20-F 1 eps7429.htm EROS INTERNATIONAL PLC 20-F; production by EPS (www.epubsinc.com)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2017

OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-32945

 

EROS INTERNATIONAL PLC
(Exact name of Registrant as specified in its charter)
 
Not Applicable
(Translation of Registrant’s name into English)
 
Isle of Man
(Jurisdiction of incorporation or organization)
 
550 County Avenue
Secaucus, New Jersey 07094
Tel: (201) 558 9001
(Address of principal executive offices)
 
Oliver Webster
Cains Fiduciaries Limited
First Names House
Victoria Road
Douglas, IM2 4DF
Isle of Man
Tel: (44) 1624 630 630
Email: fiduciaries@cains.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

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

 

Title of each class   Name of each exchange on which registered
A ordinary share, par value GBP 0.30 per share   The New York Stock Exchange

 

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

 

None
(Title of Class)

 

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

 

None
(Title of Class)

 

 

 

 

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 annual report.

 

At March 31, 2017, 41,312,202 ‘A’ ordinary shares and 19,379,382 ‘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

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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):

 

Large accelerated filer    Accelerated filer    Non-accelerated filer 
Emerging growth company ☑        

 

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

 

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

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP    International Financial Reporting Standards as issued
by the International Accounting Standards Board
  Other 

 

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

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐   No ☐

 

 

TABLE OF CONTENTS

 

EROS INTERNATIONAL PLC

 

      Page
PART I      
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   1
ITEM 3. KEY INFORMATION   1
ITEM 4. INFORMATION ON THE COMPANY   29
ITEM 4A. UNRESOLVED STAFF COMMENTS   64
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   64
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   82
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   95
ITEM 8. FINANCIAL INFORMATION   98
ITEM 9. THE OFFER AND LISTING   99
ITEM 10. ADDITIONAL INFORMATION   100
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   109
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   110
       
PART II      
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   111
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   111
ITEM 15. CONTROLS AND PROCEDURES   111
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT   112
ITEM 16B. CODE OF ETHICS   112
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES   112
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   112
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   113
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   113
ITEM 16G. CORPORATE GOVERNANCE   113
ITEM 16H. MINE SAFETY DISCLOSURE   113
       
PART III      
ITEM 17. FINANCIAL STATEMENTS   114
ITEM 18. FINANCIAL STATEMENTS   114
ITEM 19. EXHIBITS   115
       
SIGNATURES     117
     
INDEX TO EROS INTERNATIONAL’S CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

i 

 

CONVENTIONS USED IN THIS ANNUAL REPORT

 

Unless otherwise indicated or required by the context, as used in this annual report, the terms “Eros,” “we,” “us,”, “the Group”, “our” and the “Company” refer to Eros International Plc and all its subsidiaries that are consolidated under International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board (IASB) unless otherwise indicated, reference to GAAP. Our fiscal year ends on March 31 of each year. When we refer to a fiscal year, such as fiscal year 2017 or FY 2017, we are referring to the fiscal year ended on March 31 of that year. The “Founders Group” refers to Beech Investments Limited, Kishore Lulla and Vijay Ahuja. “$” and “dollar” refer to U.S. dollars.

 

“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 languages 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.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “project,” “seek,” “should” 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. We caution you that reliance on any forward-looking statement inherently involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be materially incorrect. These risks and uncertainties include but are not limited to:

·anonymous letters, to regulators or business associates or anonymous allegations on social media regarding our business practices, accounting practices and/or officers and directors;.
·our ability to successfully defend class action law suits we are party to in the U.S.;
·our ability to successfully and cost-effectively source film content;
·our ability to maintain or raise sufficient capital;
·delays, cost overruns, cancellation or abandonment of the completion or release of our films;
·our ability to predict the popularity of our films, or changing consumer tastes;
·our dependence on our relationships with theater operators and other industry participants to exploit our film content;
·our ability to maintain existing rights, and to acquire new rights, to film content;
·our dependence on the Indian box office success of our Hindi and high budget Tamil and Telugu films;
·our ability to achieve the desired growth rate of Eros Now, our digital OTT entertainment service;
·our ability to recoup the full amount of box office revenues to which we are entitled due to underreporting of box office receipts by theater operators;
·our ability to mitigate risks relating to distribution and collection in international markets;
·fluctuation in the value of the Indian Rupee against foreign currencies;
·our ability to compete in the Indian film industry;
·our ability to compete with other forms of entertainment;
·the impact of a new amendment to accounting standards for the recognition of revenue from contracts with customers;
·our ability to combat piracy and to protect our intellectual property;
·our ability to achieve or maintain an effective system of internal control over financial reporting;

ii 

 

 

·contingent liabilities that may materialize, including our exposure to liabilities on account of unfavorable judgments/decisions in relation to legal proceedings involving us or our subsidiaries and certain of our directors and officers;
·our ability to successfully respond to technological changes;
·regulatory changes in the Indian film industry and our ability to respond to them;
·our ability to satisfy debt obligations, fund working capital and pay dividends;
·the monetary and fiscal policies of India and other countries around the world, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices;
·our ability to address the risks associated with acquisition opportunities; and
·our ability to respond to the challenges relating to the international distribution of our films and related products.

 

These and other factors are more fully discussed in “Part I — Item 3. Key Information — D. Risk Factors,” “Part I — Item 5. Operating and Financial Review and Prospects” and elsewhere in this annual report. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans, objectives or projected financial results referred to in any of the forward-looking statements. Except as required by law, we do not undertake to release revisions of any of these forward-looking statements to reflect future events or circumstances.

 

iii 

 

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 table set forth below presents our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated statements of income data for each of the three years ended March 31, 2017, 2016, and 2015 and the selected statements of financial position data as of March 31, 2017, and 2016 have been derived from and should be read in conjunction with “Part I — Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements included elsewhere in this Annual Report on Form 20-F. The selected historical consolidated statements of income data for each of the two years ended March 31, 2014 and 2013 and the selected historical statements of financial position data as of March 31, 2015, 2014 and 2013 have been derived from audited consolidated financial statements not included in this Annual Report on Form 20-F.

 

   Year ended March 31, 
   2017   2016   2015   2014   2013 
   (in thousands, except earnings per share) 
Selected Statements of Income Data                         
Revenue  $252,994   $274,428   $284,175   $235,470   $215,346 
Cost of sales   (164,240)   (172,764)   (155,777)   (132,933)   (134,002)
Gross profit   88,754    101,664    128,398    102,537    81,344 
Administrative costs   (63,309)   (64,019)   (49,546)   (42,680)   (26,308)
Operating profit   25,445    37,645    78,852    59,857    55,036 
Net finance costs   (17,156)   (8,010)   (5,861)   (7,517)   (1,469)
Other gains/(losses)   14,205    (3,636)   (10,483)   (2,353)   (7,989)
Profit before tax   22,494    25,999    62,508    49,987    45,578 
Income tax expense   (11,039)   (12,711)   (13,178)   (12,843)   (11,913)
Net income (1)  $11,455   $13,288   $49,330   $37,144   $33,665 
                          
Earnings per share                         
Basic  $0.06   $0.07   $0.74   $0.66   $0.69 
Diluted  $0.05   $0.05   $0.72   $0.65   $0.69 
                          
Weighted average number of ordinary shares                         
Basic   59,410    57,732    54,278    45,590    39,439 
Diluted   60,943    59,036    54,969    45,607    39,456 
                          
Other non-GAAP measures                         
EBITDA (2)  $42,548   $36,294   $70,066   $58,871   $48,765 
Adjusted EBITDA (2)  $55,664   $70,852   $101,150   $80,284   $56,320 

 

 1

 

 

   Year ended March 31, 
   2017   2016
(Recasted)*
   2015   2014   2013 
   (in thousands) 
Selected Statement of Financial Position Data:                         
Cash and cash equivalents  $112,267   $182,774   $153,664   $145,449   $107,642 
Goodwill   4,992    5,097    1,878    1,878    1,878 
Total assets   1,343,365    1,247,878    1,149,533    906,011    798,657 
                          
Debt:                         
Current portion   180,029    210,587    96,397    92,879    79,902 
Long-term portion   89,841    92,630    218,273    165,254    165,898 
Total liabilities   459,817    438,784    393,478    327,970    312,481 
                          
Equity attributable to Eros International Plc   804,457    740,332    697,334    527,691    438,578 
Equity attributable to non-controlling interests   79,091    68,762    58,721    50,350    47,598 
Total equity  $883,548   $809,094   $756,055   $578,041   $486,176 

_______________

*On completion of purchase price allocation, the carrying amounts of intangible assets- others, related deferred tax liabilities and goodwill are recasted to reflect fair value adjustments relating to acquisition of a subsidiary. Refer Note 4 Acquisition.

 

(1) References to “net income” in this document correspond to “profit for the period” or “profit for the year” line items in our consolidated financial statement appearing elsewhere in this document.

 

(2) We use EBITDA and Adjusted EBITDA as supplemental financial measures. EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization (excluding amortization of capitalized film content and debt issuance costs). Adjusted EBITDA is defined as EBITDA adjusted for impairments of available-for-sale financial assets, profit/loss on held for trading liabilities (including profit/loss on derivatives), transactions costs relating to equity transactions, and share based payments. EBITDA, as used and defined by us, may not be comparable to similarly-titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures and working capital movement or tax position.

 

The following table sets forth the reconciliation of our net income to EBITDA and Adjusted EBITDA:

 

   Year ended March 31, 
   2017   2016   2015   2014   2013 
   (in thousands) 
Net income  $11,455   $13,288   $49,330   $37,144   $33,665 
Income tax expense   11,039    12,711    13,178    12,843    11,913 
Net finance costs   17,156    8,010    5,861    7,517    1,469 
Depreciation   1,082    1,154    1,089    789    1,003 
Amortization(a)   1,816    1,131    608    578    715 
EBITDA (Non-GAAP)   42,548    36,294    70,066    58,871    48,765 
(Gain)/Impairment of available-for-sale financial assets   (58)       1,307         
Transaction costs relating to equity transactions           61    8,169     
Net (Gain)/Loss on held for trading derivative instruments   (10,297)   3,566    7,801    (5,177)   5,667 
Share based payments   23,471    30,992    21,915    18,421    1,888 
Adjusted EBITDA (Non-GAAP)(b)  $55,664   $70,852    101,150   $80,284   $56,320 

_______________
  (a) Includes only amortization of intangible assets other than intangible assets-content.

 

  (b) Consists of compensation costs, recognized with respect to all outstanding share based compensation plans and all other equity settled instruments.

 

Our management team believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our results of operations because these measures:

·are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
·help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and

 2

 

 

·are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.

 

However, there are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies.

 

Exchange Rate Information

 

Our reporting currency is the U.S. dollar. Transactions in foreign currencies are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rates at the date of the applicable statement of financial position. For the purposes of consolidation, all income and expenses are translated at the average rate of exchange during the period covered by the applicable statement of income and assets and liabilities are translated at the exchange rate prevailing on the date of the applicable statement of financial position. When the U.S. dollar strengthens against a foreign currency, the value of our sales and expenses in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales and expenses in that currency converted to U.S. dollars increases. Recently, there have been periods of higher volatility in the Indian Rupee and U.S. dollar exchange rate. This volatility is illustrated in the table below for the periods indicated:

 

    Period End   Average(1)   High   Low
Fiscal Year                
2011   44.54   45.46   47.49   43.90
2012   50.89   48.01   53.71   44.00
2013   54.52   54.36   57.13   50.64
2014   60.35   60.35   68.80   53.65
2015   62.58   61.15   63.70   58.46
2016   66.25   65.39   68.84   61.99
2017   64.85   67.01   68.86   64.85
                 
Months                
April 2016   66.39   66.42   66.70   66.05
May 2016   66.96   66.88   67.59   66.36
June 2016   67.51   67.27   67.92   66.51
July 2016   66.77   67.16   67.49   66.77
August 2016   66.94   66.90   67.18   66.63
September 2016   66.58   66.71   67.10   66.28
October 2016   66.72   66.74   66.94   66.49
November 2016   68.56   67.64   68.86   66.39
December 2016   67.92   67.81   68.29   67.38
January 2017   67.48   68.05   68.39   67.48
February 2017   66.67   66.97   67.40   66.67
March 2017   64.85   65.80   66.83   64.85
April 2017   64.27   64.54   65.10   64.08
May 2017   64.50   64.42   64.87   64.03
June 2017   64.62   64.45   64.66   64.23

 

(1) Represents the average of the U.S. dollar to Indian Rupee exchange rates on the last day of each month during the period for all fiscal years presented, and the average of the noon buying rate for all days during the period for all months presented.

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reason for the Offer and the Use of Proceeds

 

Not Applicable.

 

 3

 

D. Risk Factors

 

This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those described in the following risk factors and elsewhere in this annual report. If any of the following risks actually occur, our business, financial condition and results of operations could suffer and the trading price of our A ordinary shares could decline.

 

Risks Related to Our Business

 

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 Notes or A ordinary shares; we are party to class action lawsuits in the U.S. and an adverse ruling could have a material adverse effect on our business, financial condition and results of operations and could negatively impact the market price of our Notes or our A ordinary shares.

 

We have been, 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, business practices and officers and directors. Every time we have received such a letter we have undertaken what we believe to be a reasonably prudent review, such as extensive due diligence to investigate the allegations, and where necessary our board of directors has engaged third party professional firms to report to them directly and the Company’s Audit Committee cleared the matter from a corporate governance point of view. Having conducted these investigations, in each instance we found the allegations were without merit. However, the public dissemination of these allegations has, and in the future may, adversely affect our reputation, business and the market for our securities, including the Notes, and requires us to spend significant time and incur substantial costs to address them.

 

In October 2015, there were a series of anonymous allegations on social media targeted at the Company’s accounting practices and disclosures following which the market price for our A ordinary shares dropped materially with the lowest being $5.59 per share. The Company’s Audit Committee subsequently appointed Skadden Arps Slate Meagher & Flom LLP to assist them in conducting an independent internal review of the allegations. With the assistance of Skadden Arps Slate Meagher & Flom LLP, the Company’s Audit Committee conducted the internal review which commenced in November 2015 and completed in March 2016, which did not result in any recommendations for restatements to prior year financials.

 

Beginning on November 13, 2015, the Company was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company. The three actions in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United States District Court for the Southern District of New York where they were then consolidated with the other two actions on May 27, 2016. In general, the plaintiffs alleged that the Company, and in some cases also the Company’s management, violated federal securities laws by overstating the Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices.

 

On April 5, 2016, a lead plaintiff and lead counsel were appointed in the now consolidated New York action. A single consolidated complaint was filed on July 14, 2016 and amended on October 10, 2016. The plaintiffs have alleged that the Company and certain individual defendants — Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran — have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 or the Exchange Act. The amended consolidated complaint claims are primarily focused on whether the Company and individual defendants made material misrepresentations concerning the Company’s film library and materially misstated the usage and functionality of Eros Now, our digital OTT entertainment service.

 

The Company’s most recent motion to dismiss the amended consolidated complaint was filed on November 11, 2016 and its reply brief was filed on January 6, 2017. The motion to dismiss contends that the amended consolidated complaint fails to identify any actionable false statements or omissions, provides no evidence of scienter, and suffers from other legal shortcomings. The Company’s motion is fully briefed and awaiting argument which is expected to happen in the near future. Although the Company remains confident in the prospects of dismissal, there can be no assurances that we will not become subject to unfavorable interim or preliminary rulings that prolong the litigation process or that a favorable outcome will be obtained.

 

We are unable to predict how long such proceedings will continue, and anticipate that we will continue to incur significant costs in connection with these matters to the extent not covered by our insurance policy and that these proceedings, investigations and inquiries will result in a substantial distraction of management’s time, regardless of the outcome. To the extent that this or any future litigation to which we are a party results in an unfavorable judgment or if we decide to settle this or other lawsuits, we may be required to pay substantial monetary damages or fines, or make changes to our products or business practices.

 

 4

 

 

If anonymous letters are sent to regulators or business associates or anonymous allegations are posted on social media or we become subject to class action lawsuits or any other related lawsuits or investigations or proceedings by regulators in the future, it could result in a diversion of management resources, time and energy, significant costs, a material decline in the market price for our Notes or our A ordinary shares, increased share price volatility, an 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.

 

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 revenues by monetizing Indian film content that we primarily co-produce or acquire from third parties, and then distribute through various channels. We have also set up Trinity Pictures as a studio to develop and produce franchise films in-house and create our own intellectual property. 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 in India 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 our Trinity Pictures initiative fails or our access to quality Indian film content otherwise deteriorates, 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.

 

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.

 

 5

 

 

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 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. See “Business — Our Business Description — Our Film Library” for detail regarding our rights. 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.

 

Based on our agreements in effect as of March 31, 2017, if we do not otherwise extend or renew our existing rights, we anticipate the rights we currently license in Hindi and regional languages, will expire as summarized in the table below.

 

Term Expiration Dates  Hindi
Film Rights
   Regional
Film Rights(1)
 
   (approximate percentage
of films whose
licensed rights expire
in the period indicated)
 
Prior to December 31, 2020   28%    21% 
2021-2025   34%    17% 
2026-2030   6%    7% 
2031-2045   21%    0% 
Perpetual(2)   11%    55% 

 

(1) Excludes the Kannada digital rights library for which we have perpetual rights subject to applicable copyright law.
(2) Subject to limitations imposed by Indian copyright law, which restricts the term to 60 years from the beginning of the calendar year following the year in which the film is released.

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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. We may receive in the future claims of infringement or misappropriation of other parties’ proprietary rights. 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.

 

Our business involves risks of liability claims for media content.

 

As a producer and distributor of media content, we may face potential liability for:

 

defamation;

 

invasion of privacy;

 

negligence;

 

copyright or trademark infringement; and

 

other claims based on the nature and content of the materials distributed.

 

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.

 

We depend 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 United States. 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.

 

 7

 

 

There is uncertainty regarding the impact of currency demonetization in India on our business.

 

The Reserve Bank of India, or RBI, and the Ministry of Finance of the Government of India withdrew the legal tender status of 500 and 1,000 currency notes pursuant to the notification dated November 8, 2016. The short-term impact of this development has been, among other things, a decrease in liquidity of cash in India. There is uncertainty on the long-term impact of this action. The RBI has also established, and continues to refine, a process for holders of affected currency notes to tender such notes for equivalent value credited into the holders’ respective bank accounts.

 

The short and long term effects of demonetization on the Indian economy, India’s capital markets and our business are uncertain and we cannot accurately predict its effect on our business, results of operations, financial condition and prospects. . We believe that, after the announcement of demonetization, our short term theatrical revenues were negatively impacted and we released 13 films in the second half of fiscal year 2017 as compared to 27 films in the second half of fiscal year 2016.

 

We depend on our relationships with theater operators and other industry participants to monetize our film content. Any disputes with multiplex operators in India 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 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.

 

While Eros Now was soft launched in 2012 and as of March 31, 2017 we had over 60 million registered users. A Small Portion of the Eros Now user base are paid subscribers as we have only recently begun efforts towards monetization. As of March 2017, we had 2.1 million paying subscribers. We must continue to grow and retain subscribers in India (one of our key markets) where they are currently used to traditional 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 the quality of data connectivity (either Wi-Fi, broadband, 3G or 4G mobile data) in India.

 

To achieve and sustain 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:

 

our ability to maintain an adequate content offering;

 

our ability to maintain, upgrade and develop our service offering on an ongoing basis;

 

our ability to successfully distribute our service across multiple mobile, internet and cable platform worldwide;

 

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;

 

our ability to compete effectively against other Indian and foreign OTT services;

 

our ability to manage technical glitches or disruptions;

 

our ability to attract and retain our employees;

 

any changes in government regulations and policies; and

 

any changes in the general economic conditions specific to the internet and the movie industry.

