EX-99 2 ex99-1.htm

Exhibit 99.1

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Introduction

 

Eros International Plc (“Eros”) and STX Filmworks, Inc., (“STX”) entered into an Agreement and Plan of Merger, dated April 17, 2020 (the “Merger Agreement”) following a period of negotiations that commenced in July of 2019. The Merger Agreement was in part based upon a preliminary, non-binding term sheet signed by Eros and STX on November 11, 2019 (the “Non-Binding Term Sheet”) in respect of a potential “merger of equals” transaction. As of July 30, 2020, pursuant to the Merger Agreement, Merger Sub, a subsidiary of Eros, merged with and into STX (the “Merger” or “Transaction”), with STX surviving as an indirect and wholly owned subsidiary of Eros. Following the Merger, Eros changed its corporate name to Eros STX Global Corporation (“Eros STX”). Eros STX, as the combined company following the Merger, is referred to herein as the “combined company” or the “Company.”

 

The following Unaudited Pro forma Condensed Combined Financial Statements of STX present the combination of the financial information of STX and Eros, adjusted to give effect to the Merger. The following Unaudited Pro forma Condensed Combined Financial Information has been prepared in accordance with Article 11 of Regulation S-X. The Merger is being accounted for as a reverse merger using the acquisition method with STX as the accounting acquirer in accordance with ASC 805, Business Combinations. Under this method of accounting the purchase price will be allocated to Eros’ assets acquired and liabilities assumed based upon their estimated fair values at the date of consummation of the Merger.

 

The total consideration for the acquisition of Eros is approximately $676.5 million, which represents the fair value of shares issued to Eros holders of approximately $521.2 million (calculated by multiplying $2.94, the average closing price of Class A shares on the NYSE from July 30, 2020 to August 3, 2020, by 177,277,956 Class A and Class B shares issued to Eros holders) and assumed short term and long-term borrowings of approximately $155.3 million. For the purposes of this Unaudited Pro Forma Condensed Combined Financial Statements, we assumed that the fair value of Class B shares approximates the fair value of Class A shares, the carrying amount of short-term borrowings approximate their estimated fair value due to the short-term maturity and long-term borrowings subject to variable rate approximate their fair value.

 

The Unaudited Pro forma Condensed Combined balance sheet as of June 30, 2020 combines the historical balance sheet of STX and the March 31, 2020 historical balance sheet of Eros, on a pro forma basis as if the Merger and related transactions, summarized below, had been consummated on June 30, 2020. The Unaudited Pro forma Condensed Combined statement of operations for the twelve-month period ended June 30, 2020, combines the historical statement of operations of STX for the twelve months ended June 30, 2020 and the historical statement of operations of Eros for the twelve-month period ended March 31, 2020 on a pro forma basis as if the Merger and related transactions, summarized below, had been consummated on July 1, 2019.

 

The historical condensed combined financial statements are presented in U.S. dollars and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The historical consolidated financial statements of Eros are presented in U.S. Dollars and have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

 

As described in the accompanying notes, the Unaudited Condensed Combined Pro Forma Financial Statements have been prepared using the acquisition method of accounting and the regulations of the Securities and Exchange Commission (the “SEC”). The historical financial statements have been adjusted in the Unaudited Condensed Combined Pro Forma Financial Statements to give effect to pro forma events that are (i) directly attributable to the Merger; (ii) factually supportable; and (iii) with respect to the Unaudited Pro Forma Condensed Combined Statement of Operations, expected to have a continuing impact on the combined company’s results.

 

The Unaudited Pro Forma Condensed Combined Financial Statements have been developed from and should be read in conjunction with:

 

  • the accompanying notes to the Unaudited Condensed Combined Pro Forma Financial Statements;

 

 

 

 

  • the historical unaudited financial statements of STX as of and for the three months ended June 30, 2020 and the related notes, attached as Exhibit 99.2 to the Company’s Report of Foreign Private Issuer on Form 6-K, submitted to the United States Securities and Exchange Commission (the “SEC”) on December 16, 2020;

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  • the historical audited financial statements of STX as of and for the year ended September 30, 2019 and the related notes, included in the Company’s Transition Report on Form 20-F, submitted to the SEC on October 30, 2020;

 

  • STX’s audited balance sheet as of March 31, 2020 and the audited consolidated statement of operations for the six months ended March 31, 2020 and the related notes, included in the Company’s Transition Report on Form 20-F, submitted to the SEC on October 30, 2020;

 

  • the historical audited financial statements of Eros as of and for the year ended March 31, 2020 and the related notes, included in Eros’ Annual Report on Form 20-F, submitted to the SEC on July 30, 2020;

 

  • other information relating to the Merger, STX and Eros contained in (i) Eros’ Annual Report on Form 20-F, submitted to the SEC on July 30, 2020, including the Merger Agreement and the description of certain terms thereof set forth in the section entitled “Item 2—Additional Information—Material contracts” and (ii) the Company’s Report of Foreign Private Issuer on Form 6-K, submitted to the SEC on August 4, 2020.

