table summarizes restricted stock unit activity for the years
ended September 30, 2017, 2018 and 2019 and for the six months ended March 31, 2019 and 2020:
The fair values of restricted stock units are determined
based on the market value of the shares on the date of grant.
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 Company recognized noncash stock-based compensation
expense of $536, $447 and $195 during the 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.
The Company issued 100,000 fully vested common shares
during the year ended September 30, 2018 and recorded stock compensation expense of $4,166.
7. Warrants
In connection with theatrical exhibition agreements
entered into in July 2013, the Company issued warrants exercisable for 1,342,298 common shares on March 3, 2014, at an
exercise price of $7.29 per share. To prevent dilution, the exercise price and number of common shares issuable are subject to
adjustment. The warrants have an exercise life of ten years. No warrants were exercised as of March 31, 2020. 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 value was capitalized in other assets and was being amortized
to film operating expenses over the five-year term of the 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 of 0.5%, and no dividend yield as the assumptions.
In connection with the issuance of Class 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 of 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.
The table below presents revenues by market and 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.
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.
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 foreign 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 Company’s current and deferred income tax
provision (benefit) consists of the following:
The income tax provision differs from the amount computed
by applying the statutory federal income tax rate to pretax loss as a result of the following differences:
The income tax effects of temporary differences between
the book value and tax basis of assets and liabilities are as follows:
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 deferred tax assets totalling $116.6 and $146.4, respectively. As of September
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 tax 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 future.
Utilization of the NOL carryforwards may be
subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in
the future, 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 tax, 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 more than
50 percentage points of the outstanding stock of a company by certain stockholders.
The Company has completed a study through December
31, 2019 and has determined an ownership change did not occur. Should the Company experience future ownership changes, utilization
of the net operating loss carryforwards may be subject to an 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 will expire
prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of
the valuation allowance.
As of September 30, 2019, 2018 and 2017 and March
31, 2020 and 2019, the Company had no unrecognized tax benefits and does not anticipate this position to change within the
next twelve months. The Company will recognize any interest and penalties associated with uncertain tax positions within the
income tax provision.
The Company files income tax returns in the 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.
Concentration of credit risk with the Company’s customer is limited
due to the Company’s customer base and the diversity of its 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.
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, the financial institutions that are party to its financial transactions.
As of September 30, 2018 and 2019 and March 31, 2020, the Company had the
following outstanding forward foreign exchange contracts (all outstanding contracts have maturities of less than four months from
March 31, 2020):
The loss capitalized to productions and loss/gain recognized in the accompanying
consolidated statements of operations for the years ended September 30, 2018 and 2019 and six months ended March 31, 2020 related
to foreign currency derivatives was immaterial.
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 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 fair value measurement. The accounting
guidance and standards establish three levels of inputs that may be used to measure fair value:
The Company has assessed that the fair values of trade receivables, financial
assets included in prepaid and other assets, restricted cash and cash and cash equivalents, trade payables, and financial liabilities
included in other payables and accruals approximate to their carrying amounts largely due to the short-term maturities of these
instruments.
The following 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.
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:
13. Valuation
and Qualifying Accounts
14. Subsequent
Events
The Company evaluated subsequent events through October
30, 2020, which is the date these consolidated financial statements were issued.
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 affected 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 length of time that such disruptions continue, which will, in turn, depend on the currently unknowable
duration of COVID-19 and among other things, the impact of governmental actions imposed in response to the 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.
We are monitoring the rapidly evolving situation and its potential impacts
on our financial position, results of operations, liquidity, and cash flows.
On July 30, 2020, the Company merged with Eros International Plc. (“Eros”),
a public company based in Mumbai, India, in accordance with the terms of an Agreement and Plan 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
accounted for as a reverse acquisition, whereby the Company will be deemed the accounting acquiror and the assets and liabilities
of Eros will be recorded at their fair values on the date of acquisition. In connection with the merger, all outstanding stock
options and restricted share units of the Company were canceled.
On April 4, 2020, The Company was granted a loan from JPMorgan Chase Bank,
N.A. in the aggregate 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 the PPP.
The Corporate Credit Facility was amended on April 17, 2020, which resulted
in the decrease of the facility from $400 million to $350 million and an increase from $200 million to $250 million the Company’s
ability to increase the borrowings, subject to certain conditions, as set forth in the credit agreement. The incremental amounts
will be issued on the same terms as the existing Corporate Credit Facility.