 

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, but 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.

 

We rely on the proper and efficient functioning of our computer and database systems, and a large-scale malfunction could result in disruptions to our business.

 

Our ability to keep our business operating depends on the proper and efficient operation of our computer and database systems, which are hosted by third party providers. Computer and database systems are susceptible to malfunctions and interruptions (including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems), and we cannot guarantee that we will not experience such malfunctions or interruptions in the future. A significant or large-scale malfunction or interruption of one or more of our computer or database systems could adversely affect our ability to keep our operations running efficiently. Any malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

A downturn in the Indian and international 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. For example, the results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business, financial condition and results of operations. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last two years after the government of the United Kingdom formally initiates a withdrawal process. However, the referendum has created uncertainty about the future relationship between the United Kingdom and the European Union. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawing as well. These developments have had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets.

 

 9

 

 

According to the International Monetary Fund’s World Economic Outlook Database, published in April 2017, the GDP growth rate of India is projected to increase from 6.8% in 2016 to approximately 7.2% in 2017 and 7.7% in 2018. The Central Statistics Office has estimated that the growth rate in GDP for the year ended March 31, 2017 is 7.1%.

 

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 the 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 the 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 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 2.2 increase in value as compared to the U.S. dollar in the Fiscal Year 2017. In the Fiscal Year 2016 it dropped by 2.5%. Changes in the growth of the Indian economy and the continued volatility of the Indian Rupee, may adversely affect our business. As of March 31, 2017, Eros International Plc had debt of $62.67 million in relation to a £50 million retail bond offering in October 2014. There can be no assurance, however, that currency fluctuations will not lead to an increase in the amount of this debt.

 

Further, at the end of the Fiscal Year 2017 $112.7 million, or 41.5% of our debt, was denominated in U.S. dollars, and we may not generate sufficient revenue in U.S. dollars to service all of our U.S. dollar-denominated debt or the Notes. Consequently, we may be required to use revenues generated in Indian Rupees to service our U.S. dollar-denominated debt or the Notes. Any devaluation or depreciation in the value of the Indian Rupee, compared to the U.S. dollar, could adversely affect our ability to service our debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Exchange Rate” for further information.

 

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Exchange Rate” for further information.

 

 10

 

 

We face increasing 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 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 in the market as a whole 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.

 

Where we are unable to ensure a wide release for our films 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 increasing competition from other forms of entertainment, which could have a material adverse effect on our business.

 

We also compete with all other sources of entertainment and information delivery, including television, 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 occupancy rates at theaters or demand for our other distribution channels will not fall.

 

Competition within the Indian film industry is growing rapidly, and certain of our competitors are larger, have greater financial resources and are more diversified.

 

The Indian film industry’s rapid growth is changing the competitive landscape, increasing competition for content, talent and release dates. Growth in the Indian film industry has attracted foreign industry participants and competitors, such as Viacom, The Walt Disney Company, 21st Century Fox, Sony Pictures, Amazon, and Netflix, many of which are substantially larger and have greater financial resources, including competitors that own theaters and/or television networks. These larger competitors may have the ability to spend additional funds on production of new films, which may require us to increase our production budgets beyond what we originally anticipated in order to compete effectively. In addition, these competitors may use their financial resources to gain increased access to movie screens and enter into exclusive content arrangements with key talent in the Indian film industry. Unlike some of these major competitors that are part of larger diversified corporate groups, we derive substantially all of our revenue from our film entertainment business. If our films fail to perform to our expectations we are likely to face a greater adverse impact than would a more diversified competitor. In addition, other larger entertainment distribution companies may have larger budgets to monetize growing technological trends. If we are unable to compete with these companies effectively, our business prospects, results of operations and financial condition could suffer. With generally increasing budgets of Hindi, Tamil and Telugu films, we may not have the resources to distribute the same level of films as competitors with greater financial strength.

 

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.

 

 11

 

 

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 United States, 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, 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 our name and branded products. The success of our business, in part, depends on our continued ability to use this intellectual property in order to increase awareness of the Eros name. We attempt to protect these intellectual property rights through available copyright and trademark laws. 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 the Eros name and other Eros intellectual property. 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.

 

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, trademarks or our other efforts to protect relevant intellectual property prove to be inadequate, the value of the Eros name 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 registered several domain names for websites that we use in our business, such as erosplc.com, erosentertainment.com, erosnow.com and although our Indian subsidiaries currently own over 70 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 United States of America, India and elsewhere.

 

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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.

 

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 an inability to access such technology.

 

The Indian film entertainment industry continues 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 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. 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.

 

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Our accounting practices and management judgments may accentuate fluctuations in our annual and quarterly operating results and may not be comparable to other film entertainment companies.

 

For first release film content, we use a stepped method of amortization and a first 12 months amortization rate based on management’s judgment taking into account historic and expected performance, typically amortizing 50% of the capitalized cost for high budget films released during or after the fiscal year 2014, and 40% of the capitalized cost for all other films, in the first 12 months of their initial commercial monetization, and then the balance evenly over the lesser of the term of the rights held by us and nine years. Our management has determined to adjust the first-year amortization rate for high budget films because of the high contribution of theatrical revenue. Similar management judgment taking into account historic and expected performance is used to apply a stepped method of amortization on a quarterly basis within the first 12 months, within the overall parameters of the annual amortization.

 

Typically 25% of capitalized cost for high budget films released during or after the fiscal year 2014, and 20% of capitalized cost for all other films, is amortized in the initial quarter of their commercial monetization. In the fiscal year 2009 and the fiscal years prior to 2009, the balance of capitalized film content costs were amortized evenly over a maximum of four years rather than nine. Because management judgment is involved regarding amortization amounts, our amortization practices may not be comparable to other film entertainment companies. In the case of film content that we acquire after its initial monetization, commonly referred to as library, amortization is spread evenly over the lesser of ten years after our acquisition or our license period. At least annually, we review film and content rights for indications of impairment in accordance with International Accounting Standard 36: Impairment of Assets issued by IASB.

 

The amount of revenue which we report may be impacted by a new accounting standard dealing with revenue from customers.

 

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue.

 

IFRS 15 is effective for Fiscal Years beginning on or after January 1, 2018 wherein earlier adoption is permitted. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements. Because the amendment to IFRS 15 has not yet been implemented widely, we cannot yet predict how it will impact our revenues under the new standard. The amendment to IFRS 15 affects all IFRS reporting companies. When the amendment becomes effective, it may have an impact on our consolidated financial statements and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.

 

If we fail to achieve or maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected.

 

When we cease to qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we will become subject to additional requirements under the Sarbanes-Oxley Act or the SOX Act, including Section 404(b) of the SOX Act which will require our independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. However, because we qualify as an “emerging growth company” under the JOBS Act, these attestation requirements do not apply to us for up to five years after November 18, 2013, the date of our initial public offering in the United States, unless we cease to qualify as an “emerging growth company.” Our management may conclude in future years, that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree and may decline to attest to our management’s assessment or may issue an adverse opinion. If we identify control deficiencies as a result of the assessment process in the future, we may be unable to conclude that we have effective internal controls over financial reporting, which are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting and certify the same in a timely manner, could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our A ordinary shares.

 

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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 similar 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, Kishore Lulla and Vijay Ahuja 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 are controlling shareholders of, or 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 “Certain Relationships 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:

 

be unable or unwilling to fulfill their obligations, whether of a financial nature or otherwise;

 

have economic or business interests or goals that are inconsistent with ours;

 

take actions contrary to our instructions, policies or objectives;

 

take actions that are not acceptable to regulatory authorities;

 

have financial difficulties; or

 

have disputes with us.

 

Any of these actions could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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Eros India has entered into shareholder agreements with third party shareholders of two of its non-wholly-owned subsidiaries, Big Screen Entertainment Private Limited, and Ayngaran International Limited (“Ayngaran”), and have signed a term sheet with Colour Yellow Productions Private Limited. See “Business” for further information. These agreements 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 Ayngaran may not be aligned with our interests. As a result, although we own a majority of the ownership interest in each of Big Screen Entertainment Private Limited, Ayngaran 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.

 

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 recent years, 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 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 migrating to an SAP ERP system, which could substantially 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 are currently in the process of migrating to an SAP ERP system to replace several of our existing IT systems. We have completed this accounting migration in India, but the process is ongoing in the rest of the world and the implementation has been delayed.

 

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Also we have not yet integrated supporting modules into the SAP ERP system, such as a module to manage our film library. 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. We will implement further modules within SAP ERP once the initial worldwide integration has been completed. The SAP ERP system will be implemented globally in our different office locations and will need to accommodate our multilingual operations, resulting in further difficulties in such implementation. Our failure to successfully integrate our IT systems across our international operations could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

Some viewers or civil society organizations may find our film content objectionable.

 

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.

 

Our films are required to be certified in India by the Central Board of Film Certification.

 

Pursuant to the Indian Cinematograph Act, 1952, or the Cinematograph Act, films must be certified for adult viewing or general viewing in India by the Central Board of Film Certification, or 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 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 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. We are also subject to certain tax proceedings in India, including service tax claims aggregating to approximately $61 million, value added tax and sales tax claims aggregating to approximately $3 million, as of March 31, 2017 for the period between Fiscal Year 2010 to Fiscal Year 2015. In addition, there have been certain public allegations made against the Indian film entertainment industry generally, as well as against certain of the entities and individuals currently active in the industry about purported links to organized crime and other negative associations. 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 “Business Overview— Litigation” 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.

 

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Our performance in India is linked to the stability of its 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 our business.

 

Taxes generally are levied on a state-by-state basis for the Indian film industry. Recently, there has been interest in rationalizing the industry’s taxes by instituting a uniform set of entertainment taxes administered by the Indian government. Such changes may increase our tax rate, which could adversely affect our financial condition and results of operations. Furthermore, in certain states, theater multiplexes have enjoyed entertainment tax benefits that may be disrupted or discontinued if India moves to a uniform entertainment tax system. This could slow the construction of new multiplexes, and may impact single screen theaters in tier 2 and tier 3 cities converting their 1,000 seater theaters into multiplexes with 2 or 3 screens with seating capacity of 300 seats or less, which we believe is a key driver for domestic theatrical revenue growth. 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 proposed changes in the Indian law and policy environment which may have an impact on our 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:

 

The General Anti Avoidance Rules (“GAAR”) have come into effect from financial year 2017-18. The tax consequences of the GAAR provisions being applied to an arrangement could result in denial of tax benefit under the domestic tax laws as well as under a tax treaty, amongst other consequences. In the absence of any precedents on the subject, the application of these provisions is uncertain.

 

Over the years, Indian Government has come up with various initiatives to accelerate economic growth, boost Indian markets and achieve transparency in the tax structures. GST is one such initiative which is expected to bring in all of these benefits and much more. It is estimated that GST will positively impact economic growth.

 

The Government of India has w.e.f. 1 July, 2017 implemented comprehensive national Goods and Services Tax (“GST”) that subsumes all existing indirect taxes such as Excise Duty, Service Tax, Countervailing Duty (CVD), Value Added Tax (VAT), Entertainment Tax at State level, Entry Tax etc. and only one tax i.e. GST is to be levied and collected on value additions at each stage of supply of goods and services at national level. . GST is introduced in view of amendment made to the Constitution of India, by the Constitution (One Hundred and First Amendment) Act 2016, which grants enabling powers to central and state government to make laws relating to GST. While the Government of India and certain state governments have announced that all committed incentives will be protected following the implementation of the GST, given the limited availability of information in the public domain concerning the GST, we cannot provide any assurance as to this or any other aspect of the tax regime following implementation of the GST. 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.

 

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GST is also expected to bring in overall tax efficiencies in the business due to factors such as reduction in effective tax rate, seamless flow of credit, simplified tax structure, abolishment of inter-state barriers, reduction in cascading effect of taxes etc. Further, it is anticipated that, zero rated exports will enhance international competitiveness. Also, the uniform tax rates all across the country will make GST neutral to geographical locations.

 

The Organization of Economic Co-operation and Development (OECD) released the final package of all Action Plans of the Base Erosion and Profit Shifting (BEPS) 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 Convention (MLI) that modified the existing bilateral treaty network would be preferable as it would ensure speed and consistency in implementation. Accordingly, MLI was introduced to incorporate treaty related measures identified as part of the final BEPS measures in relation to:
Neutralising the effects of hybrid mismatch arrangements;
Preventing the granting of treaty benefits in inappropriate circumstances;
Preventing the artificial avoidance of Permanent Establishment status;
Making dispute resolution mechanisms more effective.

 

India has signed the MLI to implement tax treaty related measures to prevent BEPS, on 7 June 2017. The MLI will operate to modify the existing tax treaties entered into between various countries.

 

An equalization levy or EL in respect of 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. Deduction of EL at the rate of six per cent (on a gross basis) is the responsibility of Indian residents / non-residents having a permanent establishment or PE in India on payments to non-residents (not having a PE in India). Consequently, if a non-resident (not having a PE in India) earns income towards a “specified service” which is chargeable to EL, then the same would be exempt in the hands of non-resident company.

 

Also, the concept of Place of Effective Management (POEM) is introduced for the purpose of determining tax residence of foreign companies in India. The POEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity 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. One of the key consequences in case the POEM of a foreign company is considered to be situated in India and consequently, it becomes tax resident in India, is that its global income would be taxable in India (even if it is not earned in India).

 

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.

 

In addition, 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.

 

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, including India, 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, for example, local authorities close theaters and could have an adverse effect on the financial markets and economies of India and other countries. 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.

 

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Our insurance coverage may be inadequate to satisfy future claims against us.

 

While we believe that we have adequately insured our operations and property in a way that we believe is customary in the Indian film entertainment industry 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, as of June 30, 2017 we owned approximately 66.22% 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 Dubai law 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. For example, under Indian law, dividends other than in cash are not permitted and cash dividends are only permitted to be paid out of distributable profits. Dubai law imposes similar limitations on dividend payments. An Indian company paying dividends is also liable to pay dividend distribution tax at an effective rate of 20.3% including cess and surcharge. In addition, the Shareholders Agreement of Ayngaran, limits the ability of that entity to pay dividends without shareholders’ approval.

 

The Relationship Agreement with 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 renewed with the execution of the 2016 Relationship Agreement between Eros India, Eros Worldwide and us (“Relationship Agreement”). The Relationship Agreement, exclusively assigns to Eros Worldwide, certain intellectual property rights and all distribution rights for films, excluding certain Tamil films (and other than global digital distribution rights, which are retained by Eros Worldwide), in all territories other than India, Nepal, and Bhutan, that are held by between Eros India and certain of its subsidiaries (the “Eros India Group”). 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 (“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.

 

The Relationship Agreement may not reflect terms that would have resulted from arm’s length negotiations among unaffiliated third parties, and the 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.

 

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Our indebtedness could adversely affect our operations, including our ability to perform our obligations, fund working capital and pay dividends.

 

As of March 31, 2017, we had $271.5 million of borrowings outstanding of which $180.7 million is repayable within one year. We may also incur substantial additional indebtedness. Our indebtedness could have important consequences, including the following:

 

we may be unsuccessful in refinancing our revolving credit facility;

 

we could have difficulty satisfying our debt obligations, and if we fail to comply with these requirements, an event of default could result;

 

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;

 

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;

 

covenants relating to our indebtedness may restrict our ability to make distributions to our shareholders;

 

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;

 

lenders are able to require us to repay their secured loans to each of Eros India and Eros International Limited prior to their maturity, which as of March 31, 2017, represented $100.03 million of the outstanding indebtedness of Eros India and $17.98 million as of March 31, 2017 of the outstanding indebtedness of Eros International Limited. Further in the event we decide to repay 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%;

 

certain Eros India loan agreements are subject to annual renewal, and until these renewals are obtained, the lenders under these loan agreements may at any time require repayment of amounts outstanding. As at March 31, 2017, loan agreements amounting to $26.0 million were pending annual renewal;

 

we may be more vulnerable to general adverse economic and industry conditions;

 

we may be placed at a competitive disadvantage compared to our competitors with less debt; and

 

we may have difficulty repaying or refinancing our obligations under our senior credit facilities on their respective maturity dates.

 

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.

 

Our ability to incur debt and the use of our funds could be limited by the restrictive covenants in existing credit facilities as well as our GBP denominated London Stock Exchange listed bond (“UK Retail Bond”).

 

Our existing credit facilities and the UK Retail Bond contain restrictive covenants, as well as requirements to comply with certain leverage and other financial maintenance tests. 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.

 

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We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

 

Based on interest rates as of March 31, 2017, and assuming no additional borrowings or principal payments on our credit facilities and the UK Retail Bond until their maturities, we would need approximately $180.7 million over the next year, and $89.96 million over the next five years, to meet our principal and interest payments under our debt agreements. Our ability to satisfy our debt obligations will depend upon, among other things:

 

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;

 

our ability to refinance our debt as it becomes due, which will be affected by the cost and availability of credit; and

 

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.

 

There can be no assurance that our business will generate sufficient cash flow from operations, or that we will be able to refinance debt as it comes due or draw under our revolving credit facilities in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, or seek additional capital. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we are unable to generate sufficient cash flow, refinance our debt on favorable terms or sell additional debt or equity securities or our assets, it could have a material adverse effect on our financial condition and on our ability to make payments on our indebtedness.

 

Our trade accounts receivables were $226.8 million as at March 31, 2017, $169.3 million as of March 31, 2016 and $197.8 million as at March 31, 2015. 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 and/or the release or airing of content, as of March 31, 2017, 25.1% of our trade account receivables were represented by our top five debtors, compared to 54.2% as of March 31, 2016. Any substantial defaults or delays by our customers could materially and adversely affect our cash flow, and we could be required to terminate our relationships with customers, which could adversely affect our business, prospects, financial condition, results of operations.

 

We face risks relating to the international distribution of our films and related products.

 

We derive a significant percentage of our net revenues from customers located outside of India. We derived 48.9% of our fiscal year 2017 net revenue from the monetization of our films in territories outside of India. 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. Further, we may enter into a number of our contracts for international markets that have longer payment cycles that may extend up to a year from the date of the contract creating a mismatch in revenue and cash received.

 

We are currently in the process of entering the China market. If we are unsuccessful in the production, distribution and monetization of films not only in India but also in the international markets including China, we may suffer losses and it may materially affect our growth prospects.

 

Our business is subject to risks inherent in international trade, many of which are beyond our control. These risks includes:

 

fluctuating foreign exchange rates;

 

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;

 

differing degrees of protection for intellectual property;

 

financial instability and increased market concentration of buyers in other markets;

 

higher past due debtor days and difficulty of collecting trade receivables across multiple jurisdictions;

 

the instability of other economies and governments; and

 

war and acts of terrorism.

 

Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-Indian 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.

 

We evaluate potential acquisitions of complementary businesses on an ongoing basis and may from time to time pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities or consummating acquisitions on acceptable terms. Future acquisitions may result in near term dilution to earnings, including potentially dilutive issuances of equity securities or issuances of debt. For instance, in Fiscal 2016, our subsidiary, Eros India acquired 100% of the shares and voting interest in Techzone, to utilize Techzone’s billing integration and distribution across major telecom operations in India, in order to complement our Eros Now services. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:

 

diverting of financial and management resources from existing operations;

 

incurring indebtedness and assuming additional liabilities, known and unknown, including liabilities relating to the use of intellectual property we acquire;

 

incurring significant additional capital expenditures, transaction and operating expenses and non-recurring acquisition-related charges;

 

experiencing an adverse impact on our earnings from the amortization or impairment of acquired goodwill and other intangible assets;

 

failing to successfully integrate the operations and personnel of the acquired businesses;

 

entering new markets or marketing new products with which we are not entirely familiar; and

 

failing to retain key personnel of, vendors to and clients of the acquired businesses.