 

The Unaudited Pro forma Condensed Combined Statement of Operations exclude non-recurring items, which are directly related to the Merger. Additionally, certain pro forma adjustments have been made to the historical consolidated Eros financial statements in order to (i) convert them from IFRS to U.S. GAAP; and (ii) conform their accounting and presentation policies to those applied by STX.

 

Under the acquisition method of accounting, the total acquisition consideration, calculated as described in Note 3 to the Unaudited Pro Forma Condensed Combined Financial Statements, has been preliminarily allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values with the excess allocated to goodwill. Since the Unaudited Condensed Combined Pro Forma Financial Statements have been prepared based on preliminary acquisition consideration and fair values attributable to the Merger, the actual amounts recorded for the Merger will likely differ from the information presented, and any differences may be material. The estimation and allocation of acquisition consideration is subject to change pending further review of the fair value of the assets acquired and liabilities assumed. A final determination of fair values will be based on the actual net tangible and intangible assets and liabilities of Eros once the final valuation is completed.

 

The Unaudited Condensed Combined Pro Forma Financial Statements do not reflect the realization of any expected cost savings or other synergies from the Merger, including cost savings initiatives planned subsequent to the completion of the Merger. Although management believes such cost savings and other synergies will be realized following the Merger, there can be no assurance that these cost savings or any synergies will be achieved in full or at all.

 

The Unaudited Condensed Combined Pro Forma Financial Statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been had the Merger occurred on the dates assumed, nor do they purport to be indicative of future consolidated results of operations or consolidated financial position.

 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JUNE 30, 2020

(in thousands)

 

   STX Filmworks
 (Note 1)		   EROS
(Note 1)		   EROS Pro Forma
GAAP and
Reclassification Policy
Adjustments
(Note 2)		   Note 5  Pro Forma EROS   Pro Forma Adjustments   Note 6  Pro Forma Combined 
                               
ASSETS                                    
Cash and cash equivalents  $55,756   $2,563    —       2,563   $99,402    A1  $157,721 
Accounts receivable, net   108,480    118,014    —       118,014    (30,000)   A2   196,494 
Investments   —    3,942    —       3,942    —       3,942 
Restricted deposits   —    4,850    —       4,850    —       4,850 
Other current assets   16,309         —       —    —       16,309 
Total current assets   180,545    129,369    —       129,369    69,402       379,316 
                                     
Film and television costs, net   72,194    —    464,824    P1   464,824    (333,824)   A3   203,194 
Property and equipment, net   2,973    9,234    (3,502)   P2   5,732    —       8,705 
Intangible assets   —    464,824    (464,824)   P3   —    149,400    A4   149,400 
Goodwill   —    —    —       —    469,481    A5   469,481 
Income tax receivable   —    1,975    (1,975)   P4   —    —       — 
Deferred income taxes   —    742    (742)   P5   —    —       — 
Right of use assets   —    1,512    (1,512)   P6   —    —       — 
Other assets   39,513    —    4,229    P7   4,229    —       43,742 
Total assets  $295,225   $607,656   $(3,502)     $604,154   $354,459      $1,253,838 
                                     
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                    
Accounts payable and accrued expenses  $86,424   $90,941   $—      $90,941   $—      $177,365 
Accrued participations and residuals   39,962    —    —       —    —       39,962 
Deferred revenue, current   24,547    —    —       —    —       24,547 
Shareholder liability   16,433    —    —       —    —       16,433 
Paycheck protection program loan   2,954     —    —       —    —       2,954 
Total current liabilities   170,320    90,941    —       90,941    —       261,261 
                                     