 

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.

 

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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.

 

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. The trading price of our ordinary shares on AIM and the NYSE has been highly volatile. For example, the highest price that our ordinary shares traded in the period beginning November 12, 2012 and ending November 12, 2013 was $4.48 per share and the lowest price was $2.96 per share, prior to giving effect to the one-for-three reverse stock split effectuated on November 12, 2013. Since the listing of our A ordinary shares on the NYSE, the highest closing price of the A ordinary shares, in the period beginning November 12, 2013 and ended May 31, 2017, was $39.01 per share and the lowest price was $5.59 per share. The market price of the A ordinary shares on the NYSE may fluctuate as a result of several factors, including the following:

·attacks from short sellers;
·variations in our quarterly operating results;
·adverse media report about us or our directors and officers;
·changes in financial estimates or publication of research reports by analysts regarding our A ordinary shares, other comparable companies or our industry generally;
·volatility in our industry, the industries of our customers and the global securities markets;
·risks relating to our business and industry, including those discussed above;
·strategic actions by us or our competitors;
·adverse judgments or settlements obligating us to pay damages;
·actual or expected changes in our growth rates or our competitors’ growth rates;
·investor perception of us, the industry in which we operate, the investment opportunity associated with the A ordinary shares and our future performance;
·addition or departure of our executive officers;
·trading volume of our A ordinary shares;
·sales of our ordinary shares by us or our shareholders;
·domestic and international economic, legal and regulatory factors unrelated to our performance; or
·the release or expiration of lock-up or other transfer restrictions on our outstanding A ordinary shares.

 

These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes may cause the market price of ordinary shares to decline.

 

In addition, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have also recently become the subject of securities class action litigation against us. 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.

 

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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, as defined in “Part I — Item 4. Information on the Company — C. Organizational Structure” 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.

 

The Founders Group, which includes our Chairman, Kishore Lulla, holds a substantial interest in and, through the voting rights afforded to our B ordinary shares and held by the Founders Group, will continue to have the ability to exercise a controlling influence over our business, which will limit your ability to influence corporate matters.

 

Our B ordinary shares have ten votes per share and our A ordinary shares, which are trading on the NYSE, have one vote per share. As of June 30, 2017, the Founders Group collectively owns 43.93% of our issued share capital in the form of 12,783,454 A ordinary shares, representing 6.89% of the voting power of our outstanding ordinary shares, and 13,879,382 B ordinary shares, representing all of our B ordinary shares and 74.77% of the voting power of our outstanding ordinary shares.

 

Due to the disparate voting powers attached to our two classes of ordinary shares, the Founders Group continues to have significant influence over management and affairs and over all matters requiring shareholder approval, including our management and policies and the election of our directors and senior management, the approval of lending and investment policies, revenue budgets, capital expenditure, dividend policy, significant corporate transactions, such as a merger or other sale of our company or its assets and strategic acquisitions, for the foreseeable future. In addition, because of this dual class structure, the Founders Group will continue to be able to control all matters submitted to our shareholders for approval unless and until they come to own less than 10% of the outstanding ordinary shares, when all B ordinary shares held by the Founders Group will automatically convert into A ordinary shares on a one-for-one basis.

 

This concentrated control could delay, defer or prevent a change in control of our Company, impede a merger, consolidation, takeover or other business combination involving our company, or discourage a potential acquirer from making a tender offer, initiating a potential merger or takeover or otherwise attempting to obtain control of the Company even though other holders of A ordinary shares may view a change in control as beneficial. Many of our directors and senior management also serve as directors of, or are employed by, our affiliated companies, and we cannot guarantee that any conflicts of interest will be resolved in our favor. As a result of these factors, members of the Founders Group may influence our material policies in a manner that could conflict with the interests of our shareholders. As a result, the market price of our A ordinary shares could be adversely affected.

 

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 and these expenses will likely increase after we no longer qualify as an “emerging growth company.” 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.

 

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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 Exchange Act of 1934, as amended, or the Exchange Act. Although we intend to report quarterly financial results and report certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence and our quarterly or current reports may contain less information than required under U.S. filings. In addition, we are exempt from the Section 14 proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding sales of ordinary shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to the Securities Exchange Act. As a result, you may not have all the data that you are accustomed to having when making investment decisions. For example, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder with respect to their purchases and sales of our A ordinary shares.

 

The periodic disclosure required of foreign private issuers is more limited than that required of domestic U.S. issuers and there may therefore be less publicly available information about us than is regularly published by or about U.S. public companies. See “Part I — 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, with the exception of our Audit Committee currently having two rather than three members, our charter does not require that we meet these requirements.

 

As the corporate governance standards applicable to us are different than those applicable to domestic U.S. issuers, you may not have the same protections afforded under U.S. law and the NYSE rules as shareholders of companies that do not have such exemptions. It is also possible that the significant ownership interest of the Founders Group could adversely affect investor perception of our corporate governance.

 

We are an “emerging growth company” and if we decide to comply only with reduced disclosure requirements applicable to emerging growth companies, our A ordinary shares could be less attractive to investors and our share price may be more volatile.

 

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the SOX Act. We will cease to be an “emerging growth company” upon the earliest of (1) the first fiscal year following the fifth anniversary of our initial public offering, November 12, 2013, (2) the first fiscal year after our annual gross revenue is $1 billion or more, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities or (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our A ordinary shares less attractive if we choose to rely on these exemptions. If some investors find our A ordinary shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our A ordinary shares and our share price may be more volatile.

 

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.

 

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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, — see “Part II — Item 4. Information on the Company — Government Regulations” and Isle of Man common law. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Isle of Man law are to an extent governed by the common law of the Isle of Man. The common law of the Isle of Man is derived in part from comparatively limited judicial precedent in the Isle of Man as well as from English common law, which has persuasive, but not binding, authority on a court in the Isle of Man. The rights of our shareholders and the fiduciary responsibilities of our directors under Isle of Man law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Isle of Man has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Isle of Man. Furthermore, shareholders of Isle of Man companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. As a result, shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. company.

 

Our board of directors may determine that a shareholder meets the criteria of a “prohibited person” and subject such shareholder’s shares to forced divestiture.

 

Our articles of association permit our board of directors to determine that any person owning shares (directly or beneficially) constitutes a “prohibited person” and is not qualified to own shares if such person is in breach of any law or requirement of any country and, as determined solely by our board of directors, such ownership would cause a pecuniary or tax disadvantage to us, another shareholder or holders of our other securities. If our board of directors determines that a shareholder meets the above criteria of a “prohibited person,” they may direct such shareholder to transfer all A ordinary shares such shareholder owns to another person. Under the provisions of our articles of association, such a determination by our board of directors would be conclusive and binding on such shareholder.

 

If our board of directors directs such shareholder to transfer all A ordinary shares such shareholder owns, such shareholder may recognize taxable gain or loss on the transfer. See “Part I — Item 10. Additional Information — E. Taxation” for a more detailed description of the tax consequences of a sale or exchange or other taxable disposition of such shareholders A ordinary shares.

 

Judgements 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 United States. A substantial part of our current operations are conducted in India. In addition, substantially all of our directors and executive officers are nationals and residents of countries other than the United States and we believe that a substantial portion of the assets of these persons may be located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. Moreover, the courts of India would not automatically enforce judgments of U.S. courts obtained in such actions against us or our directors and officers, or entertain actions brought in India against us or such persons predicated solely upon United States federal securities laws. Further, the U.S. has not been declared by the Government of India to be a reciprocating territory for the purposes of enforcement of foreign judgments, and there are grounds upon which Indian courts may decline to enforce the judgments of United States courts. Some remedies available under the laws of United States jurisdictions, including remedies available under the United States federal securities laws, may not be allowed in Indian courts if contrary to public policy in India. Since judgments of United States courts are not automatically enforceable in India, it may be difficult for you to recover against us or our directors and officers based upon such judgments. There is uncertainty as to whether the courts of the Isle of Man would recognize or enforce judgments of United States courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, there is uncertainty as to whether such Isle of Man courts would be competent to hear original actions brought in the Isle of Man against us or such persons predicated upon the securities laws of the United States or any state.

 

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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 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 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 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 2016 during the period of anonymous short seller attack 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 favourable outlook on the company, it may cause investor sentiment to be weak, demand for our 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 Isle of Man 2006 Companies 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 Companies Act, our future earnings, financial condition, cash flows, working capital requirements and capital expenditures. The 2006 Companies Act provides that a company satisfies the solvency test if: (i) it is able to pay its debts as they become due in the normal course of the company’s business: and (ii) the value of the company’s assets exceeds the value of its liabilities. There can be no assurance that we will be able to pay dividends. Additionally, we are restricted by the terms of certain of our current debt financing facilities and may be restricted by the terms of any future debt financings in relation to the payment of dividends.

 

We may be classified as a passive foreign investment company, or PFIC, under United States tax law, which could result in adverse United States 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, 2017, and we do not expect to become one in the future, although there can be no assurance in this regard. The determination of whether or not we are a PFIC for any taxable year is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States 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 the 2013, 2014 and 2015 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 United States income tax on gain recognized on the sale or other disposition of the shares and on the receipt of distributions on the shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Further, if we were a PFIC for any year during which a U.S. Holder held our shares, we would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our shares. Each U.S. Holder is urged to consult its tax advisors concerning the United States 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.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of our Company

 

Eros International Plc was incorporated in the Isle of Man as of March 31, 2006 under the Companies Act 1931 commonly known as the 1931 Act — see “Part II — Item 4. Information on the Company — Government Regulations,” as a public company limited by shares. Effective as of September 29, 2011, the Company was de-registered under the 1931 Act and re-registered as a company limited by shares under the Isle of Man, Companies Act 2006 (as amended) commonly referred to as the 2006 Act. We maintain our registered office at Fort Anne, Douglas, Isle of Man IM15PD, our principal executive office in the U.S.A is at 550 County Avenue, Secaucus, New Jersey 07094; and our telephone number is +1(201) 558-9021. We maintain a website at www.erosplc.com. Information contained in our website is not a part of, and is not incorporated by reference into, this annual report.

 

Our capital expenditures in fiscal 2017, 2016 and 2015 were $173.5 million, $211.3 million and $276.2 million respectively. Our principal capital expenditures were incurred for the purposes of purchasing intangible film rights and related content. We expect our capital expenditure needs in fiscal 2018 to be approximately $180-$200 million, a significant amount of which we expect to be used for the acquisition of further intangible film rights and related content.

 

B. Business Overview

 

Eros International Plc is a leading global company in the Indian film entertainment industry, which co-produces, acquires and distributes Indian language films in multiple formats worldwide. The Company was founded in 1977 and is one of the oldest companies in the Indian film industry to focus on international market. We believe we are pioneers in our business. Our success is built on the relationships we have cultivated over the past 40 years with leading talent, production companies, exhibitors and other key participants in our industry. By leveraging these relationships, we have aggregated rights to over 3,000 films in our library, including recent and classic titles that span different genres, budgets and languages. Eros Now, our digital OTT entertainment service, has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal library as well as third party aggregated content, which we believe makes it one of the largest Indian movie offering platforms around the world.

 

We have a multi-platform business model and derive revenues from the following three distribution channels:

 

Theatrical: The theatrical channel largely includes revenues from multiplex chains and single screen theaters. We are a leading player in a growing and under-penetrated cinema market with three out of top four and seven out of top 15 box office hits in calendar year 2015. We released a total of 45 films in fiscal year 2017, including five high budget films and 10 medium budget films, which is indicative of our scale and leading market position.

 

Television Syndication: We de-risk our theatrical revenues while enhancing revenue predictability through pre-sales and television syndication which includes satellite television broadcasting, cable television and terrestrial television which are facilitated by our long-standing Eros brand, reputation and industry relationships. We license 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 payments terms may extend up to a year; and

 

Digital and ancillary: In addition to our theatrical and television distribution networks, we have a global network for the digital distribution of our content, which consists of full length films, music, music videos, clips and other video content. Through our digital distribution channel, we mainly monetize music assets and distribute movies and other content primarily in Internet Protocol television (IPTV), Video on Demand (VOD) (including Subscription Video on Demand (SVOD) and Direct-to-Home (DTH)) and online internet channels. This enables us to prolong the lifecycle of our films and film library. We are present in a high-growth digital market with India projected to have over 969 million wireless internet users by 2021, according to the FICCI Report 2017.

 

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Content development and acquisition

 

The success of our film distribution business lies in our ability to acquire and develop content. We have been building and adding to our film library for the past 40 years and each year, through acquisition and co-production arrangements, we seek to acquire rights to 60 to 70 additional films. We currently own or have license rights over approximately 3,000 films, including recent and classic titles that span different genres, budgets and languages. Each year, we focus on co-production, acquisition and distribution of a diverse portfolio of Indian language and themed films that we believe will have a wide audience appeal. For fiscal 2017, we released a total of 45 films in India and overseas. These comprised 12 Hindi films, 16 Tamil and 2 Telugu language films and 15 regional films. The Company’s strong portfolio of films drove theatrical, television and digital/ancillary revenues worldwide with key titles such as Housefull 3 (Hindi), Sardaar Gabbar Singh (Telugu), Baar Baar Dekho (Hindi), Dishoom (Hindi) and Ki and Ka (Hindi), Rock On 2 (Hindi), Kahaani 2 (Hindi), Chaar Sahibzaade 2 (Punjabi) and Double Feluda (Bengali) contributing a significant share to our revenue for fiscal 2017.

 

For fiscal year 2017 our aggregate revenues were $253 million which were derived from theatrical, television syndication and digital and ancillary distribution channels. Our typical annual slate of new releases consists of both Hindi language films and regional language films, primarily Tamil, Telugu and other regional Indian languages. Our most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) which we release globally. Of the total 45 movies acquired in the year, five are high budget films. We released 10 medium budget films in fiscal 2017 which mainly comprise Hindi, Tamil, Telugu and regional language films. This annual release slate is built around the high budget films to create a slate that will attract varying segments of the audience. The low budget film slate consists of Hindi, Tamil, Telugu and other regional language films.

 

We have maintained our focus on high and medium budget Hindi films because these films typically have better production values, more recognizable stars that attract larger theatrical audiences and also drive higher revenues from television syndication in India. We seek to mitigate the risks associated with these high budget films through the use of our extensive pre-sale strategies. We have increased our focus on high and medium budget Tamil and Telugu films for similar reasons. In addition, we can release a Tamil and Hindi film on the same date as they cater to different audiences, which allow us to effectively schedule releases for our film portfolio and to take a greater combined share of the box office on those release dates.

 

With a focus on creating intellectual property in-house along with delivering wholesome entertainment to audiences, we have entered into key co-production partnerships with producers and directors. Colour Yellow Production, a subsidiary of Eros India with Anand L Rai has announced film releases across budgets, genres and languages, which also includes Anand L Rai’s directorial venture. This co-production model along with our in-house production franchise ‘Trinity’ gives us better visibility on actual cost of production ensuring capped budgets and exclusive distribution rights, typically for at least 20 years.

 

In-House Production Arm — Trinity Pictures

 

We set up Trinity Pictures in fiscal year 2015 as what we believe to be one of India’s first dedicated franchise studio that creates valuable intellectual property around powerful character and plot-driven franchises and monetizes these properties across films, merchandising, gaming amongst others. Trinity’s first franchise “Sniff-I Spy” is currently in production and is set for release in fiscal year 2018. Two editions of Sniff comics have already been released along with iconic Chacha Choudhary comics. These comics are available in five languages. Sniff mobile games and video games will also hit the markets following the movie’s release. Merchandizing and animation series are also being prepared.

 

Trinity Pictures, the company’s visionary venture and in-house franchise label has more than twenty franchises across new and diverse genres. Out of these twenty franchises, five are lined up in the next couple of years — a spy-superhero film, Sniff directed by Amole Gupte, — a live action tri-lingual (Hindi, Telugu and Tamil) elephant film to be directed by multiple award-winning Tamil director, Prabhu Solomon, ace director Krish’s buddy cop film which will be shot in Hindi and Tamil simultaneously, featuring popular lead actors from both South India and the Hindi film industry, an action thriller to be directed by Vipul Amrutlal Shah to be shot next year and two Indo-China co-productions, a first for any Indian studio — Kabir Khan’s travel drama and Siddharth Anand’s cross-cultural romantic comedy currently titled Love In Beijing.

 

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Award winning content / franchise

 

We are strategically positioned as a leader in our industry and are able to monetize our films through multiple channels globally. We have won over 189 awards in the last three Fiscal Years including Best Studio of the Year and Excellence in International Distribution. Some of our films from fiscal year 2017 that won awards include – Dishoom, Baar Baar Dekho, Phobia, Nil Battey Sannata, Parktan, Olappeeppei. Further, our films won Best Film, Best Director, Best Story, Best Actor, Best Music, Best Special Effects awards and Best Child Actor awards, to name a few. Bajrangi Bhaijaan won 37 awards including National Award for Popular Film. Bajirao Mastani won over 78 award titles including National Award for Best Director. Tanu Weds Manu Returns won 18 awards including National Award for Best Female Actor in a leading role, Hero won 7 awards and Badlapur won 7 awards. Our Malayalam film Pathemari also won a national award for Best Malayalam Film.

 

Market opportunity

 

Domestic: Our distribution capabilities enable us to target a majority of the 1.3 billion people in India, our primary market for Hindi language films where, according to bollywoodhungama.com, we participated in two, seven and four films of the top fifteen grossing films in India, in calendar year 2016, 2015 and 2014 respectively. Recently, as demand for regional films and other media has increased in India, our brand recognition in Hindi films has helped us to grow our non-Hindi film business by targeting regional audiences in India and overseas. With our distribution network for Hindi and Tamil films and additional distribution support through our majority owned subsidiary, Ayngaran, we believe we are well positioned to expand our offering of non-Hindi content.

 

Overseas: Depending on the film, the distribution rights we acquire 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 includes Germany, Poland, Russia, France, Italy, Spain, Indonesia, Malaysia, Japan, South Korea, the Middle East and Latin America among others. Additionally, there is a large established Indian diaspora in North America which has a strong interest in the content of the Indian film industry. In all these markets it is the locals who are neither English nor Hindi speaking who view the content of the Indian film in a dubbed or subtitled version in their language, similar to the manner in which they view Hollywood content. In markets with large South Asian populations, such as the United States and the United Kingdom, comScore reported our market share (as an average over the preceding six calendar years to 2016) as 31% of all theatrically released Indian language films in the United Kingdom and the United States, based on gross collections. Other international markets that exhibit significant demand for subtitled or dubbed Indian-themed entertainment include Europe and Southeast Asia. China is increasingly becoming an important market and we expect to release select films from our slate for wider release into China. In fiscal year 2017, a Bollywood Film Dangal was released in China across 9,000 screens and grossed about $180 million at the box office, underpinning the potential of the China Market. As per information published by Campaign Asia-Pacific, based on data from PricewaterhouseCoopers’ Global Entertainment and Media Outlook 2016 — 2020 (“PwC Outlook 2016”), China is expected to overtake the U.S. box office this year. The China box office grew 49% in 2015 to $6.3 billion and was expected to grow to $10.3 billion this year. In comparison, the U.S. box office was expected to contract from $10.3 billion to $10 billion this year. Hollywood’s share of the Chinese box office has slipped to 38.4% in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screens and by end of 2015 that number grew to almost 32,000, with 8,035 screens being added in 2014. Overall China is propelling Asia-Pacific’s growth (including Indonesia and Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion in 2020 and continues to emerge as an important growth markets for the Indian film industry.