Revolving credit facilities, net   213,567    —    —       —    —       213,567 
Term loan due to related party   42,580    —    —       —    —       42,580 
Accrued participations and residuals   64,595    —    —       —    —       64,595 
Deferred revenue   15,955    —    —       —    —       15,955 
Shareholder liability   39,816    —    —      —   —      39,816 
Acceptances   —    1,858    —       1,858    —       1,858 
Short-term borrowings   —    116,858    —       116,858    (23,677)   A6   93,181 
Long-term borrowings   —    62,114    —       62,114    —       62,114 
Income taxes payable   —    14,900    —       14,900    —       14,900 
Deferred income taxes   —    2,688    —       2,688    38,844    A7   41,532 
Lease liabilities   —    1,553    —       1,553    —       1,553 
Long-term liabilities   10,648    8,258    —       8,258    —       18,906 
Total liabilities   557,481    299,170    —       299,170    15,167       871,818 
                                     
Commitments and contingencies                                    
                                     
Convertible redeemable preferred stock:                                    
Convertible preferred stock, Class A   20,666    —    —       —    (20,666)   A8   — 
Convertible preferred stock, Class B   174,466    —    —       —    (174,466)   A9   — 
Convertible preferred stock, Class C   224,760    —    —       —    (224,760)   A10   — 
Convertible preferred stock, Class D   116,782    —    —       —    (116,782)   A11   — 
                                     
Stockholders' equity (deficit):                                    
Common Stock, Class A, 30p par value   —    —    —       —    8,052    A12   8,052 
Common Stock, Class B, 30p par value   —    —    —       —    130,557    A13   130,557 
Common Stock par value   116    66,727    —       66,727    (66,843)   A14   — 
Additional paid-in capital   —    673,717    —       673,717    335,697    A15   1,009,414 
Reserves   —    (405,665)           (405,665)   405,665    A16   — 
Other components of equity   —    (85,660)   (2,776)   P8   (88,436)   88,436    A17   — 
Other comprehensive loss   (401)   —    —       —    —       (401)
Accumulated deficit   (798,645)   —    —       —    (25,598)   A18   (824,243)
Non-controlling interest   —    59,367    (726)   P9   58,641    —       58,641 
Total stockholders' equity (deficit)   (798,930)   308,486    (3,502)      304,984    875,966       382,020 
Total liabilities and stockholders' equity (deficit)  $295,225   $607,656   $(3,502)     $604,154   $354,459      $1,253,838 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED JUNE 30, 2020

(in thousands, except share and per share data)

 

   STX Filmworks
(Note 1)		   EROS
(Note 1)		   Pro Forma
Adjustments		   Note 6  Pro Forma
Combined		 
                    
Revenue  $385,198   $155,452    —      $540,650 
                        
Operating expenses                       
Direct operating   197,146    81,725    (54,451)   A21   224,420 
Impairment film cost   —    431,200    —       431,200 
Distribution and marketing   151,451    —    —       151,451 
General and administrative   52,692    143,425    (1,945)   A19   194,172 
Restructuring expense   4,973    —    —       4,973 
Depreciation and amortization   2,041    894    4,986    A20   7,921 
Total operating expenses   408,303    657,244    (51,410)      1,014,137 
                        
Loss from operations   (23,105)   (501,792)   51,410       (473,487)
                        
Other expense:                       
Interest expense, net of interest income   (20,737)   (8,779)   2,361    A22   (27,155)
Other gains (losses), net   (979)   (3,316)   —       (4,295)
Total other expense   (21,716)   (12,095)   2,361       (31,450)
                        
Loss before provision for income taxes   (44,821)   (513,887)   53,771       (504,937)
   Provision for income taxes   490    (22,183)   (177)   A23   (21,870)
Net loss   (45,311)   (491,704)   53,947       (483,068)
Net  loss attributable to non-controlling interest   —    (72,712)   —       (72,712)
Net loss attributable to equity holders of Company  $(45,311)  $(418,992)   53,947      $(410,356)
                        
Net loss per share attributable to equity holders of the Company:                       
   Basic and diluted                    $(1.10)
                        
Weighted average number of shares             373,540,888    A24   373,540,888 

 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

  1. Basis of Presentation

 

Description of Pro Forma Financial Statements: Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the Unaudited Pro forma Condensed Combined Financial Information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

 

The Unaudited Pro forma Condensed Combined Financial Information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination. The pro forma adjustments reflecting the consummation of the Business Combination are based on certain currently available information and certain assumptions and methodologies that management believes are reasonable under the circumstances. The Unaudited Condensed Pro Forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Management believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the Unaudited Pro forma Condensed Combined Financial Information.

 

The Unaudited Pro forma Condensed Combined Financial Information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the post-combination company. They should be read in conjunction with the historical financial statements and notes thereto of STX and Eros.