 

Eros Now

 

Eros Now has over 60 million registered users across WAP, APP and Web and had 2.1 million paying subscribers as of March 31 2017. Eros Now has steadily grown its registered user base from 19 million users in the fourth quarter of Fiscal 2015 to 60 million users in Fiscal 2017, an overall growth of 216% during the period. Eros Now has steadily grown its paying subscribers from 1.1 million users in the first quarter of Fiscal 2017 to 2.1 million users in the fourth quarter of Fiscal 2017, an overall growth of 91% in the same period. Continuing with the momentum as of June 2017, Eros Now has 68 million registered users and 2.9 million paying subscribers. We define paying subscribers to mean any subscriber who has made a valid payment to subscribe to a service that includes Eros Now services as part of a bundle or on a standalone basis, either directly or indirectly through an OEM or TELCO in any given month, be it through a daily, weekly or monthly billing pack, as long as the validity of the pack is for at least one month. While a majority of registered users are from India, Eros Now has registered users in 135 different countries.

 

Eros Now is focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile phones, tablets, cable or internet, including through deals with OEMs. Eros Now has integration deals around the world with telecom operators and different OEMs and connected devices. Content is a key driver behind Eros Now’s success. We believe our library size of over 10,000 films with over 50% of the library is held in perpetuity and 30% expiry over next 10 years will position Eros Now to be the largest Indian language OTT service worldwide.

 

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Our revenue model focuses on business to business (B2B) distribution which includes our partnerships with leading mobile operators in India, including Idea Cellular, Bharti-Airtel, Vodafone, BSNL and Reliance Jio. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers. Eros Now also has partnered with Micromax, Samsung and Smartron to pre-bundle Eros Now in smart phones sold in India. It has also entered into partnerships with several leading electronic payment platforms including Paytm, Mobikwik, SBI Buddy, Freecharge and Speedpay that enable Eros Now subscribers to make easy and hassle free payments using e-wallet services. Eros Now recently announced a strategic integration deal with Ola, India's leading mobile app for transportation, using Ola’s connected in-car entertainment platform for ridesharing, Ola Play. This strategic revenue-sharing partnership will enable an immersive and personalized experience that customers can seamlessly control through their smartphones as well as through a device mounted at the back of the seat.

 

Eros Now has also entered the Malaysian market with partnerships with the country’s leading telecom operators, Maxis Berhad and U Mobile. Eros Now is the only Indian OTT platform to penetrate the growing Malaysian market. Eros Now recently entered into a partnership with T-Mobile’s video streaming program, Binge On. Eros Now is accessible to T-Mobile’s large customer base of approximately 71.5 million users across the U.S.A., who can stream its extensive library of Bollywood and regional language films, music, and originals. Eros Now is available on Lyca TV, which is the world’s largest OTT ethnic entertainment provider and delivers broad range of international content across multiple devices. Eros Now has also partnered with Jadoo TV, a leading distributor of internet based South Asian and multicultural content provider across the U.S.A., Europe and Australia. Eros Now is focused on the monetization of its global user base and has a target to achieve 6 to 8 million paying subscribers by the end of fiscal 2018.

 

Eros Now has billing integration system with Fortumo, a leading global provider of direct carrier billing. Fortumo payments cover 98 markets and connect merchants to subscribers of more than 350 mobile operator networks. Apple has featured the Eros Now app in its “App Store Best of 2016”.

 

Eros Now enhances its consumer appeal through exploring dynamic genres to create unseen, relatable and contemporary “Originals” that target the youth of India and are an important part of the Eros Now content strategy. Eros Now’s original content offering began with the release of Salute Siachen, India’s first ever celebrity high endurance expedition to the Siachen Glacier which was shot on a mobile phone. In addition, Eros Now originals such as Flesh by Siddharth Anand, Smoke and Side Hero will be launched in Fiscal 2018. These originals follow a rigorous greenlighting process just like films, with script, screenplay, budgeting pilot episode production, market research and testing of the pilot episode and final production. Eros Now has also added a series of short originals titled Black and White which range from interviews to teˆ te-a¨ -teˆ te with leading talent from the Indian film industry and are shot exclusively for Eros Now. Another short form of original content available on Eros Now is “E-Buzz”, this offers exclusive behind the scene to all social celebrity events on the calendar.

 

Eros Now — Market Opportunity

 

Eros Now is uniquely positioned to benefit from the fast growing internet and mobile penetration in India. As per Telecom Regulatory Authority of India (TRAI) there are over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India are likely to cross 969 million by 2021. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. It is expected that over the next couple years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.

 

Our portfolio of films over the last three completed fiscal years comprised 173 films. In fiscal 2017 our aggregate revenues were $253 million and we released 45 films in total either in India, overseas or both. These comprised 12 Hindi films, 16 Tamil films and 17 regional language films. The Company’s strong portfolio of films like Ki & Ka, Housefull 3, Baar Baar Dekho, Kahaani 2 (Overseas), Sardaar Gabbar Singh, 24 (Tamil), Janatha Garage and Dishoom drove theatrical, television and digital/ancillary revenues worldwide.

 

Our total revenues for fiscal 2017 decreased to $253.0 million from $274.4 million in fiscal 2016, our net income decreased to $11.5 million for fiscal 2017 from $13.3 million in fiscal 2016, EBITDA (Non-GAAP) increased to $42.5 million in fiscal 2017 from $36.3 million in fiscal 2016 and Adjusted EBITDA (Non-GAAP) decreased to $55.7 million from $70.9 million in fiscal 2016.

 

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The tables below set forth, for the periods indicated, revenue by primary geographic area based on customer location, and the percentage share of total revenue.

 

   Year ended March 31, 
   2017   2016   2015 
   (in thousands) 
India  $129,251   $158,843   $109,513 
Europe   7,695    24,367    27,146 
North America   10,132    19,865    19,052 
Rest of the world   105,916    71,353    128,464 
Total revenue  $252,994   $274,428   $284,175 

 

   Year ended March 31, 
   2017   2016   2015 
   (%) 
India   51.1    57.9    38.5 
Europe   3.0    8.9    9.6 
North America   4.0    7.2    6.7 
Rest of the world   41.9    26.0    45.2 
Total revenue   100.0%    100.0%    100.0% 

 

Our Competitive Strengths

 

We believe the following competitive strengths position us as a leading global company in the Indian film entertainment industry.

 

Leading co-producer and acquirer of new Indian film content, with an extensive film library.

 

As one of the leading participants in the Indian film entertainment industry we believe our size, scale and market position will continue contributing to our growth in India and internationally. We have established our size and scale by aggregating a film library of over 3,000 films. We have demonstrated our leading market position by releasing, internationally or globally, Hindi language films which were among the top grossing films in India in calendar years 2016, 2015 and 2014. We believe that we have strong relationships with the Indian creative community and a reputation for quality productions. We set up Trinity Pictures to become what we believe to be one of India’s first dedicated franchise studio that develops valuable intellectual property in the form of franchise films and have already commissioned two Indo-Chinese co-production films under the Trinity Pictures.

 

We believe that these factors, along with our worldwide distribution platform, will enable us to continue to attract talent and film projects of a quality that we believe is one of the best in our industry, and build what we believe will continue to be a strong film slate in the coming years with some of the leading actors and production houses with whom we have previously delivered our biggest hits. We believe that the combined strength of our new releases and our extensive film library positions us well to build new strategic relationships.

 

Established, worldwide, multi-channel distribution network with entry proposed into China.

 

We distribute our films to the Indian population in India, the South Asian diaspora worldwide and to non-Indian consumers who view Indian films that are subtitled or dubbed in local languages. Internationally, our distribution network extends to over 50 countries, such as the United States, the United Kingdom and throughout the Middle East, where we distribute films to Indian expatriate populations, and to Germany, Poland, Russia, Romania, Indonesia, Malaysia, Taiwan, Japan, South Korea, China and Arabic and Spanish speaking countries, where we release Indian films that are subtitled or dubbed in local languages. China is increasingly becoming an important market and we expect to release selected successful films from our slate for wider release into China. We are also planning the release of our Indo-Chinese co-productions in Fiscal 2019 in India, China and the rest of the world. Through this global distribution network, we distribute Indian entertainment content over three primary distribution channels — theatrical, television syndication and digital and ancillary platforms. Our primarily internal distribution network allows us greater control, transparency and flexibility over the regions in which we distribute our films, which we believe results in the direct exploitation of our films without the payment of significant commissions to sub-distributors. Our digital presence – Eros Now, strategically positions us to a capture a large digital opportunity in India and globally and provides a new avenue to further monetize our content library.

 

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Diversified revenue streams and pre-sale strategies mitigate risk and promote stable cash flow generation.

 

Our revenue model is diversified by three major distribution channels:

·theatrical distribution;
·television syndication; and
·digital distribution and ancillary products and services, including Eros Now.

 

In fiscal 2017 our revenues from theatrical distribution accounted for nearly 39.9% of our aggregate revenues, revenues from television syndication accounted for 34.8% and digital distribution and ancillary revenues accounted for 25.3%, reflecting our diversified revenue base that reduces our dependence on any single distribution channel.

 

We bundle library titles with new releases to maximize cash flows and we also utilize a pre-sale strategy to mitigate new production project risks by obtaining contractual commitments to recover a portion of our capitalized film costs through the licensing of television, music and other distribution rights prior to a film’s completion.

 

Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. For Fiscal 2018, we already have pre-sales visibility for some of our films such as Munna Micheal, Sarkar3, Shubh Mangal Savdhaan. For Fiscal 2017 pre sales from sale of satellite television rights was achieved for our films such as Housefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. In fiscal 2017, for our two high budget Hindi films we recouped 31% to 57% of the direct production cost through television and other pre-sales. We recouped 108% and 93% of our direct production cost of the two Telugu films released through contractual commitments prior to the films releases, and we recouped 96% of our direct production cost of one Tamil film released through contractual commitments prior to the film’s release.

 

In addition, we further seek to reduce risk to our business by building a diverse film slate, with a mix of films by budget, region and genre that reduces our reliance on “hit films.” This broad-based approach also enables us to bundle old and new titles for our television and digital distribution channels to generate additional revenues long after a film’s theatrical release period is completed. We believe our multi-pronged approach to exploiting content through theatrical, television syndication and digital distribution channels, our pre-sale strategies and our portfolio approach to content sourcing and exploitation mitigates our dependence on any one revenue stream and promotes cash flow generation.

 

Strong brand with fast growing international reach

 

Theatrical Distribution Outside India: Outside India, we distribute our films theatrically through our offices in Dubai, Singapore, the United States, the United Kingdom, Australia and Fiji and through sub-distributors in other markets. In our international markets, instead of focusing on wide releases, we select a smaller number of theaters that play films targeted at the expatriate South Asian population or the growing international audiences for Indian films. We generally theatrically release subtitled versions of our films internationally on the release date in India, and dubbed versions of films in countries outside India 12-24 weeks after their initial theatrical release in India sometimes after a long gap. In Russia, we recently partnered with Central Partnership, an affiliate of Gazprom Media, to promote, develop and distribute Indian and Russian content across multiple platforms in both countries.

 

International Broadcasting Distribution: Outside of India, we license Indian film content to content aggregator to reach cable and pay TV subscriber and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania) amongst others. We also license dubbed content to Europe, Arabic and Spanish speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.

 

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Dynamic management of our film library

 

We have the ability to combine our new release strategy with our library monetization efforts to maximize our revenues. We believe our extensive film library provides us with unique opportunities for content monetization, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films. The existence of high margin library monetization avenues especially in television and digital platforms reduce reliance on theatrical revenues.

 

Strong and experienced management team with established relationships with key industry participants.

 

Our management team has substantial industry knowledge and expertise, with a majority of our executive officers and executive directors having been involved in the film, media and entertainment industries for 20 or more years, and has served as a key driver of our strength in content sourcing. In particular, several members of our management team have established personal relationships with leading talent, production companies, exhibitors and other key participants in the Indian film industry, which have been critical to our success. Through their relationships and expertise, our management team has also built our global distribution network, which has allowed us to effectively exploit our content globally.

 

Our Strategy

 

Our strategy is driven by the scale and variety of our content and the global exploitation of that content through diversified channels. Specifically, we intend to pursue the following strategies:

 

Scaling up productions and co-productions including a unique dedicated franchise studio model, Trinity Pictures, to augment our film library and distribute high quality content globally .

 

We will continue to leverage the longstanding relationships with creative talent, production houses and other key industry participants that we have built since our founding to source a wide variety of content. Our focus will be on investing in future slates comprised of a diverse portfolio mix ranging from high budget global theatrical releases to lower budget movies with targeted audiences. We intend to maintain our focus on high and medium budget films and augment our library with quality content for exploitation through our distribution channels and explore new bundling strategies to monetize existing content.

 

We continue to be focused on ramping up our own productions and co-productions through key partnerships. These partnerships include the ones we have with talented producer-director, Aanand L Rai (Colour Yellow Production) and Trinity Pictures, Eros’ in-house franchise label. We have recently partnered with Phars Film, one of the UAE’s largest film distribution and exhibition network. The partnership will involve Eros and Phars Films jointly co-producing Malayalam films along with exploration of theatrical rights between the two entities. The partnership licenses Eros to exploit the distribution of all Malayalam movies produced jointly in India, while Phars Films would exploit the same overseas. We will also partner with Pana Film, one of the largest Turkish film studios for Indo-Turkish co-productions. Original stories blending Indian and Turkish cultures will be conceptualized and developed by Eros’ in-house writers along with top Turkish writers, and both films will be bilingual. This will expand our presence to Turkey, the Middle East and North African regions. These strategic partnerships not only help us augment our in-house content production model but also expand our geographical canvas for content monetization. We also have distribution partnership with Central Partnership in Russia, that we believe will open new markets for Eros releases.

 

To promote Eros Now, our OTT digital entertainment service platform, as the preferred choice for online entertainment by consumers across digital platforms.

 

As per Telecom Regulatory Authority of India (TRAI) there are over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India are likely to cross 969 million by 2021. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. It is expected that over the next couple years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.

 

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Eros Now is increasingly focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile, tablets, cable or internet, including through deals with OEMs. Eros Now had over 60 million registered users and over 2.1 million paying users in March 2017. While a majority of users are from India, Eros Now has registered users in 135 different countries. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages. Eros Now service is integrated with some of India’s leading telecom operators, Bharti Airtel, Idea Cellular, BSNL and Jio and has partnered with Micromax, Samsung and Smartron to pre-bundle Eros Now in smart phones to be sold in India. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers. We continue to believe that Eros Now will be a significant player within the OTT online Indian entertainment industry, especially given the rapidly growing internet and mobile penetration within India.

 

Eros Now was also the number one trending app on the Google Play Store in the month of July. Demonetization in India increased the access to large addressable market through mobile wallets for Eros Now. Eros expands its reach by having tied up exclusively with SBI Buddy and other e-wallets in India such as Paytm, Mobikwik, Freecharge and Speedpay with an aggregate addressable market of 260 million.

 

Capitalize on positive industry trends driven by roll-out of high speed 4G services in the Indian market.

 

Propelled by the economic expansion within India and the corresponding increase in consumer discretionary spending, the FICCI Indian Media and Entertainment Industry Report 2017 (FICCI Report 2017) projects that the dynamic Indian media and entertainment industry will grow at a 13.9% compound annual growth rate, or CAGR, from $19.6 billion in 2016 to $37.5 billion by 2021, and that the Indian film industry will grow from $2.2 billion in 2016 to $3.2 billion in 2021. India is one of the largest film markets in the world. In fiscal 2017 the average ticket price amongst the two leading multiplex cinema chains in India was $.2.90 compared to $2.77 in fiscal 2016, a 4.5% increase year-on-year.

 

The Indian television market is the second largest in the world after China, reaching an estimated 181 million television, or TV households in 2016, of which over 169 million were subscribing cable and satellite households. FICCI Report 2017 projects that the Indian television industry will grow from $9.1 billion in 2016 to $18.1 billion in 2021. The growing size of the television industry has led television satellite networks to provide an increasing number of channels, resulting in competition for quality feature films for home viewing in order to attract increased advertising and subscription revenues.

 

Broadband and mobile platforms present growing digital avenues to exploit content. As per the latest Telecom Regulatory Authority of India report, there were over 1.2 billion wireless subscribers in India at the end of December 2016. The number of wireless internet users in India is likely to exceed 969 million by 2021. It is expected that over the next couple of years, 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. The average selling price of internet-enabled mobile phones is currently just below INR9,000 (~$140) which is half of that in China. Online video consumption is expected to increase the share of video in overall mobile internet traffic from 49% in 2016 to 75% in 2021.

 

We will take advantage of the opportunities presented by these trends within India to monetize our library and distribute new films through existing and emerging platforms, including by exploring new content options for expanding our digital strategy such as filming exclusive short form content for consumption through emerging channels such as mobile and internet streaming devices.

 

Further extend the distribution of our content outside of India to new audiences.

 

We currently distribute our content to consumers in more than 50 countries, including in markets where there is significant demand for subtitled and dubbed Indian themed entertainment, such as Europe and South East Asia, as well as to markets where there is significant concentration of South Asian expatriates, such as the Middle East, the United States and the United Kingdom.

 

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Our growth from non-diaspora international markets shows a growing appetite for the content of the Indian Film Industry in many new markets. One of our strongest potential markets, China, with a market size of $6.3 billion and almost 32,000 screens, is projected to soon surpass the United States as the largest film market in the world. We believe our memorandum of understanding to collaborate with China Film Corp., Shanghai Film Group Co. Ltd. and Fudan University Press Co. Ltd. to co-produce and distribute Sino-Indian films will be an important step in maximizing our opportunity in China. With Trinity’s launch, the studio is also expanding into new film markets, which includes entry into China. Two projects will be co-produced with a leading Chinese studio, based on stories organically weaving the socio-cultural worlds of India and China. Additionally, the films will be shot in both Chinese and Hindi. We intend to promote and distribute our films in additional countries, and further expand in countries where we already distribute, when we believe that demand for Indian filmed entertainment exists or the potential for such demand exists. We have also entered into arrangements with local distributors in Taiwan, Japan, South Korea, and China to distribute dubbed or subtitled Eros films through theatrical release, television broadcast or DVD release. Additionally, we believe that the general population growth in India experienced over recent years may eventually lead to increasing migration of Indians to other regions, resulting in increased demand for our films internationally. In Russia, we recently partnered with Central Partnership, an affiliate of Gazprom Media, to promote, develop and distribute Indian and Russian content across multiple platforms in both countries.

 

Expand our regional Indian content offerings.

 

We continue to be committed towards promoting regional content films and growing the regional movie industry. Our recent association with Phars Films towards jointly producing and distributing Malayam movies is another strong step in this direction. We will utilize our resources, international reputation and distribution network to continue expanding our non-Hindi content offerings to reach the substantial Indian population whose main language is not Hindi. While Hindi films retain a broad appeal across India, the diversity of languages within India allows us to treat regional language markets as distinct markets where particular regional language films have a strong following. In fiscal 2017, we released 33 non-Hindi regional language films. as compared to 30 films in fiscal 2016.

 

Our regional language films include Marathi, Malayalam, Punjabi and Bengali films. Our Malayalam 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.

 

Slate Profile

 

The success of our film distribution business lies in our ability to acquire content. Each year, we focus on the acquisition and distribution of a diverse portfolio of Indian language and themed films that we believe will have a wide audience appeal. For fiscal 2017, our releases included 12 new Hindi films, of which 2 were high budget films, and 18 Tamil and Telugu language films, of which 3 were high budget films. Our typical annual slate of new releases consists of both Hindi language films as well as films produced specifically for audiences whose main language is not Hindi, primarily Tamil, and to a lesser extent other regional Indian languages. Our most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) that we release globally each year. Of these Hindi, Tamil and Telugu films, we generally have four to six high budget films. The remainder of the films (mainly Hindi but also Tamil and/or Telugu) included in each annual release slate is built around these high budget films to create a slate that will attract varying segments of the audience, and typically includes eight to thirteen medium budget films. The remainder of the slate consists of Hindi, Tamil, Telugu and other language films of a lower budget.

 

We have maintained our focus on high and medium budget Hindi films because these films typically have better production values and more recognizable stars that typically attract larger theatrical audiences. These high and medium budget films also typically drive higher revenues from television syndication in India. We seek to mitigate the risks associated with these higher budget films through the use of our extensive pre-sale strategies. We have increased our focus on high and medium budget Tamil and Telugu films for similar reasons. In addition, we can release a Tamil and Hindi film on the same date as they cater to different audiences, which allow us to effectively schedule releases for our film portfolio and to take a greater combined share of the box office on those release dates. Our slate contained five high budget films in fiscal 2017, of which two were Hindi, one Tamil and two were Telugu and six high budget films in fiscal 2016, of which three were Hindi, two Tamil and one was Telugu.

 

Hindi Film Content. Our typical annual slate of films is comprised of high or medium budget films in the popular comedy and romance genres, supported by lower budget films.

 

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Selected Hindi Releases in fiscal 2017 (a)

 

Film   Cast/(Director)   Co-production/
Acquisition
  Genre   Actual Month 
of Release
 
Housefull 3   Akshay Kumar, Riteish Deshmukh, Abhishek / (Nadiadwala / Sajid Farhad)   Co Production   Comedy   June 16  
                   
Dishoom   John Abraham, Varun Dhawan, Jackie Fernandez / (Nadiadwala / Rohit Dhawan)   Co Production   Action   Jul 2016  
                   
Ki & Ka   Arjun Kapoor & Kareena Kapoor / (R. Balki)   Co Production   Drama   Apr 2016  
                   
Baar Baar Dekho   Siddharth Malhotra & Katrina Kaif / (Dharma / Nitya Mehra)   Acquisition   Romantic Drama   Sep 2016  
                   
Rock On 2   Farhan Akhtar, Arjun Rampal / (Excel / Shujaat Saudagar)   Acquisition   Drama   Nov 2016  
                   
Kahaani 2   Vidya Balan, Arjun Rampal (Sujoy Ghosh)   Acquisition (Overseas)    Thriller    Dec 2016  
                   
Banjo   Riteish Deshmukh & Nargis Fakhri / (Ravi Jadhav)   Production   Drama   Sep 2016  
                   
Happy Bhag Jayegi   Diana Penty, Abhay Deol, Jimmy Shergill   Co Production   Romantic Comedy   Aug 2016  

 

(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Hindi film releases. We released a total of 45 films in fiscal 2017 of which 12 were Hindi films.

 

Tamil, Telugu and Other Regional Film Content. In order to respond to consumer demand for regional films, we have a slate of films produced in languages other than Hindi, such as Tamil, Telugu, Marathi, Malayalam and Punjabi.

 

Selected Tamil, Telugu and other regional language releases in fiscal 2017 (a)

 

Film   Cast/(Director)   Co-production/
Acquisition
  Genre   Actual Month 
of Release
 
                   
Sardaar Gabbar Singh (Telugu)   Pawan Kalyan / (North Star / K S Ravindra)   Co Production   Action   April 2016  
                   
24 (Tamil)   Suriya, Samantha / Studio Green / Vikram Kumar   Acquisition   Science Fiction   May 2016  
                   
Chaar Sahibzaade 2 (Punjabi)   3D Animation / (Harry Baweja)   Co Production   Animation, History   Nov 2016  
                   
Janatha Garage (Telugu)   Junior NTR, Mohanlal, Samantha Ruth and Nithya Menen / (Koratala Siva)    Acquisition   Action/Romance   Sep 2016  

 

(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Tamil and Telugu film releases. We released a total of 45 films in fiscal 2017 of which 33 were regional films other than Hindi.

 

Our typical annual slate includes between 18 to 30 Tamil films and Telugu, of which 5 were global Tamil and Telugu releases in fiscal 2017 compared to 10 in fiscal 2016. Tamil films are predominantly star-driven action or comedy films, which appeal to audiences distinct from audiences for more romance-focused Hindi films. We believe that a Tamil or Telugu film and a Hindi film can be released simultaneously on the same date without adversely affecting business for either film as each caters to a different audience.

 

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We believe we can capitalize on the demand for regional films and replicate our success with Tamil and Telugu films for other distinct regional language films, including Marathi, Malayalam and Punjabi. In addition, the key Indian release dates for films, during school and other holidays, vary by region and therefore the ability to release films on different holidays in various regions, in addition to being able to release films in different regional languages simultaneously, expands the likely periods in which films can be successfully released. We intend to build up our portfolio of films targeting other regional language markets gradually.

 

Selected Major Releases in fiscal 2018(a)

 

Film   Cast/(Director)   Production/
Co-Production/
Acquisition
         
Sarkar 3   Amitabh Bachchan, Amit Sadh, Ronit Roy, Yami, Jackie Shroff (Ram Gopal Verma)   Co Production
         
Posto   Soumitra Chatterjee, Lily Chakraborty (Shibhoprasad Mukherjee & Nandita Roy)   Acquisition
         
Oru Kidayin Karunai Manu   Vidharth, Raveena Ravi (Suresh Sangiah)   Co Production
         
Tujha Tu Majha Mi   Lalit Prabhakar, Neha Mahajan (Kuldeep Jadhav)   Acquisition
         
Munna Michael   Tiger Shroff, Nidhhi Agerwal, Nawazuddin Siddiqui (Sabbir Khan)   Co Production
         
Sniff   Khushmeet Gill, Surekha Sikri, Manmeet Singh among others (Amole Gupte)   Production
         
Shubh Mangal Savdhaan   Ayushman Khurana, Bhumi Pednekar (Prasanna / Colour Yellow Productions)   Production
         
Bhavesh Joshi   Harshvardhan Kapoor (Vikram Motwane / Phantom Films)   Co Production
         
Happy Bhag Jayegi 2   Diana Penty, Abhay Deol, Jimmy (Mudassar Aziz / Colour Yellow Productions)   Production
         
Chandamama Door Ke   Sushant Singh Rajput, Nawazuddin Siddiqui (Sanjay Puran Singh)   Co Production
         
Soorma   Saif Ali Khan & Others (Navdeep Singh / Colour Yellow Productions)   Production

_______________

  (a) The list of films set forth in the table above is for illustrative purposes only, is not complete and only includes released and anticipated future releases. Due to the uncertainties involved in the development and production of films, the date of their completion can be significantly delayed, planned talent can change and, in certain circumstances, films can be cancelled or not approved by the Indian Central Board of Film Certification. See “Part I — Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business — Our films are required to be certified in India by the Central Board of Film Certification.”

 

Seasonality

 

Theater attendance in India has traditionally been highest during school holidays, national holidays and during festivals, and we typically aim to release high budget films at these times. This timing of releases also takes account of competitor film releases, Indian Premier League cricket matches and the timing dictated by the film production process and as a result, our quarterly results can vary from one year to the next.

 

Content Development and Sourcing

 

We currently acquire films using two principal methods — by acquiring rights for films produced by others, generally through a license agreement, and by co-producing films with a production house, typically referred to as a banner, that is usually owned by a top Indian actor, director or writer, on a project by project basis. We regularly co-produce and acquire film content from some of the leading banners in India. We continue to be focused on ramping up our own productions and co-productions through key partnerships. These partnerships include the ones we have with - talented producer-director, Aanand L Rai (Colour Yellow Production) and Trinity Pictures, Eros’ in-house franchise label. We have recently partnered with Phars Film, one of the UAE’s largest film distribution and exhibition network. The partnership will involve Eros and Phars Films jointly co-producing Malayalam films along with exploration of theatrical rights between the two entities. The deal licenses Eros to exploit the distribution of all Malayalam movies produced jointly in India, while Phars Films would exploit the same overseas. We will also partner with Pana Film, one of the largest Turkish film studios for Indo-Turkish co-productions. Original stories blending Indian and Turkish cultures will be conceptualized and developed by Eros’ in-house writers along with top Turkish writers, and both films will be bilingual. This will expand our presence to Turkey, the Middle East and North African regions. These strategic partnerships not only helps us augment our in-house content production model but also expands our geographical canvas for content monetization.

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Regardless of the acquisition method, over the past five years, we have typically obtained exclusive global distribution rights in all media for a minimum period of ten to twenty years from the Indian initial theatrical release date, although the term can vary for certain films for which we may only obtain international or only Indian distribution rights, and occasionally soundtrack or other rights are excluded from the rights acquired. For co-produced films, we typically have exclusive distribution rights for at least twenty years, co-own the copyright in such film in perpetuity and, after the exclusive distribution right period, share control over the further exploitation of the film.

 

We believe producers bring proposed films to us not only because of established relationships, but also because they want to leverage our proven distribution and marketing capabilities. Our in-house creative team also directly develops film ideas and contracts with writers and directors for development purposes. When we originate a film concept internally, we then approach appropriate banners for co-production. Our in-house creative team also participates in the selection of our slate with other members of our management in our analysis focused on the likelihood of the financial success of each project. Our management is extensively involved in the selection of our high budget films in particular.

 

Through Trinity Pictures, our franchise feature studio, plans to release Sniff during the fiscal 2018. Two additions of Sniff comics are already available in store along with iconic Chacha Choudhary comics which are available in five languages. The video game will also be launched before the movie release along with merchandising and animation series in the pipeline. We believe, Trinity Pictures is one of the first Bollywood studios in India with a dedicated in-house team of writers (the ”Trinity Writers Room”)and has created around twenty original franchises since its inception, out of which we expect atleast two films will release in fiscal 2019. Trinity’s initial film slate lineup includes a range of character driven franchises across budgets, genres and languages. The first Indo-China film “The Zookeeper” (working title), written and developed in-house by Trinity Pictures to be co-produced with Chinese studio Peacock Mountain Culture & Media Ltd, will be directed by Kabir Khan who also directed Bajrangi Bhaijaan and will be shot simultaneously in both languages. The Company expects this film to be released in fiscal 2019. Another Indo-China film will be co-produced with Huaxia Film Distribution Co Ltd and is currently titled, Love in Beijing (working title), and will be directed by Siddharth Anand It will be shot in both languages and is also expected to be released in fiscal 2019. Other projects includes a children’s action franchise, live action elephant film and a buddy cop film. Trinity Pictures is in discussions with third parties to create a digital comic book series, online gaming, animation series and merchandise for these franchise films.

 

Regardless of whether a film will be acquired or co-produced, we determine the likely value to us of the rights to be acquired for each film based on a variety of factors, including the stars cast, director, composer, script, estimated budget, genre, track record of the production house, our relationship with the talent and historical results from comparable films. Our primary focus is on sourcing a diversified portfolio of films expected to generate commercial success. We generally co-produce our high budget films and acquire rights to more medium and low budget films. Our model of primarily acquiring or co-producing films rather than investing in significant in-house production capability allows us to work on more than one production with key talent simultaneously, since the producer or co-producer takes the lead on the time intensive process of production, allowing us to scale our film slate more effectively. The following table summarizes typical terms included in our acquisition and co-production contracts.

 

    Acquisition   Co-production
Film Cost   Negotiated “market value”   Actual cost of production or capped budget and 10-15% production fee
         
Rights   10 years-20 years   Exclusive distribution rights for at least 20 years after which Eros shares control over the further exploitation of the film, and co-owned copyright in perpetuity, subject to applicable copyright laws
         
Payment Terms   10-30% upon signature
Balance upon delivery or in installments between signing and delivery
  In accordance with film budget and production schedule
         
Recoupment Waterfall   “Gross” revenues
Less 10-20% Eros distribution fee (% of cost or gross revenues)
Less print, advertising costs (actuals)
Less cost of the film
Net revenues generally shared equally
  Generally same as Acquisition except sometimes Eros also charges interest and/or a production or financing fee for the cost of capital and overhead recharges

 

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Where we acquire film rights, we pay a negotiated fee based on our assessment of the expected value to us of the completed film. Although the timing of our payment of the negotiated fee for an acquired film to its producer varies, typically we pay the producer between 10% and 30% of a film’s negotiated acquisition cost upon signing the acquisition agreement, and the remainder upon delivery of the completed film or in installments paid between signing and delivery. In addition to the negotiated fee, the producer usually receives a share of the film’s revenue stream after we recoup a distribution fee on all revenues, the entire negotiated fee and distribution costs, including prints and ads. After we sign an acquisition agreement, we do not exercise any control over the production process, although we do retain complete control over the distribution rights we acquire.

 

For films that we co-produce, in exchange for our commitment to finance typically 100% of the agreed-upon production budget for the film and agreed budget adjustments, we typically share ownership of the intellectual property rights in perpetuity and secure exclusive global distribution rights for all media for at least twenty years. After we recoup our expenses, we and the co-producers share in the proceeds of the exploitation of the intellectual property rights. Pending determination of the actual production cost of the film, we also agree to a pre-determined production fee to compensate the co-producer for his services, which typically ranges from 10%-15% of the total budget. We typically also provide a share of net revenues to our co-producers. Net revenues generally means gross revenues less our distribution fee, distribution cost and the entire amount we have paid as committed financing for production of the film. Our distribution fee varies from co-produced film to co-produced film, but is generally either a continuing 10% to 20% fee on all revenues, or a capped amount that is calculated as a percentage of the committed financing amount for production of the film. In some cases, net revenues also deduct an overhead charge and an amount representing an interest charge on some or all of the committed financing amount. Typically, once we agree with the co-producer on the script, cast and main crew including the director, the budget and expected cash flow through a detailed shooting schedule, the co-producer takes the lead in production and execution. We normally have our executive producer on the film to oversee the project.

 

We reduce financing risk for both acquired and co-produced films by capping our obligation to pay or advance funds at an agreed-upon amount or budgeted amount. We also frequently reduce financial risk on a film to which we have committed funds by pre-selling rights in that film.

 

Pre-sales give us advance information about likely cash flows from that particular film product, and accelerate cash flow realizable from that product. Our most common pre-sale transactions are the following:

·pre-selling theatrical rights for certain geographic areas, such as theaters outside the main theater circuits in India or certain non-Indian territories, for which we generally get nonrefundable minimum guarantees plus a share of revenues above a specified threshold;
·pre-selling television rights in India, generally by bundling releases in a package that is licensed to satellite television operators for a specified run; and
·pre-selling certain music rights, including for movie soundtracks and ringtones.

 

From time to time we also acquire specific rights to films that have already been released theatrically. We typically do not acquire global all-media rights to such films, but instead license limited rights to distribution channels, like digital, television, audio and home entertainment only, or rights within a certain geographic area. As additional rights to these films become available, we frequently seek to license them as well, and our package of distribution rights in a particular film may therefore vary over time. We work with producers not only to acquire or co-produce new films, but also to license from them other rights they hold that would supplement rights we hold or have previously held related to older films in our library. In certain cases, we may not hold full sequel or re-make rights or may share these rights with our co-producers.

 

Our Film Library

 

We currently own or license rights to over 3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal library as well as third party aggregated content, which we believe makes it one of the largest Indian movie offering platforms around the world. Our film library has been built up over more than 40 years and includes hits from across that time period, including, among others, Ki & Ka, Housefull 3, Dhishoom, Baar Baar Dekho, Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas, Hum Dil De Chuke Sanam, Lage Raho Munna Bhai, Om Shanti Om, Vicky Donor, English Vinglish, and Goliyon Ki Raasleela: Ram-Leela. We have acquired most of our film content through fixed term contracts with third parties, which may be subject to expiration or early termination. We own the rights to the rest of our film content as co-producers or sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to 60 to 70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least December 31, 2025.

 

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In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. More than 65% of the films in our Hindi library are films produced in the last 15 years. We own or license rights to films produced in several regional languages, including Tamil, Telugu, Kannada, Marathi, Bengali, Malayalam and Punjabi.

 

We treat our new releases as part of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.

 

A summary of certain key features of our film library rights as of March 31, 2017 follows below.

 

    Hindi Films   Regional Language Films
(excluding Kannada films)
  Kannada Films
             
Approximate percentage of total library   19%   65%   16%
             
Approximate percentage of co-production films   1%   Less than 1%   Not applicable
             
Minimum remaining term of exclusive distribution rights for total films (approximate percentage of rights expiring at the earliest in the periods indicated)   2020 or earlier:29%
2021-2025: 35%
2026-2030: 6%
2031-2045: 22%
Perpetual rights, subject to applicable copyright law limitations: 9%
  2020 or earlier: 21%
2021-2025: 17%
2026-2030: 7%
2031-2045: 0%
Perpetual rights, subject to applicable copyright law limitations: 55%
  Not applicable
             
Remaining term of exclusive distribution rights for co-production (approximate percentage of rights expiring earliest in the periods indicated)   2020 or earlier: 0%
2021-2025: 0%
2026-2030: 0%
2031-2045: 0%
Perpetual rights, subject to applicable copyright law limitations: 100%
  Perpetual rights, subject to applicable copyright law limitations: 100%   Perpetual rights, subject to applicable copyright law limitations: 100%
             
Date of first release (by Eros or prior rights owner)   1933-2017   1935-2017   *
             
Rights in major distribution channels   Theatrical: 19%
Television syndication: 19%
Digital: 92%
  Theatrical: 12%
Television syndication: 15%
Digital: 93%
  Digital: 100%
             
Music Rights (approximate percentage of films)   10%   13%   0%
             
Production Years (approximate percentage of films produced in the periods indicated)   1933-1965: 13%
1966-1990: 20%
1991-2017: 67%
  1933-1965: 4%
1966-1990: 25%
1991-2017: 72%
  *

 

  * Our Kannada digital rights library was acquired in September 2010, subsequent to the production and date of first release for these films, and consequently this information is not in our records.

 

Distribution Network and Channels

 

We distribute film content primarily through the following distribution channels:

·theatrical, which includes multiplex chains and stand-alone theaters;
·television syndication, which includes satellite television broadcasting, cable television and terrestrial television; and
·digital and ancillary which primarily includes IPTV, VOD, music, inflight entertainment, home video, internet channels and Eros Now.

 

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We generally monetize each new film we release through an initial twelve month revenue cycle commencing after the film’s theatrical release date. Thereafter, the film becomes part of our film library where we seek to continue to monetize the content through various platforms. The diagram below illustrates a typical distribution timeline through the first twelve months following theatrical release of one of our films.

 

Film release first cycle timeline

 

 

 

We currently acquire films both for global distribution, which includes the Indian domestic market as well as international markets and for international distribution only.

 

Certain information regarding our initial distribution rights to films initially released in the three fiscal years 2017, 2016 and 2015 is set forth below:

 

   Year ended March  31, 
   2017   2016   2015 
Global (India and International)               
Hindi films   8    27    30 
Regional films (excluding Tamil films)   12    6     
Tamil films   3    8    6 
International Only               
Hindi films   3    5    15 
Regional films (excluding Tamil films)           1 
Tamil films   12    10    13 
India Only               
Hindi films   1    1     
Regional films (excluding Tamil films)   5    5     
Tamil films   1    1     
Total   45    63    65 

 

“High budget” films refer to Hindi films with direct production costs in excess of $8.5 million and Tamil and Telugu films with direct production costs in excess of $7.0 million, in each case translated at the historical average exchange rate for the applicable fiscal year. “Low budget” films refer to Hindi, and regional films with less than $1.0 million in direct production costs, in each case translated at the historical average exchange rate for the applicable fiscal year. “Medium budget” films refer to Hindi, and regional films within the remaining range of direct production costs.