 

Accounting Policies and Reclassifications: As part of preparing these Unaudited Pro forma Condensed Combined Financial Statements, the Company conducted an initial review of the accounting policies of Eros to determine if differences in accounting policies require reclassification of results of operations or reclassification of assets or liabilities to conform to STX’s accounting policies and classifications, and such reclassifications identified are reflected in the Unaudited Pro forma Condensed Combined Financial Statements. Upon completion of the merger, STX will perform a detailed review of Eros’ accounting policies. As a result of that review, STX may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements of the combined company.

 

Purchase Accounting and Preliminary Valuation: Eros and STX have concluded that the Merger represents a reverse merger (“Business Combination”) pursuant to ASC 805, Business Combinations. STX has not yet completed a final valuation analysis of the fair market value of Eros’ assets to be acquired and liabilities to be assumed. Using the total consideration for the Merger, STX has estimated the allocations to such assets and liabilities. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the Unaudited Pro forma Condensed Combined balance sheet. The final purchase price allocation will be determined when STX has determined the final consideration and completed the detailed valuations and other studies and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used to prepare the pro forma adjustments. The final purchase price allocation may include (1) changes in allocations to intangible assets, deferred taxes and goodwill based on the results of certain valuations, jurisdictional analysis and other studies that have yet to be completed, other changes to assets and liabilities and (2) changes to the ultimate purchase price consideration, including the fair value of Class A and Class B shares and debt assumed. For the purposes of the Unaudited Pro forma Condensed Combined Financial Information, the accounting policies of Eros and STX are aligned giving effect to certain pro forma adjustments, if any.

 

Description of Balance Sheet: The Unaudited Pro forma Condensed Combined Balance Sheet as of June 30, 2020 combines the historical balance sheet of STX and the March 31, 2020 historical balance sheet of Eros, on a pro forma basis as if the Merger and related transactions had been consummated on June 30, 2020. The Unaudited Pro forma Condensed Combined Balance Sheet as of June 30, 2020 has been prepared using, and should be read in conjunction with, the following:

 

  • STX’s unaudited balance sheet as of June 30, 2020 and the related notes, which is included in the unaudited interim financial statements of STX for the three months ended June 30, 2020 attached as Exhibit 99.2 to this Report of Foreign Private Issuer on Form 6-K, submitted to the United States Securities and Exchange Commission (the “SEC”) on December 16, 2020; and

 

 

 
  • Eros’ audited balance sheet as of March 31, 2020 and the related notes, which is included in Eros’ Annual Report on Form 20-F submitted to the SEC on July 30, 2020.

 

Description of Statement of Operations: The Unaudited Pro forma Condensed Combined Statement of Operations for the twelve-month period ended June 30, 2020, combines the historical statement of operations of STX for the twelve months ended June 30, 2020 and the historical statement of operations of Eros for the twelve-month period ended March 31, 2020 on a pro forma basis as if the Merger and related transactions had been consummated on July 1, 2019.

 

The Unaudited Pro forma Condensed Combined Statement of Operations for the year ended June 30, 2020 has been prepared using, and should be read in conjunction with, the following:

 

  • STX’s unaudited statement of operations for the three months ended June 30, 2020 and the related notes, which is included in the unaudited interim financial statements of STX for the three months ended June 30, 2020 attached as Exhibit 99.2 to this Report of Foreign Private Issuer on Form 6-K, submitted to the United States Securities and Exchange Commission (the “SEC”) on December 16, 2020;

 

  • STX’s audited consolidated statement of operations for the six months ended March 31, 2020 and the related notes, included in the Company’s Transition Report on Form 20-F, submitted to the SEC on October 30, 2020;

 

  • STX’s audited statement of operations for the year ended September 30, 2019 and the related notes, which is included in STX’s Transition Report on Form 20-F submitted to the SEC on October 30, 2020; and

 

  • Eros’ audited statement of operations for the year ended March 31, 2020 and the related notes, which is included in Eros’ Annual Report on Form 20-F submitted to the SEC on July 30, 2020.

 

  2. IFRS TO GAAP and Conforming Reclassification Adjustments to Unaudited Pro Forma Condensed Financial Information

 

IFRS TO GAAP Adjustments

The adjustments to convert Eros’ balance sheet as of March 31, 2020 and its statement of operations for the year ended March 31, 2020 from IFRS to GAAP are as follows:

 

·Reclassification of Eros’ intangible assets and content library to Film and TV costs, net (see Note 5 tickmarks P1 and P3).