 

We distribute content in over 50 countries through our own offices located in key strategic locations across the globe. In response to Indian cinemas’ continued growth in popularity across the world, especially in non-English speaking markets, including Germany, Poland, Russia, Southeast Asia and Arabic speaking countries, we offer dubbed and/or subtitled content in over 25 different languages. We have entered into co-production deals with Chinese film companies. In addition to our internal distribution resources, our global distribution network includes relationships with distribution partners, sub-distributors, producers, directors and prominent figures within the Indian film industry and distribution arena.

 

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Theatrical Distribution and Marketing

 

Indian Theatrical Distribution. The Indian theatrical market is comprised of both multiplex and single screen theaters which are 100% digitally equipped. In India, the cost of distributing a digital film print is lower than the cost of distributing a digital film print in the United States. Utilization of digital film media also provides additional protection against unauthorized copying, which enables us to capture incremental revenue that we believe are at risk of loss through content piracy.

 

India is divided into 14 geographical regions known as “Film Circuits” or “Film Territories” in the Indian Film Trade. We distribute our content in all of the circuits either through our internal distribution offices (Mumbai, Delhi, East Punjab, Mysore, Kerala, West Bengal and Bihar) or through sub-distributors in remaining circuits. The Film Circuits where we have direct offices comprise of a market share of up to 75% of the India theatrical revenue. Our primarily internal distribution network allows us greater control, transparency and flexibility over the core regions in which we distribute our films, and allows us to retain a greater portion of revenues per picture as a result of direct exploitation instead of using sub-distributors, which requires the payment of additional fees, sub distributor margins or revenue shares.

 

We entered into agreements with certain key multiplex operators to share net box office collections for our theatrical releases with the exhibitor for a predetermined fee of 50% of net box office collections for the first week, after which the split decreases over time.

 

We primarily enter into agreements on a film-by-film and exhibitor-by-exhibitor basis; however, we also have annual agreements with some of the top national multiplex chains. To date, our agreements have been on terms that are no less favorable than the terms of the prior settlement agreements; however, we cannot guarantee such terms can always be obtained.

 

The largest number of screens in India that we book for a particular film are booked for the first week of theatrical release, because as a substantial portion of box office revenues are collected in the first week of a film’s theatrical exhibition. Our agreements with pan India multiplex operators is such that 100% of the entire first week of Eros share of revenues from all our films from such multiplexes is paid to us within 10 days of the release.

 

In single screens we either obtain non-refundable minimum guarantees/refundable advances and a revenue sharing arrangement above the minimum guarantee and with certain smaller multiplex chainswe obtain refundable advances and a revenue sharing arrangement.

 

Pursuant to the Cinematograph Act, Indian films must be certified for adult viewing or general viewing by the Central Board of Film Certification, or CBFC, which looks at factors such as the interest of sovereignty, integrity and security of India, friendly relations with foreign states, public order and morality. Obtaining a desired certification may require us to modify the title, content, characters, storylines, themes or concepts of a given film.

 

International Distribution. Outside of India, we license Indian film content to content aggregator to reach cable and pay TV subscriber and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania), amongst others. We also license dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.

 

Marketing. The pre-release marketing of a film is an integral part of our theatrical distribution strategy. Our marketing team creates marketing campaigns tailored to market and movie, utilizing print, brand tie-ups, music pre-releases, television, print and outdoor advertising, social media marketing on Facebook and Twitter and online advertising to generate momentum for the release of a film. We generally begin print media public relations as soon as a film commences shooting, with full marketing efforts commencing two to three months in advance of a film’s release date, starting with a theatrical trailer for the film promoted as part of another film currently playing in theaters. In addition, usually between six to eight weeks before the initial Indian theatrical release date, we separately release clips from the films featuring musical numbers. Those clips and the accompanying music tracks are separately available for purchase and add to consumer awareness and anticipation of the upcoming film release. We also maintain a Facebook page, which supplies background detail, chat opportunities and photos of upcoming films as well as links to our YouTube content.

 

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We also use promotional agreements and integrated television marketing to subsidize marketing costs and expand our marketing reach. We partner with leading consumer companies in India which support our marketing campaigns in exchange for including their brands in promotional billboards, print ads and other marketing materials for our new film releases. Our marketing teams also work with our film stars to coordinate promotional appearances on popular television programming, timed to coincide with the marketing period for upcoming theatrical releases.

 

Our marketing efforts are primarily managed by employees located in offices across India or in one of our international offices in Dubai, Singapore, the U.S., the United Kingdom, Australia and Fiji. Occasionally, sub-distributors manage marketing efforts in regions that do not have a dedicated Eros marketing team, using the creative aspects developed by us for our marketing campaigns. Managing marketing locally permits us to more easily identify appropriate local advertising channels and results in more effective and efficient marketing.

 

Television Distribution

 

India Distribution. We believe that the increasing television audience in India creates new opportunities for us to license our film content, and expands audience recognition of the Eros name and film products. We license Indian film content (usually a combination of new releases and existing films in our library), to satellite television broadcasters operating in India under agreements that generally allow them to telecast a film over a stated period of time in exchange for a specified license fee. We have, directly or indirectly, licensed content for major Indian television channels such as Colors, Sony, the Star Network and Zee TV.

 

Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. Where we do pre-sales, we negotiate a set license fee which is payable over time with the last payment due on delivery of the film. For Fiscal 2018, we already have pre-sales visibility for some of our films such as Munna Micheal, Sarkar3, Shubh Mangal Savdhaan and others. For fiscal 2017 pre sales from sale of satellite television rights was achieved for our films such as Housefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. We recouped 108% and 93% of our direct production cost of the two Telugu films released through contractual commitments prior to the films releases, and we recouped 96% of our direct production cost of one Tamil film released through contractual commitments prior to the film’s release.

 

Our content is typically released on satellite television three to six months after the initial theatrical release. In India there are currently six direct to home, or DTH, providers. We have offered some of our films through DTH service providers, but we have also licensed these rights with the satellite TV rights to satellite channel providers. As the number of DTH subscribers increase in India, we anticipate that we will have an opportunity to license directly for DTH exploitation. We have also provided content to regional cable operators. Although DTH distribution is still relatively small in India, with Indian telecom networks and DTH platforms expanding their services, we are beginning to see an increased interest for video on demand in India. We also sub-license some of our films for broadcast on Doordarshan, the sole terrestrial television broadcast network, which is government owned. We are seeing increasing growth from the Indian cable system which is predominantly digital. We believe that as the cable industry migrates towards digital technology and moves toward consolidation, cable television licensing will represent a more significant revenue stream for our business.

 

International Distribution. Outside of India, we license Indian film content to content aggregators to reach cable and pay subscribers and for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania), amongst others. We also license dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.

 

Digital Distribution

 

In addition to our theatrical and television distribution networks, we have a global network for the digital distribution of our content, which consists of full length films, music, music videos, clips and other video content. Through our digital distribution channel we mainly monetize music assets and distribute movies and other content primarily in IPTV, VOD (including SVOD and DTH) and online internet channels. Our film content is distributed in original language, subtitled into local languages or dubbed, in each case as driven by consumer or regional market preferences. With our large library of content and slate of new releases, we have sought to capitalize on changes in consumer demand through early adoption of new formats and services, which we believe enables us to generate a larger portion of our revenue through digital distribution than the film entertainment industry average in India.

 

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With a significant portion of the Indian and international population rapidly moving toward digital technology, we are increasing our 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 we supply. In addition, with the proliferation of internet users, we are increasing our online distribution presence as well. These platforms enable us to continue to monetize a film in our library long after its theatrical release period has ended. In addition, the speed, ease of availability and prices of digital film distribution diminish incentives for unauthorized copying and content piracy.

 

In North America, we have an agreement with International Networks, a subsidiary of Comcast, to provide a SVOD service fully branded as ‘Eros Now’. The service is carried on most of the major cable network providers including Comcast, Cox Communications, Cablevision and Time Warner Cable. We provide all programming for this film and music channel and share revenues with the cable providers. We also provide content to Amazon Digital and participate in a revenue share deal. We have also appointed Royalty Network Inc. and have granted sub-publishing rights to collect revenues. In Canada, Eros has signed a Program License Agreement for various movies with Rogers Broadcasting Limited.

 

On YouTube, where we have exceeded 6.4 billion views to date since our launch in 2007 and have over 7.9 million free subscribers as of June 2017, we sell banner and pre-roll advertisements, and share these advertising revenues with Google.

 

Eros Now

 

As per the latest Telecom Regulatory Authority of India report, there are over 1.2 billion wireless subscribers in India at the end of March 2017. The number of wireless internet users in India is likely to exceed 969 million by 2021. 3G and 4G subscribers would constitute over 80% of the wireless internet subscribers base. The number of internet-enabled mobile phones exceeded 300 million in 2016 and is expected to hit 700 million in 2021. The average selling price of internet-enabled mobile phones is currently just below INR9,000 (USD 140) which is half of that in China. Online video consumption is expected to increase the share of video in overall mobile internet traffic from 49% in 2016 to 75% in 2021.

 

Eros Now, our digital OTT entertainment service has over 60 million registered users across WAP, APP and Web and had 2.1 million paying subscribers as of March 31 2017. Eros Now has grown its registered user base from 19 million users in the fourth quarter of fiscal 2015 to 60 million users in fiscal 2017. Eros Now has grown its paying subscribers from 1.1 million users in the first quarter of fiscal 2017 to 2.1 million users in the fourth quarter of fiscal 2017. Continuing with the momentum as of June 2017 Eros Now has 68 million registered users and 2.9 million paying subscribers. We define paying subscribers to mean any subscriber who has made a valid payment to subscribe to a service that includes Eros Now services as part of a bundle or on a standalone basis, either directly or indirectly through an OEM or TELCO in any given month, be it through a daily, weekly or monthly billing pack, so long as the validity of the pack is for at least one month.

 

Our revenue model focuses on B2B distribution which includes our partnerships with leading mobile operators in India, including Idea Cellular, Bharti-Airtel, Vodafone, BSNL and Reliance Jio. With these platforms offering Eros Now integrated as part of their video services, it has increased Eros Now’s potential of reaching a significant number of India’s total mobile subscribers. Eros Now also has partnered with leading OEMs such as Micromax, Samsung and Smartron to pre-bundle Eros Now in smart phones sold in India. It has also entered into partnerships with several leading electronic payment platforms including Paytm, Mobikwik, SBI Buddy, Freecharge and Speedpay that enable Eros Now subscribers to make easy and hassle free payments using e-wallet services. Eros Now recently announced a strategic integration deal with Ola, India's leading mobile app for transportation, using Ola’s connected in-car entertainment platform for ridesharing, Ola Play. This strategic revenue-sharing partnership will enable an immersive and personalized experience that customers can seamlessly control through their smartphones as well as through a device mounted at the back of the seat.

 

Eros Now has entered the Malaysian market with partnerships with the country’s leading telecom operators, Maxis Berhad and U Mobile. Eros Now is the only Indian OTT platform to penetrate the growing Malaysian market. Eros Now recently entered into a partnership with T-Mobile’s video streaming program, Binge On. Eros Now is accessible to T-Mobile’s large customer base of approximately 71.5 million users across the US, who can stream its extensive library of Bollywood and regional language films, music, and originals. Eros Now is available on Lyca TV, which is the world’s largest OTT ethnic entertainment provider and delivers broad range of international content across multiple devices. Eros Now has also partnered with Jadoo TV, a leading distributor of internet based South Asian & multicultural content provider across the U.S., Europe & Australia.

 

Eros Now partnered with IIFA (International Indian Film Academy) to be the first exclusive digital platform to air the awards weekend to its millions of subscribers worldwide. It also penetrated deeper into the market in Fiscal 2017 by forming long term partnerships across the leading Telecom operators in India including Reliance Jio, Vodafone, Idea, BSNL and Airtel.

 

Eros Now has billing integration system with Fortumo, a leading global provider of direct carrier billing. Fortumo payments cover 98 markets and connect merchants to subscribers of more than 350 mobile operator networks. Apple has featured the Eros Now app in its “App Store Best of 2016”. Eros Now was also the number one trending app in July 2017 on Google Play store.

 

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Eros Now enhances its consumer appeal through exploring dynamic genres to create unseen, relatable and contemporary “Originals” that target the youth of India and are an important part of the Eros Now content strategy. Eros Now’s original content offering began with the release of Salute Siachen, India’s first ever celebrity high endurance expedition to the Siachen Glacier. In addition, Eros Now originals such as Flesh by Siddharth Anand, Smoke and Side Hero will be launched in Fiscal Year 2018. These originals follow a rigorous greenlighting process just like films, with script, screenplay, budgeting pilot episode production, market research and testing of the pilot episode and final production. Eros Now has also added a series of short originals titled Black & White which range from interviews to teˆte-a¨-teˆte with leading talent from the Indian film industry and are shot exclusively for Eros Now. Another short form of original content available on Eros Now is “E-Buzz”, this offers exclusive behind the scenes to all key social celebrity events on the calendar.

 

Physical and Other Distribution

 

We also distribute globally our film content through physical formats (DVDs and Video Compact Discs, or VCDs), in hotels and with airlines, and for use on mobile networks. We distribute and license content on physical media throughout the world, including on Blu-ray and DVDs, and in India on VCD and DVD. In India, and in servicing South Asian consumers internationally, we distribute to wholesalers & corner shop retailers and internet platforms such as Amazon, as well as supply local wholesalers and retailers. We also license content to third party distributors internationally to provide content dubbed in local languages for consumption by non-South Asian audiences. We also have direct sales to corporate customers, primarily in India, who bundle our DVDs or VCDs with their own products for promotional purposes. This aspect of our business works on a volume basis, with the low margins being offset by large confirmed orders. We have provided content for various mobile platforms such as Singtel and Shotformats Digital Productions.

 

Music

 

Music is integral to our films, and when we obtain global, all-media rights in our acquired or co-produced films, music rights typically are included. Film music rights are often marketed and monetized separate from the underlying film, both before and after the release of the related films. In addition, we act as a music publisher for third party owned music rights within India. Through our internal resources and network of licensees, we are able to provide our consumers with music content directly, through third party platforms or through licensing deals. The content is primarily taken from our film content and the revenues are derived from mobile rights, MP3 tracks, sold via third party platforms such as iTunes and Rhapsody as well as streaming services such as Spotify and Google Music digital streaming, physical CDs and publishing/master rights licensing.

 

We also exploit the music publishing and master rights we own, which involves directly licensing songs to radio and television channels in India, synchronizing of music content to film, television and advertisers globally, as well as receiving royalties from public performance of these songs when they are played at public events. Ancillary revenues from public performances in India are collected and paid over to us through Novex , which monitor, collect and distribute royalties to their members.

 

Intellectual Property

 

As our revenues are primarily generated from commercial exploitation of our films and other audio and/or audio-visual content, our intellectual property rights are a critical component of our business. Unauthorized use/access of intellectual property, particularly piracy of DVDs and CDs, as well as on-line piracy through unauthorized streaming/downloads, is widespread in India and other countries, and the mechanisms for protecting intellectual property rights in India and such other countries are not as effective as those of the United States and certain other countries. In order to restrict piracy we participate directly and through industry organizations by way of actions including legal claims against persons/entities who illegally pirate our content. Further we also deal with piracy by promoting and marketing our 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 our OTT platform “Eros Now” to grow rapidly. However this business faces competition from sites offering unauthorized pirated content. In order to tackle this issue of on-line piracy, we have adapted modernized Digital Right Management technology in order to ensure that our content is protected from unauthorized and illegal access and copying.

 

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Copyright protection in India

 

The Indian Copyright Act, 1957 (as amended) (“Copyright Act”), has prescribed provisions relating to registration of copyrights, transfer of ownership and licensing of copyrights and infringement of copyrights and remedies available in that respect. The Copyright Act affords copyright protection to cinematographic films and sound recordings and all other audio-visual content. 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.

 

Recently, 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.

 

In December 2009, the Union Information & Broadcasting Ministry established a task force to recommend measures to combat film, video and cable piracy, which submitted recommendations in September 2010, including:

·as a condition to licenses being granted to theaters and multiplexes by district authorities, theater and multiplex operators should be required to prohibit viewers from carrying a cam-cording device inside the theater;
·encouraging state governments to enact legislation providing for preventive detention of video and audio pirates and bring video pirates under the Goonda Act; and
·undertaking measures to ensure high fidelity in genuine DVDs to discourage the public from buying pirated versions.

 

However, these are recommendations of the task force, and there can be no assurance that any of these recommendations will be accepted and become binding law or regulation in a timely manner, or at all.

 

It is pertinent to note that, piracy continues to be one of the major issues affecting the Indian Film Industry with an annual loss of substantial revenues, to the tune of around INR 180 Billion every year.  In an effort to protect their IP, filmmakers in India have started getting ‘John Doe’ orders from court that put the onus of the ISP to block access to websites and URL’s that facilitate pirated content. We obtain similar protective orders from court for our films and also engage the services of a specialized anti-piracy agency to vigilantly monitor and take down on-line pirated content from our cinematograph films.

 

Recently, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India issued the National Intellectual Property Rights Policy which aims, among other things, to stimulate intellectual property creation and protection by Indian and foreign corporates, to commercialize intellectual property rights by exploring the feasibility of creation of an IPR exchange and to enable valuation of intellectual property rights as intangible assets. The policy contemplates the review of existing intellectual property related laws, wherever necessary, and states that the Indian Cinematography Act, 1952 should be suitably amended to provide for penal provisions for illegal duplication of films.

 

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 70 Indian registered trademarks and domain names, which are used in their business, including the registered trademark “Eros,” “Eros International,” “Eros Music,” “Eros Now”, “Trinity Media”, “Trinity Pictures” and “Trinity Movies”. However, certain of our trademarks used in India are still under the process of registration. A majority of these registrations, and certain applications for registrations, are in the name of our subsidiaries Eros India, Eros Films or Eros Digital Private Limited, with whom we have an informal arrangement with respect to the use of such trademarks. The registration of any trademark in India is a time-consuming process, and there can be no assurance as to when any such registration will be granted.

 

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The Indian Trade Marks Act, 1999, or 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 trademark is prohibited, including where the mark sought to be registered is not distinctive.

 

Until recently, to obtain registration of a trademark in multiple countries, an applicant was required to make separate applications in different languages and countries and disburse different fees in the respective countries. However, the Madrid Protocol enables nationals of member countries, including India, to secure protection of trademarks by filing a single application with one fee and in one language in their country of origin.

 

In lieu of the above the Trademarks Act, 1999 of India was amended by the Trade Marks (Amendment) Act 2010, or the Trademarks 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 trademark registrar to extend the time for filing a notice of opposition of published applications and provides for a uniform time limit of four months in all cases. Further, it simplifies the law relating to transfer of ownership of trademarks by assignment or transmission and brings the law generally in line with international practice. Pursuant to the Madrid Protocol and the Trademarks Amendment Act, we have obtained trademarks in Egypt, the European Community, United Arab Emirates, Australia and the United States.

 

Recently, 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 amended by the Trademark Rules, 2017. Some notable amendments were; reduction in the number of Trademark procedural forms; specific concessions to Start Ups, Individuals and Small Enterprises and for e-filing; 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

 

The Indian film industry’s 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 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.

 

We believe we were 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 our direct competitors, such as The Walt Disney Company (“Disney”), 20th Century Fox Pictures and Viacom Studio 18, have moved toward similar models in addition to their other business lines within the Indian entertainment industry. We also face 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 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. Our primary competitors for Indian film content in the markets outside of India are UTV, Fox, Viacom and Yash Raj Films. We believe our experience and understanding of the Indian film market positions us well to compete with new and existing entrants to the Indian media and entertainment sector. comScore reported our market share (as an average over the preceding six calendar years to 2016) as 31% of all theatrically released Indian language films in the United Kingdom and the U.S., based on gross collections. Competition within the industry is based on relationships, distribution capabilities, reputation for quality and brand recognition.

 

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Our Film Library

 

We currently own or license rights to films currently comprising over 3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal library as well as third party aggregated content which it believes makes it one of the largest Indian movie offering platforms around the world. Our film library has been built up over more than 40 years and includes hits from across that time period, including among others Ki & Ka, Housefull 3, Baar Baar Dekho, Sardaar Gabbar Singh, 24 (Tamil), Janatha Garage, Dishoom Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas, Hum Dil De Chuke Sanam, Lage Raho Munna Bhai, Om Shanti Om, Vicky Donor, English Vinglish, and Goliyon Ki Raasleela: Ram-Leela. We have acquired most of our film content through fixed term contracts with third parties, which may be subject to expiration or early termination.

 

We own the rights to the rest of our film content as co-producers or sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to at least 65-70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least March 31, 2020.

 

In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. More than half of our library is comprised of films first released ten or more years ago, including films released as early as the 1940s. We own or license rights to films produced in several regional languages, including Tamil, Kannada, Marathi, Telugu, Bengali Malayalam and Punjabi.

 

We treat our new releases as part of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.

 

Litigation

 

From time to time, we and our subsidiaries are involved in various lawsuits and legal proceedings that arise in the ordinary course of business. The following discussion summarizes examples of such matters. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Beginning on November 13, 2015, the Company was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company. The three actions in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United States District Court for the Southern District of New York where they were then consolidated with the other two actions on May 27, 2016. In general, the plaintiffs alleged that the Company, and in some cases also Company’s management, violated federal securities laws by overstating Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices.

 

On April 5, 2016, a lead plaintiff and lead counsel were appointed in the now-consolidated New York action. A single consolidated amended complaint was filed on July 14, 2016 and amended on October 10, 2016. The plaintiffs have alleged that the Company and certain individual defendants — Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran — have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act. The amended consolidated complaint has narrowed in scope significantly and does not assert certain claims that had been asserted in prior complaints, including (i) claims arising under Sections 11 and 15 of the Securities Act, (ii) accounting and GAAP allegations, and (iii) claims against certain individual defendants, who are not now named defendants. The remaining claims are primarily focused on whether the Company and individual defendants made material misrepresentations concerning the Company’s film library and materially misstated the usage and functionality of Eros Now. The Company’s most recent motion to dismiss the amended consolidated complaint was filed on November 11, 2016 and its reply brief was filed on January 6, 2017. The Court has not scheduled oral argument or indicated when it will rule on this motion.

 

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Eros India and its subsidiaries are involved in ordinary course government tax audits and assessments, which typically include assessment orders for previous tax years including on account of disallowance of certain claimed deductions.

 

During the year ended March 2015, Eros received two notices from the Commissioner of Service Tax (India) to show cause why an amount aggregating to $30 million for the period April 1, 2009 to March 31, 2014 should not be levied on and paid on account of service tax arising on temporary transfer of copyright services and certain other related matters. Eros has filed its objections against the notice with the authorities. Subsequently in June 2015, Eros received assessment orders from the Commissioner of Service Tax (India) levying tax as stated above and ordering Eros to pay an additional amount of $30 million as interest and penalties in connection with the aforesaid matters. On September 3, 2015, the Company filed an appeal against the said order before the authorities. In April 2016, Eros, received a show cause notice from the Commissioner of Service Tax on similar grounds amount aggregating to $1 million for the period 1 April 2014 to 31 March 2015. Considering the facts and nature of levies and the ad-interim protection for service tax levy for a certain period granted by the Honorable High Court of Mumbai, the Group expects that the final outcome of this matter will be favorable. Accordingly, based on the assessment made after taking appropriate legal advice, no additional liability has been recorded in Group’s consolidated financial statements.

 

During the year ended March 2015, Eros received several assessment orders and demand notices from value added tax and sales tax authorities in India for the payment of amounts aggregating to $3 million (including interest and penalties) for certain fiscal years between April 1, 2005 and March 31, 2011. Eros has appealed against each of these orders, and such appeals are pending before relevant tax authorities. Though there uncertainties are inherent in the final outcome of these matters, the Company believes, based on assessment made after taking legal advice, that the final outcome of the matters will be favorable. Accordingly, no additional liability has been recorded in Group’s consolidated financial statements.

 

During Fiscal 2017, a claim has been filed against Eros International Plc in the Commercial Court, Queen’s Bench Division of the High Court in London. The plaintiff (former employee) alleged that he is not to be treated as a “Leaver” for the purpose of share options awarded to him under the two Joint Ownership Deeds (“the JSOP Agreement”) entered into with the Company on April 20, 2012 at the time he served his vesting notices and that he was entitled to exercise his share options under the JSOP Agreement in accordance with the Vesting Notices. The estimated amount of claim is US$ 2.5 million. The Company is contesting the claim on the grounds that the employee has not met the JSOP Agreement terms and therefore not eligible for awards. Given the uncertainty inherent in the matter, based on assessment made after making appropriate legal advice, the Company does not believe that the ultimate outcome of this matter will be unfavorable. Accordingly, no liability has been recorded in Group’s consolidated financial statements.

 

Eros is also named in various lawsuits challenging its ownership of some of its intellectual property or its ability to distribute these films in India. A number of these lawsuits seek injunctive relief restraining Eros from releasing or otherwise exploiting various films, including Om Shanti Om, Kochadaiiyaan, Bhoot Returns and Goliyon Ki Rasleela-Ram-leela, Bajrangi Bhaijaan, Welcome Back, Sardar Gabbar Singh, Aligarh, Housefull 3.

 

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 and criminal proceedings had been initiated in various local courts in India in and around November 2013, including arrest warrants against Mr. Kishore Lulla and others involved in the making of this film, alleging that this film disrespected religious sensibilities and seeking to restrain its release or seeking directions for a review of its film certification. We have contested such claims in the local courts as well as by way of petitions filed by us before the Supreme Court of India. While hearings or investigations continue in some of these proceedings, we have obtained interim orders in our favor from the Supreme Court of India as well as certain of the local courts where such proceedings are being heard, including stays on all criminal proceedings against Eros India, Mr. Kishore Lulla and other persons involved in the making of the film. This film was released in November 2013.

 

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Government Regulations

 

The following description is a summary of various sector-specific laws and regulations applicable to Eros.

 

Material Isle of Man Regulations

 

Companies Regime. The Isle of Man is an internally self-governing dependent territory of the British Crown. It is politically and constitutionally separate from the United Kingdom and has its own legal system and jurisprudence based on English common law principles.

 

Isle of Man company law is largely based on that of England and Wales. There are two separate codes of company law, embodied in the Companies Acts of 1931-2004 (commonly referred to as the 1931 Act as the principal Act is the Companies Act 1931) and the Companies Act 2006 (commonly referred to as the 2006 Act), respectively. Our Company was incorporated on March 31, 2006 under the 1931 Act. Effective September 29, 2011, it re-registered as a company incorporated under the 2006 Act.

 

The 2006 Act updates and modernizes Isle of Man company law by introducing a new simplified corporate vehicle into Isle of Man law. The new 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.

 

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Miscellaneous. In addition to the foregoing, the following other points should be noted in relation to companies incorporated under the 2006 Act:

(a)there are no prohibitions in relation to the company providing financial assistance for the purchase of its own shares;
(b)there is no differentiation between public and private companies, but a company may adopt a name ending in the words “Public Limited Company” or “public limited company” or the abbreviation “PLC” or “plc”;
(c)there are simple share offering/annual report requirements;
(d)there are reduced compulsory registry filings;
(e)the statutory accounting requirements are simplified; and
(f)the 2006 Act allows a company to indemnify and purchase indemnity insurance for its directors.

 

Shareholders should note that the above list is not exhaustive.

 

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.

 

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).

 

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 is required to apply in the specified format for certification of such film, with the prescribed fee. The film is examined by an examining committee, which determines whether the film:

·is suitable for unrestricted public exhibition;
·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;
·is suitable for public exhibition restricted to adults;
·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;
·is suitable for certification in terms of the above if a specified portion or portions be excised or modified therefrom; or
·that the film is not suitable for unrestricted or restricted public exhibitions, or that the film be refused a certificate.

 

A film will not be certified for public exhibition if, in the opinion of the CBFC, the film or any part of it is against the interests of the sovereignty, integrity or security of India, friendly relations with foreign states, public order, decency or morality, or involves defamation or contempt of court or is likely to incite the commission of any offence. Any applicant, if aggrieved by any order of the CBFC either refusing to grant a certificate or granting a certificate that restricts exhibition to certain persons only, may appeal to the Film Certification Appellate Tribunal constituted by the Central Government in India under the Cinematograph Act.

A certificate granted or an order refusing to grant a certificate in respect of any film is published in the Official Gazette of India and is valid throughout India for ten years from the date of grant. Films certified for public exhibition may be re-examined by the CBFC if any complaint is received. Pursuant to grant of a certificate, film advertisements must indicate that the film has been certified for such public exhibition.

 

The Central Government in India may issue directions to licensees of cinemas generally or to any licensee in particular for the purpose of regulating the exhibition of films, so that scientific films, films intended for educational purposes, films dealing with news and current events, documentary films or indigenous films secure an adequate opportunity of being exhibited.

 

The Central Government in India, acting through local authorities, may order suspension of exhibition of a film, if it is of the opinion that any film being publicly exhibited is likely to cause a breach of peace. Failure to comply with the Cinematograph Act may attract imprisonment and/or monetary fines.

 

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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.

A draft Cinematograph Bill, 2013 has been prepared by the Ministry of Information and Broadcasting and is awaiting approval.

 

Insolvency and Bankruptcy Code, 2016. An act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation 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.

 

Labour Laws. Depending on the nature of work and number of workers employed at any workplace, various labour related legislations may apply. Certain significant provisions of such labour related laws are provided below.

 

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.

 

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Indian Takeover Regulations. The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 came into effect on October 22, 2011, which was last amended on March 06, 2017, superseding the earlier takeover regulations. The Takeover Regulations provide the process, timing and disclosure requirements for a public announcement of an open offer in India and the applicable pricing norms.

 

Pursuant to the Takeover Regulations, a requirement to make a mandatory open offer by an “acquirer” (together with persons acting in concert with it) for at least 26% of the total shares of the Indian listed company, to all shareholders of such company (excluding the acquirer, persons acting in concert with it and the parties to any underlying agreement including persons deemed to be acting in concert) is triggered, subject to certain exemptions including transfers between promoters, if an acquirer acquires shares or voting rights in the Indian listed company, which together with its existing holdings and those of any persons acting in concert with him entitle the acquirer and persons acting in concert to exercise 25% or more of the voting rights in the Indian listed company; or an acquirer that holds between 25% and the maximum permissible non-public shareholding of an Indian listed company, acquires additional voting rights of more than 5% during a financial year; or an acquirer acquires, directly or indirectly, control over an Indian listed company, irrespective of acquisition of shares or voting rights in the Indian listed company.

 

An acquisition of shares or voting rights in, or control over, any company that would enable a person to exercise or direct the exercise of such percentage of voting rights in, or control over, an Indian listed company, the acquisition of which would otherwise attract the obligation to make an open offer under the Takeover Regulations will also trigger a mandatory open offer under the Takeover Regulations. Where the primary target of the acquisition is an overseas parent of an Indian listed company and the Indian listed company represents over 80% of a specified materiality parameter (including asset value, revenue or market capitalization) of the overseas parent company, such acquisition would be treated as a “direct acquisition” of the Indian listed company.

 

Indian Companies Act. A majority of the provisions of the Companies Act, 2013 are now in effect, bringing into effect significant changes to the Indian company law framework, such as in the provisions related to issue of capital, disclosures, corporate governance norms, audit matters, and related party transactions. The Companies Act, 2013 has also introduced additional requirements which do not have equivalents under the Companies Act, 1956, including the introduction of a provision allowing the initiation of class action suits in India against companies by shareholders or depositors, a restriction on investment by an Indian company through more than two layers of subsidiary investment companies (subject to certain permitted exceptions), and prohibitions on advances to directors. Indian companies with net worth, turnover or net profits of INR 5,000 million or higher during any financial year are also required to spend 2.0% 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.

 

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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.

 

    Isle of Man Law   Delaware Law
         
General Meetings  

The 2006 Act does not require a company to hold an annual general meeting of its shareholders. Subject to anything contrary in the company’s memorandum and articles of association, a meeting of shareholders can be held at such time and in such place, within or outside the Isle of Man, as the convener of the meeting considers appropriate. Under the 2006 Act, the directors of a company (or any other person permitted by the company’s memorandum and articles of association) may convene a meeting of the shareholders of a company. Further, the directors of a company must call a meeting to consider a resolution requested in writing by shareholders holding at least 10% of the company’s voting rights. The Isle of Man Court may order a meeting of members to be held and to be conducted in such manner as the Court orders, among other things, if it is of the opinion that it is in the interests of the shareholders of the company that a meeting of shareholders is held.

 

Our articles require our Board of Directors to convene annually a general meeting of the shareholders at such time and place, and to consider such business, as the Board of Directors may determine.

  Shareholders of a Delaware corporation generally do not have the right to call meetings of shareholders unless that right is granted in the certificate of incorporation or bylaws. However, if a corporation fails to hold its annual meeting within a period of 30 days after the date designated for the annual meeting, or if no date has been designated for a period of 13 months after its last annual meeting, the Delaware Court of Chancery may order a meeting to be held upon the application of a shareholder.
         
Quorum Requirements for General Meetings   The 2006 Act provides that a quorum at a general meeting of shareholders may be fixed by the articles. Our articles provide a quorum required for any general meeting consists of shareholders holding at least 30% of the issued share capital of the Company.   A Delaware corporation’s certificate of incorporation or bylaws can specify the number of shares that constitute the quorum required to conduct business at a meeting, provided that in no event will a quorum consist of less than one-third of the shares entitled to vote at a meeting.
         
Board of Directors   Our articles provide that unless and until otherwise determined by our Board of Directors, the number of directors will not be less than three or more than twelve, with the exact number to be set from time to time by the Board of Directors. While there is no concept of dividing a 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.   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   Delaware Law
         
Removal of Directors  

Under Isle of Man law, notwithstanding anything in the memorandum or articles or in any agreement between a company and its directors, a director may be removed from office by way of shareholder resolution. Such resolution may only be passed (a) at a meeting of the shareholders called for such purposes including the removal of the director or (b) by a written resolution consented to by a shareholder or shareholders holding at least 75% of the voting rights.

 

The 2006 Act provides that a director may be removed from office by a resolution of the directors if the directors are expressly given such authority in the memorandum or articles, but our articles do not provide this authority.

  A typical certificate of incorporation and bylaws provide that, subject to the rights of holders of any preferred stock, directors may be removed at any time by the affirmative vote of the holders of at least a majority, or in some instances a supermajority, of the voting power of all of the then outstanding shares entitled to vote generally in the election of directors, voting together as a single class. A certificate of incorporation could also provide that such a right is only exercisable when a director is being removed for cause (removal of a director only for cause is the default rule in the case of a classified board).
         
Vacancy of Directors  

Subject to any contrary provisions in a company’s memorandum or articles of association, a person may be appointed as a director (either to fill a vacancy or as an additional director) by a resolution of the directors or by a resolution of the shareholders.

 

Our articles provide that any vacancy resulting from, among other things, removal, resignation, conviction and disqualification, may be filled by another person willing to act as a director by way of shareholder resolution or resolution of our Board of Directors. Any director appointed by the Board of Directors will hold office only until the next annual general meeting of the Company, when he will be subject to retirement or re-election.

  A typical certificate of incorporation and bylaws provide that, subject to the rights of the holders of any preferred stock, any vacancy, whether arising through death, resignation, retirement, disqualification, removal, an increase in the number of directors or any other reason, may be filled by a majority vote of the remaining directors, even if such directors remaining in office constitute less than a quorum, or by the sole remaining director. Any newly elected director usually holds office for the remainder of the full term expiring at the annual meeting of shareholders at which the term of the class of directors to which the newly elected director has been elected expires.
         
Interested Director Transactions   Under Isle of Man law, as soon as a director becomes aware of the fact that he is interested in a transaction entered into or to be entered into by the company, he must disclose this interest to the board of directors. Our articles provide that no director may participate in approval of a transaction in which he or she is interested.   Under Delaware law, some contracts or transactions in which one or more of a Delaware corporation’s directors has an interest are not void or voidable because of such interest provided that some conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. For an interested director transaction not to be voided, either the shareholders or the 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   Delaware Law
         
Cumulative Voting   There is no concept of cumulative voting under Isle of Man law.   Delaware law does not require that a Delaware corporation provide for cumulative voting. However, the certificate of incorporation of a Delaware corporation may provide that shareholders of any class or classes or of any series may vote cumulatively either at all elections or at elections under specified circumstances.
         
Shareholder Action Without a Meeting   A written resolution will be passed if it is consented to in writing by shareholders holding in excess of 50% or 75% in the case of a special resolution of the rights to vote on such resolution. The consent may be in the form of counterparts, and our articles provide that, in such circumstances, the resolution takes effect on the earliest date upon which shareholders holding a sufficient number of votes to constitute a resolution of shareholders have consented to the resolution in writing. Any holder of B ordinary shares consenting to a resolution in writing is first required to certify that it is a permitted holder as defined in our articles. If any written resolution of the shareholders of the company is adopted otherwise than by unanimous written consent, a copy of such resolution must be sent to all shareholders not consenting to such resolution upon it taking effect.   Unless otherwise specified in a Delaware corporation’s certificate of incorporation, any action required or permitted to be taken by shareholders at an annual or special meeting may be taken by shareholders without a meeting, without notice and without a vote, if consents, in writing, setting forth the action, are signed by shareholders with not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote were present and voted. All consents must be dated. No consent is effective unless, within 60 days of the earliest dated consent delivered to the corporation, written consents signed by a sufficient number of holders to take the action are delivered to the corporation.
         
Business Combinations   Under Isle of Man law, a merger or consolidation must be approved by, among other things, the directors of the company and by shareholders holding at least 75% of the voting rights. A scheme of arrangement (which includes, among other things, a sale or transfer of the assets of the company) must be approved by, among other things, the directors of the company, a 75% shareholder majority and also requires the sanction of the court.   With certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a Delaware corporation must be approved by the board of directors and a majority (unless the certificate of incorporation requires a higher percentage) of the outstanding shares entitled to vote thereon.
         
Interested Shareholders   There are no equivalent provisions under Isle of Man law relating to interested shareholders.   Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in specified corporate transactions (such as mergers, stock and asset sales and loans) with an “interested shareholder” for three years following the time that the shareholder becomes an interested shareholder. Subject to specified exceptions, an “interested shareholder” is a person or group that owns 15% or more of the corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or more of the voting stock at any time within the previous three years.

 

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    Isle of Man Law   Delaware Law
         
        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.
         