 

·Reversal of the revaluation of property, plant and equipment. Under IFRS, property, plant and equipment may be revalued to fair value if fair value can be measured reliably. All items in the same class are revalued at the same time and the revaluations are kept up to date. Unlike IFRS Standards, the revaluation of property, plant and equipment is not permitted under US GAAP (see Note 5 tickmarks P2, P8 and P9).

 

Conforming Reclassification Adjustment

The adjustment to conform accounting policies of Eros’ balance sheet as of March 31, 2020 and its statement of operations for the year ended March 31, 2020 to STX are as follows:

 

·Reclassification of Eros’ income tax receivable, deferred income taxes and right of use assets into other assets. (see Note 5 tickmarks P4, P5, P6 and P7).

 

 

 
  3. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2020

 

The Unaudited Pro forma Condensed Combined Balance Sheet as of June 30, 2020 gives effect to the Business Combination as if it was completed on June 30, 2020.

 

The adjustments included in the Unaudited Pro forma Condensed Combined Balance Sheet as of June 30, 2020 include the following:

 

   

The reclassification between common stock and additional paid in capital due to the reverse merger, the issuance of 24,350,641 Eros A Ordinary Shares in connection with certain equity financing arrangements contemplated in the Merger Agreement and 171,912,291 Eros A Ordinary Shares underlying contingent value rights (“CVR’s) awarded to certain STX stockholders pursuant to the Merger Agreement. Shortly after filing a registration statement on Form F-3, the Company will issue a total of 171,912,291 Eros A Ordinary Shares in connection with the settlement of such CVRs. Therefore, we have included 171,912,291 Eros A Ordinary Shares as issued and outstanding (see Note 6 tickmarks, A8, A9, A10, A11, A12, A13, A14, A15, A16 and A17).

Purchase Price Allocation and Merger Adjustments

Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the Unaudited Pro forma Condensed Combined Financial Information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

 

Purchase Price Allocation

 

(in thousands)

 

Cash and cash equivalents   $                   2,563   (x)
Accounts receivable   88,014   See tickmark A2
Investments   3,942   (x)
Restricted deposits   4,850   (x)
Film and television costs   131,000   See tickmark A3
Property and equipment   5,732   (x)
Intangible assets   149,400   See tickmark A4
Other assets   4,229   (x)
Accounts payable and accrued expenses   (90,941)   (x)
Acceptances   (1,858)   (x)
Short term borrowings   (23,677)   See tickmark A6
Income taxes payable   (14,900)   (x)
Deferred income taxes   (41,532)   See tickmark A7
Lease liabilities   (1,553)   (x)
Long-term liabilities   (8,258)   (x)
Fair value of net assets acquired   207,011    
Goodwill   469,481   See tickmark A5
Total estimated purchase consideration   $               676,492   (y)

 

(x) Fair value is assumed to equal Eros’ historical carrying value due to either the liquid nature or short-term duration of the asset or liability or based upon overall immateriality to the purchase price allocation.

 

(y) Total consideration of approximately $676.5 million represents the estimated fair value of Class A and Class B shares issued to Eros holders of approximately $521.2 million (we assumed that the fair value of Class B shares approximates the fair value of Class A shares) and assumed short term and long-term borrowings of approximately $155.3 million. The carrying amount of short-term borrowings approximate their estimated fair value due to their short-term maturity. Long-term borrowings subject to variable rate approximate their fair value.

 

Accounts Receivable. Accounts receivables consist primarily of receivables from theatrical exhibitors, home entertainment, television partners and international distributors. Eros trade receivables are primarily accounted for at book value which approximates fair value. The fair value of Eros’ accounts receivable was reduced from April 1, 2020 to July 30, 2020 due to more than insignificant credit deterioration (under U.S. GAAP) of Eros’ customers in the context of potential business disruptions caused by COVID-19 and its ability to collect accounts receivable balances within the initially estimated period considered for calculation of the fair values as of March 31, 2020 (see tickmark A2).

 

 

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”). The main objective of the update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by companies at each reporting date. For accounts receivable, net, STX will be required to use a new forward-looking “expected losses” model that generally will result in the recognition of allowances for losses earlier than under current accounting guidance. Eros had previously adopted the new credit loss standard. STX will adopt ASU 2016-13 on a modified retrospective basis during the first half of fiscal 2021. The implementation of CECL is not expected to have a material impact to the Company’s combined consolidated financial statements.

 

Film and Television Costs. Film and television costs includes film and content rights, content advances and film productions. Fair value of the film and television costs was based upon estimated future cash flows, considering assumptions related to revenue growth based on the number of customers/subscribers, number of films produced or acquired, and rates charged to customers. The earnings expected to be generated by the film and television costs were forecasted over the estimated duration of the film and television costs. The earnings were then adjusted by taxes and the required return for the use of the contributory assets and discounted to present value at a rate commensurate with the risk of the asset. The fair value of the film and television costs was also reduced from April 1, 2020 to July 30, 2020 due to the COVID - 19 pandemic. Stay-at-home orders and the closure of cinemas has resulted in delays for the release of Eros’ films and the halting of new production. Due to the COVID 19 uncertainty we have adjusted our future revenue projection and increased our discount rate to reflect the impact from the COVID-19 pandemic on the fair value of Eros’ film and television costs (see Note 6 tickmarks A3).

Identifiable intangible assets. Identifiable primarily include intangible assets include subscriber relationships and tradenames. The fair value of the identifiable intangible assets and their weighted-average useful lives are as follows (see Note 6 tickmark A4):

Subscriber Relationships. The fair value of subscriber relationships was preliminarily estimated based on the estimated future cash flows to be generated from the subscriber contracts considering assumptions related to contract renewal rates and revenue growth based on the number of subscribers and contract rates. The earnings expected to be generated by the subscriber relationships were forecasted over the estimated duration of the intangible asset. The earnings were then adjusted by taxes and the required return for the use of the contributory assets and discounted to present value at a rate commensurate with the risk of the asset.

The amortization period and related pro forma adjustment for the subscriber relationships asset is based on the expected net cash flows from the acquired Eros customers and a preliminary assumption of amortization on a straight-line basis over a 5-year period.

A 10% change in the valuation of subscriber relationships would cause a corresponding increase or decrease in the balance of goodwill of approximately $2.4 million and annual amortization expense and $0.5 million, assuming an overall weighted average useful life of 5 years.

Tradenames. Tradenames are primarily related to the Eros brand and name. The fair value of tradenames was preliminarily estimated based on the present value of the theoretical cost savings that could be realized by the owner of the tradenames because of not having to pay a stream of royalty payments to another party. These cost savings were calculated based on the hypothetical royalty payment that a licensee would be required to pay in exchange for use of the tradenames, reduced by the tax shield realized by the licensee on the royalty payments. The cost savings were discounted to present value at a rate commensurate with the risk of the asset.

Tradenames have an indefinite useful life and will not be amortized, but rather are assessed for impairment at least annually or more frequently whenever events or circumstances indicate that the rights might be impaired. Any change in the value of the tradenames is expected to be allocated to goodwill, which is another indefinite-lived asset that is also reviewed for impairment at least annually or more frequently whenever events or circumstances indicate that goodwill might be impaired.

Deferred income taxes. Deferred income taxes were adjusted to record the deferred tax impact of acquisition accounting adjustments primarily related to intangible assets. The incremental deferred tax liabilities were calculated based on the tax effect of the approximately $38.8 million step-up in book basis of the net assets of Eros, excluding the amount attributable to goodwill, using the estimated statutory tax rates (26%) (see Note 6 tickmark A7).

 

 

Goodwill. Goodwill represents the excess of the preliminary purchase price over the estimate of the fair value of the underlying tangible and intangible assets acquired and liabilities assumed. In accordance with ASC 805, goodwill will not be amortized but instead will be tested for impairment annually, or as required on a more frequent basis (see Note 6 tickmark A5).

 

The adjustments included in the Unaudited Pro forma Condensed Combined Balance Sheet as of June 30, 2020 include the following transaction adjustments:

 

  · The issuance of approximately 24.4 million Eros A Ordinary Shares on July 30, 2020 in an equity financing transaction in connection with the Merger, resulting in proceeds of approximately $75.0 million. Issuance costs were considered immaterial (see Note 6 tickmarks A1 and A15).

 

  · The issuance of 10.8 million Eros A Ordinary Shares in an equity facility transaction resulting in proceeds of $35.0 million. Issuance costs were considered immaterial (see Note 6 tickmarks A1 and A15).

 

  · The issuance of 4.2 million Eros A Ordinary Shares in a capital raise transaction resulting in proceeds of $15.0 million. Issuance costs were considered immaterial (see Note 6 tickmarks A1 and A15).

 

  · Transaction costs of approximately $12.8 million incurred, but not accrued as of June 30, 2020, in consummating the Business Combination. Includes legal, financial advisory and other professional fees related to the Business Combination. These costs are not included in the Unaudited Pro forma Condensed Combined Statement of Operations as they are deemed to not have a continuing impact on the results of the post-Business Combination company (see Note 6 tickmarks A1 and A18).

 

  · The payment of $12.8 million of STX Management bonuses that were payable on the consummation of the Merger (see Note 6 tickmarks A1 and A18).

 

  · The conversion of $23.7 million of short-term debt into Eros A Ordinary Shares prior to the Merger (see Note 6 tickmarks A6 and A15).

 

  4. Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations for the Twelve Months Ended June 30, 2020

 

The Unaudited Pro forma Condensed Combined Statement of Operations for the twelve months ended June 30, 2020 has been prepared as follows:

 

STX

STX’s unaudited statement of operations for the three months June 30, 2020, STX’s audited statement of operations for the six months ended March 31, 2020 and the last quarter of STX’s audited statement of operations for the year ended September 30, 2019.

 

EROS

Eros’ audited statement of operations for the year ended March 31, 2020.

 

The adjustments included in the Unaudited Pro forma Condensed Combined Statement of Operations for the twelve months ended June 30, 2020 include the following:

 

·The elimination of STX transaction costs that were expensed during the 12 months ended June 30, 2020 (see Note 6 tickmark A19).

 

·The removal of historical amortization of intangible assets and the amortization of the new intangible assets and film and television costs related to the transaction. The estimated useful lives were determined based on a review of the time-period over which economic benefit is estimated to be generated as well as additional factors. Factors considered include contractual life, the period over which a majority of cash flow is expected to be generated and/or management’s view based on historical experience with similar assets (see Note 6 tickmarks A20 and A21).

 

 
          Amortization 
          Expense 
       Remaining  Twelve Months 
       Useful Life  Ended 
   Total   (in Years)  June 30, 2020 
Film and Television Costs             
Film and television costs  $70,000   7  $10,000 
Intangible assets             
Subscriber relationships  $26,400   5  $5,280 
Trademarks / trade names   120,000   Indefinite   — 
Other   3,000   5   600 
   $149,400      $5,880 
 Grand total   $219,400      $15,880 

 

·The reversal of interest expense related to Eros’ New Notes that were fully converted as of July 30, 2020 in connection with the Merger (see Note 6 tickmark A22).

 

·Reflects the income tax effect of the pro forma adjustments. The income tax effect was determined utilizing the blended statutory income tax rate of 26%. The final determination of deductibility will be determined once the purchase accounting is finalized (see Note 6 tickmark A23).

 

·The net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since July 1, 2019. As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire period presented. Also, assumes that all common stock equivalents anti-dilutive (see Note 6 tickmark A24).

 

The pro forma basic and diluted net loss per share for the twelve months ended June 30, 2020 is computed as follows:

 

   Year ended 
   June 30, 2020 
   (All amounts in thousands of dollars, except per share amounts) 
   Basic and Diluted 
Pro Forma Net Loss Per Share:     
Numerator:     
Net loss attributable to equity holders of the combined company  $(410,356)
Denominator:     
Pro forma adjusted weighted average shares outstanding   373,540,888 
Pro forma net loss per common share  $(1.10)

 

   Class A   Class B   Total 
Eros Founder   3,946,203    19,899,085    23,845,288 
Eros Public   138,459,723         138,459,723 
    142,405,926    19,899,085    162,305,011 
EROS equity facility   8,983,360    1,801,333    10,784,693 
EROS raise   4,188,252         4,188,252 
EROS total   155,577,538    21,700,418    177,277,956 
STX total             196,262,932 
Combined total   155,577,538    21,700,418    373,540,888 

 

 

 
  5. Pro forma conforming IFRS to GAAP adjustments and reclassification adjustments to the Unaudited Pro Forma Condensed Combined Financial Statements, by line item:

 

P1  To reflect the reclassification of historical intangible assets  $464,824 
         
P2  To reflect the reversal of the revaluation of property, plant and equipment  $(3,502)
         
P3  To reflect the reclassification of historical intangible assets  $(464,824)
         
P4  To reflect reclassification of income tax receivable to other assets  $(1,975)
         
P5  To reflect reclassification of deferred income taxes to other assets  $(742)
         
P6  To reflect reclassification of right of use assets to other assets  $(1,512)
         
P7  To reflect reclassification of income tax receivable to other assets  $1,975 
   To reflect reclassification of deferred income taxes to other assets   742 
   To reflect reclassification of right of use assets to other assets   1,512 
      $4,229 
         
P8  To reflect the accumulated deficit impact from the reversal of the revaluation of property, plant and equipment  $(2,776)
         
P9  To reflect the non-controlling interest impact from the reversal of the revaluation of property, plant and equipment  $(726)

 

 

 
6. Pro forma adjustments to the Unaudited Pro forma Condensed Combined Financial Statements, by line item:

 

A1  To reflect the issuance of 24.4 million Eros A Ordinary Shares  $75,000 
   To reflect the issuance of 10.8 million Eros A Ordinary Shares   35,000 
   To reflect the issuance of 4.2 million Eros A Ordinary Shares   15,000 
   To reflect Merger costs   (12,798)
   To reflect the payment of $12.8 million of STX management bonuses payable upon the closing of the reverse merger   (12,800)
      $99,402 
         
A2  To reflect the fair value of accounts receivable  $(30,000)
         
A3  To reflect the fair value of film and television costs  $(333,824)
         
A4  Adjustments to intangible assets as a result of valuation     
   To reflect the fair value of subscriber relationships  $26,400 
   To reflect the fair value of trademarks / trade names   120,000 
   To reflect the fair value of other intangibles   3,000 
      $149,400 
         
A5  To reflect the fair value of goodwill resulting from reverse merger  $469,481 
         
A6  To reflect the conversion of short-term debt into Eros A Ordinary Shares  $23,677 
         
A7  To reflect the deferred income tax adjustment related to intangible assets  $38,844 
         
A8  To reflect the conversion of redeemable preferred stock, Class A  $(20,666)
         
A9  To reflect the conversion of redeemable preferred stock, Class B  $(174,466)
         
A10  To reflect the conversion of redeemable preferred stock, Class C  $(224,760)
         
A11  To reflect the conversion of redeemable preferred stock, Class D  $(116,782)
         
A12  To reflect the par value of common stock, Class A  $8,052 
         
A13  To reflect the par value of common stock, Class B  $130,557 
         
A14  To reflect the elimination of STX common stock account balance  $(116)
   To reflect the elimination of Eros common stock account balance   (66,727)
      $(66,843)

 

 

 
A15  Adjustments to additional paid in capital resulting from reverse merger     
   To reflect the elimination of Eros additional paid in capital  $(673,717)
   To reflect equity consideration   521,197 
   To reflect non-controlling interest   (58,641)
   To reflect the conversion of redeemable preferred stock, Class A   20,666 
   To reflect the conversion of redeemable preferred stock, Class B   174,466 
   To reflect the conversion of redeemable preferred stock, Class C   224,760 
   To reflect the conversion of redeemable preferred stock, Class D   116,782 
   To reflect the par value of common stock, Class A   (8,052)
   To reflect the par value of common stock, Class B   (130,557)
   To reflect the elimination of STX common stock account balance   116 
   To reflect the issuance of 24.4 million Eros A Ordinary Shares   75,000 
   To reflect the issuance of 10.8 million Eros A Ordinary Shares   35,000 
   To reflect the issuance of 4.2 million Eros A Ordinary Shares   15,000 
   To reflect the conversion of short-term debt into Eros A Ordinary Shares   23,677 
      $335,697 
         
A16  To reflect the elimination of Eros reserve account balance  $405,665 
         
A17  To reflect the elimination of Eros other components of equity balance  $88,436 
         
A18  To reflect Merger costs  $(12,798)
   To reflect the payment of $12.8 million of STX management bonuses payable upon the closing of the reverse merger   (12,800)
      $(25,598)
         
A19  To reflect the elimination of STX Merger costs that were expensed during     
   the 12 months ended June 30, 2020  $(1,945)
         
A20  To reflect the removal of the historical amortization of intangible assets  $(894)
   To reflect the amortization of the new intangible assets related to the Merger   5,880 
      $4,986 
         
A21  To reflect the removal of the historical amortization of film and television costs  $(64,451)
   To reflect the amortization of film and television costs related to the Merger   10,000 
      $(54,451)
         
A22  To reflect the reversal of interest expense related to Eros’ New Notes that     
   were fully converted as of July 30, 2020 in connection with the Merger  $2,361 
         
A23  To reflect the tax impact of the pro forma adjustments based upon a 26% effective tax rate  $(177)
         
A24  To reflect the historical weighted average shares outstanding and the issuance   373,540,888