Limitations on Personal Liability of Directors   Under Isle of Man law, a director who vacates office remains liable under any provisions of the 2006 Act that impose liabilities on a director in respect of any acts or omissions or decisions made while that person was a director.   A Delaware corporation may include in its certificate of incorporation provisions limiting the personal liability of its directors to the corporation or its shareholders for monetary damages for many types of breach of fiduciary duty. However, these provisions may not limit liability for any breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, the authorization of unlawful dividends, shares repurchases or shares barring redemptions, or any transaction from which a director derived an improper personal benefit. A typical certificate of incorporation would also provide that if Delaware law is amended so as to allow further elimination of, or limitations on, director liability, then the liability of directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended. However, these provisions would not be likely to bar claims arising under U.S. federal securities laws.
         
Indemnification of Directors and Officers  

A company may indemnify against all expenses, any person who is or was a party, or is threatened to be made a party to any civil, criminal, administrative or investigative proceedings (threatened, pending or completed), by reason of the fact that the person is or was a director of the company, or who is or was, at the request of the company, serving as a director or acting for another company.

 

Any indemnity given will be void and of no effect unless such person acted honestly and in good faith and in what such person believed to be in the best interests of the company and, in the case of criminal proceedings, had no reasonable cause to believe that the conduct of such person was unlawful.

  Under Delaware law, subject to specified limitations in the case of derivative suits brought by a corporation’s shareholders in its name, a corporation may indemnify any person who is made a party to any third party action, suit or proceeding on account of being a director, officer, employee or agent of the corporation (or was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of directors who were not parties to the suit or proceeding (even though less than a quorum), if the person:
         

 

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    Isle of Man Law   Delaware Law
         
       

·     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.

         
Appraisal Rights   There is no concept of appraisal rights under Isle of Man law.   A shareholder of a Delaware corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive cash in the amount of the fair value of the shares held by that shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction.

 

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    Isle of Man Law   Delaware Law
         
Shareholder Suits  

The Isle of Man Court may, on application of a shareholder, permit that shareholder to bring proceedings in the name and on behalf of the company (including intervening in proceedings to which the company is a party). In determining whether or not leave is to be granted, the Isle of Man Court will take into account such things as whether the shareholder is acting in good faith and whether the Isle of Man Court itself is satisfied that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

 

Under Isle of Man law, a shareholder may bring an action against the company for a breach of a duty owed by the company to such shareholder in that capacity.

  Under Delaware law, a shareholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation, including for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. An individual also may commence a class action suit on behalf of himself or herself and other similarly situated shareholders where the requirements for maintaining a class action under Delaware law have been met. A person may institute and maintain such a suit only if such person was a shareholder at the time of the transaction which is the subject of the suit or his or her shares thereafter devolved upon him or her by operation of law. Additionally, under established Delaware case law, the plaintiff generally must be a shareholder not only at the time of the transaction which is the subject of the suit, but also through the duration of the derivative suit. Delaware law also requires that the derivative plaintiff make a demand on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff, unless such demand would be futile. In such derivative and class actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.
         
Inspection of Books and Records  

Upon giving written notice, a shareholder is entitled to inspect and to make copies of (or obtain extracts of) the memorandum and articles and any of the registers of shareholders, directors and charges. A shareholder may only inspect the accounting records (and make copies or take extracts thereof) in certain circumstances.

 

Our articles provide that no shareholder has any right to inspect any accounting record or other document of the company unless he is authorized to do so by statute, by order of the Isle of Man Court, by our Board of Directors or by shareholder resolution.

  All shareholders of a Delaware corporation have the right, upon written demand, to inspect or obtain copies of the corporation’s shares ledger and its other books and records for any purpose reasonably related to such person’s interest as a shareholder.

 

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    Isle of Man Law   Delaware Law
         
Amendment of Governing Documents   Under Isle of Man law, the shareholders of a company may, by resolution, amend the memorandum and articles of the company. The memorandum and articles of a company may authorize the directors to amend the memorandum and articles, but our memorandum and articles do not contain any such power. Our memorandum of association provides that our memorandum of association and articles of association may be amended by a special resolution of shareholders.   Under Delaware law, amendments to a corporation’s certificate of incorporation require the approval of shareholders holding a majority of the outstanding shares entitled to vote on the amendment. If a class vote on the amendment is required by Delaware law, a majority of the outstanding stock of the class is required, unless a greater proportion is specified in the certificate of incorporation or by other provisions of Delaware law. Under Delaware law, the 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.
         
Dividends and Repurchases  

The 2006 Act contains a statutory solvency test. A company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of its business and where the value of the company’s assets exceeds the value of its liabilities.

 

Subject to the satisfaction of the solvency test and any contrary provision contained in a company’s articles, a company may, by a resolution of the directors, declare and pay dividends. Our articles provide that where the solvency test has been satisfied, our Board of Directors may declare and pay dividends (including interim dividends) out of our profits to shareholders according to their respective rights and interests in the profits of the company.

 

Under Isle of Man law, a company may purchase, redeem or otherwise acquire its own shares for any consideration, subject to, among other things, satisfaction of the solvency test.

 

Delaware law permits a corporation to declare and pay dividends out of statutory surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.

 

Under Delaware law, any corporation may purchase or redeem its own shares, except that generally it may not purchase or redeem those shares if the capital of the corporation is impaired at the time or would become impaired as a result of the redemption. A corporation may, however, purchase or redeem capital shares that are entitled upon any distribution of its assets to a preference over another class or series of its shares if the shares are to be retired and the capital reduced.

 

Changes in Capital

 

The conditions in our articles of association governing changes in capital are not more stringent than as required under the 2006 Act. Our articles of association provide that our directors may, by resolution, alter our share capital. The 2006 Act subjects any reduction of share capital to the statutory solvency test. The 2006 Act provides that a company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of the company’s business and where the value of the company’s assets exceeds the value of its liabilities.

 

C. Organizational Structure

 

We conduct our global operations through our Indian and international subsidiaries, including our majority-owned subsidiary Eros International Media Limited, or Eros India, a public company incorporated in India and listed on the BSE Limited and National Stock Exchange of India Limited, or the Indian Stock Exchanges. Our agent for service of process in the United States is Prem Parameswaran, located at 550 County Avenue, Secaucus, New Jersey.

 

As of June 30, 2017, the Founders Group holds approximately 43.93% of our issued share capital, which comprise all of our B ordinary shares and certain A ordinary shares. Beech Investments Limited, a company incorporated in the Isle of Man, is owned by discretionary trusts that include Eros director Kishore Lulla as a potential beneficiary. Ganesh Holdings Limited is a wholly-owned subsidiary of the Ganesh Trust of which Vijay Ahuja and his family are beneficiaries.

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The following diagram summarizes the corporate structure of our consolidated group of companies as of June 30, 2017:

 

Eros Organizational Chart (as of June 30, 2017)

 

 

 

(a) Eros India holds 100% of each of its Indian subsidiaries other than Big Screen Entertainment Private Limited (India) and Colour Yellow Productions Private Limited (India), Ayngaran International Media Private Limited, Ayngaran Anak Media Private Limited and Eros International Distribution LLP.
(b) Ayngaran International Limited (Isle of Man) holds 51% of Ayngaran Anak Media Private Limited (India) and 100% of each of its other subsidiaries

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D. Property, Plant and Equipment

 

Our properties consist primarily of studios, office facilities, warehouses and distribution offices, most of which are located in Mumbai, India. We own our corporate and registered offices in Mumbai and rent our remaining properties in India. Five 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.” We also own or lease eight properties in the United Kingdom, the United States and Dubai in connection with our international operations outside of India. Property, plant and equipment with a net carrying amount of approximately $7.8 million (2016: $10.1 million) have been pledged to secure borrowings, and we currently do not have any significant plans to construct new properties or expand or improve our existing properties.

 

The following table provides detail regarding our properties in India and globally.

 

Location   Size   Primary Use   Leased / Owned
Mumbai, India   13,992 sq. ft.   Corporate Office   Owned
Mumbai, India   2,750 sq. ft.   Studio Premises   Leased(1)
Mumbai, India   8,094 sq. ft.   Executive Accommodation   Leased(1)
Mumbai, India   17,120 sq. ft.   Office   Leased(1)
Mumbai, India   1,000 sq. ft.   Film Negatives Warehouse   Leased
Mumbai, India   120 sq. ft.   Film Prints Warehouse   Leased
Mumbai, India   2,750 sq. ft.   Corporate   Owned
Delhi, India   600 sq. ft.   Film Distribution Office   Leased
Kolkata, India   640 sq. ft.   Film Distribution Office   Leased
Punjab, India   438 sq. ft.   Film Distribution Office   Leased
Bihar, India   1,130 sq. ft   Film Distribution Office   Leased
Kerala, India   1,800 sq. ft   Film Distribution Office   Leased
Kerala, India   1,500 sq. ft   Film Distribution Office   Leased
Mumbai, India   600 sq. ft.   DVD warehouse   Leased
Mumbai, India   1,600 sq. ft.   Warehouse   Leased
Chennai, India   8,942 sq. ft.   Corporate Office   Leased
Delhi, India   3,915 sq. ft.   Branch Office   Leased
Mumbai, India   750 sq. ft.   Branch Office   Leased
Bangalore, India   5,100 sq. ft.   Branch Office   Leased
Dubai, United Arab Emirates   536 sq. ft.   Corporate Office   Leased
Dubai, United Arab Emirates   747 sq. ft.   Corporate Office   Leased
Secaucus, New Jersey, U.S.   10,000 sq. ft.   Corporate Office   Leased(1)
London, England   7,549 sq. ft.   DVD Warehouse   Owned
London, England   4,506 sq. ft.   Corporate Office   Leased(1)
Fujairah, United Arab Emirates   676 sq. ft.   Corporate Office   Leased
Fujairah, United Arab Emirates   676 sq. ft.   Corporate Office   Leased
San Francisco, California, U.S.   2,315 sq. ft.   Digital team   Leased

 

(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

 

A. Operating Results

 

You should read the information contained in the table below in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report. The tables set forth below with our results of operations and period over period comparisons are not adjusted for the fluctuations in exchange rates described in “Part I — Item 3. Key Information — A. Selected Financial Data.”

 

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Outlook

 

Our primary revenue streams are derived from three channels: theatrical, television syndication and digital and ancillary. For the fiscal year ended March 31, 2017, the aggregate revenues from theatrical, television syndication and digital and ancillary were $101.0 million, $88.0 million and $64 million respectively, compared to $138.4 million, $72.1 million and $63.9 million, respectively, for the fiscal year ended March 31, 2016.

 

The contribution from these three distribution channels can fluctuate year over year based on, among other things, our mix of films and budget levels, and the size of our television syndication deals.

 

The largest component of our revenue is attributable to the theatrical distribution of our films in India. We anticipate that as additional multiplex theaters are built in India, there will be increased opportunities to exploit our film content theatrically. We expect that this multiplex theater growth coupled with the rise in ticket prices and the anticipated increase in the number of high budget Hindi and Tamil films in our slate will result in increased revenue. In addition, in India, we cannot predict the share of theatrical revenue we will receive, as we currently negotiate film-by-film and exhibitor-by-exhibitor. We set up Trinity Pictures in fiscal year 2015 as a dedicated franchise studio that develops valuable intellectual property in the form of franchise films. With a focus on creating intellectual property in-house along with delivering wholesome entertainment to audiences, we have entered into key co-production partnerships with producers and directors. Colour Yellow Production, a subsidiary of Eros India with Anand L Rai has announced film releases across budgets, genres and languages. This co-production model along with our in-house production franchise ‘Trinity’ gives us better visibility on actual cost of production ensuring capped budgets and exclusive distribution rights, typically for at least 20 years.

 

We believe China to be a significant market opportunity for Indian films. As per PwC Global Entertainment & Media Outlook, 2016-2020, China is expected to overtake the US box office next year. China box office grew 49% in 2015 to $6.3 billion and is expected to grow to $10.3 billion next year. In comparison the US box office is expected to contract from $10.3 billion to $10 billion next year. Hollywood’s share of the Chinese box office has slipped to 38.4% in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screens and by end of 2015 that number grew to almost 32,000. Overall China is propelling Asia-Pacific’s growth (including Indonesia, Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion by 2020 and this continues to emerge as an important growth markets for Indian films. We are exploring the release of our films in bigger markets such as China. In fiscal year 2017, a Hindi Film Dangal was released in China across 9,000 screens and grossed about $180 million at the box office.

 

Increasing the number of Tamil and Telugu global releases in our film mix allows us to expand our audience within significant regional markets. As we expand into other regional languages such as Marathi, Bengali, Punjabi and Malayalam, we may see the composition of our film mix changing over time in order to allow us to successfully scale our business around Hindi as well as regional language content. At the same time, the distribution window for the theatrical release of films, and the window between the theatrical release and distribution in other channels, have each been compressing in recent years and may continue to change. In fiscal year 2017, we released 18 Tamil and Telugu films as compared to 21 films in fiscal year 2016.

 

A substantial portion of our revenue is also derived from television syndication. Because of increased demand for Indian film content on television in India as the number of DTH subscribers increase and the cable industry migrates toward digital technology, we expect a significant increase in demand for premium content such as movies and sports and a resultant increase in licensing fees payable to us by satellite and cable television operators. However, as competitors with compelling products, including international content providers, expand their content offerings in India, we expect competition for television syndication revenues to increase, and license fees for such content could decrease.

 

Currently, the remainder of our revenue is derived from digital distribution and ancillary products and services. With a significant portion of the Indian and international population moving toward adoption of digital technology, we are increasing our focus on providing on-demand services. We have expanded our digital presence with the launch of our on-demand entertainment portal Eros Now, which leverages our film and music libraries by providing ad-supported and subscription-based streaming of film and music content via internet-enabled devices. Eros Now has been increasingly focused on delivering product features, being truly platform agnostic and monetizing it’s growing registered user base. We also have an ad-supported YouTube portal site on Google that hosts an extensive collection of clips of our content. Accordingly, we anticipate that our revenue and costs associated with digital distribution are likely to increase over time. Ancillary revenues also include all other revenues that are not theatrical or television, including licensing to airlines and cable operators.

 

We anticipate that our costs associated with the co-production and acquisition of film content are likely to increase over time as we continue to focus more on investing in high budget Hindi films as well as high budget Tamil and Telugu films. In addition, increased competition in the Indian film entertainment industry, including from international film entertainment providers such as Disney, Twentieth Century Fox and Viacom, is likely to cause the cost of film production and acquisition to increase. In fiscal year 2017, we invested $173.5 million in film content, and in fiscal year 2018, we expect to invest approximately $180 to $200 million in film content.

 

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We anticipate our administrative costs will increase as we expand our management team, especially to support the expansion of our digital businesses. In addition, our administrative costs will increase due to the costs associated with being a U.S.-listed public company. Although aggregate spending will increase, we do not anticipate that this will result in a material change in aggregate administrative costs as a percentage of revenue.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with IFRS as issued by the IASB, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management considers the following accounting policies to be critical because they are important to our financial condition and results of operations and require significant judgment and estimates on the part of management in their application. The development and selection of these critical accounting policies have been determined by our management and the related disclosures have been reviewed with the Audit Committee of our board of directors. For a summary of all our accounting policies, see Note 3 to our audited Consolidated Financial Statements appearing elsewhere in this annual report.

 

Use of estimates

 

Estimates and judgments are evaluated on a regular basis and are based on historical experience and other factors, such as expectations of future events that are believed to be reasonable under the present circumstances.

 

The Group makes estimates and assumptions concerning the future. These estimates, by definition, will rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are highlighted below:

 

Revenue

 

Revenue is recognized, net of sales related taxes, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, the product is delivered or services have been rendered and collectability is reasonably assured. The Group considers the terms of each arrangement to determine the appropriate accounting treatment.

 

The following additional criteria apply in respect of various revenue streams within filmed entertainment:

 

·Theatrical — Contracted minimum guarantees are recognized on the theatrical release date. The Group’s share of box office receipts in excess of the minimum guarantee is recognized at the point they are notified to the Group.

 

·Television — License fees received in advance which do not meet all the above criteria are included in deferred income until the above criteria is met. In arrangements for catalogue sales the Company recognizes revenue if the recognition criteria set forth above is met, including whether a valid sales contract exists, all films are delivered, the Company is reasonably certain on collectability, and the Company’s contractual obligations are complete, even if the arrangement provides for a deferred payment term of up to a year.

 

·Digital - Digital and ancillary media revenues are recognized at the earlier of when the content is accessed or declared.

 

·Other — DVD, CD and video distribution revenue is recognized on the date the product is delivered or if licensed in line with the above criteria. Visual effects, production and other fees for services rendered by the Group and overhead recharges are recognized in the period in which they are earned and in certain cases, the stage of production is used to determine the proportion recognized in the period.

 

Goodwill and trade name

 

The Group tests annually whether goodwill and trade name have suffered impairment, in accordance with its accounting policy. The recoverable amount of cash-generating units has been determined based on value in use calculations. We use market related information and estimates (generally risk adjusted discounted cash flows) to determine value in use. Cash flow projections take into account past experience and represent management’s best estimate about future developments. Key assumptions on which management has based its determination of fair value less costs to sell and value in use includes estimated growth rates, weighted average cost of capital and tax rates. As at March 31, 2017, for assessing impairment of goodwill, value in use is determined using discounted cash flow method. The estimated cash flows for a period of four years were developed using internal forecasts, extrapolated for the fifth year, and a pre-tax discount rate of 17.2% and terminal growth rate of 4%. As of March 31, 2017, for assessing the impairment of the trade name, value in use is determined using the relief from royalty method based on a Royalty rate of 3% on the estimated total revenue for a period of four years, extrapolated for the fifth year, and, a pre-tax discount rate of 22.5% and terminal growth rate of 4%.These estimates, includes the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill and tradename impairment.

 

Basis of consolidation

 

The Group evaluates arrangements with special purpose vehicles in accordance with of IFRS 10 – Consolidated Financial Statements to establish how transactions with such entities should be accounted for. This requires a judgment over control such that it is exposed, or has rights, to variable returns and can influence the returns attached to the arrangements.

 

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Intangible assets

 

The Group is required to identify and assess the useful life of intangible assets and determine their income generating life. Judgment is required in determining this and then providing an amortization rate to match this life as well as considering the recoverability or conversion of advances made in respect of securing film content or the services of talent associated with film production.

 

Accounting for the film content requires Management’s judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each film or its license period, whichever is the shorter. These judgments are used to determine the amortization of capitalized film content costs. The Group uses a stepped method of amortization on first release film content writing off more in year one which recognizes initial income flows and then the balance over a period of up to nine years. In the case of film content that is acquired by the Group after its initial exploitation, commonly referred to as Library, amortization is spread evenly over the lesser of 10 years or the license period. Management’s policy is based upon factors such as historical performance of similar films, the star power of the lead actors and actresses and others. Management regularly reviews, and revises when necessary, its estimates, which may result in a change in the rate of amortization and/or a write down of the asset to the recoverable amount.

 

The Group tests annually whether intangible assets have suffered any impairment, in accordance with the accounting policy. These calculations require judgments and estimates to be made, and, as with Goodwill, in the event of an unforeseen event these judgments and assumptions would need to be revised and the value of the intangible assets could be affected. There may be instances where the useful life of an asset is shortened to reflect the uncertainty of its estimated income generating life. This is particularly the case when acquiring assets in markets that the Group has not previously exploited.

 

Allowances for doubtful accounts

 

The Group extends credit to customers and other parties in the normal course of business and maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. The Group bases such estimates on historical experience, existing economic conditions, and any specific customer collection issues the Group has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding balance or when the Group determines that the balance will not be collected. The allowance for doubtful accounts as of March 31, 2017 and March 31, 2016, was $2,430 and $1,315 respectively.

 

Valuation of available-for-sale financial assets

 

The Group follows the guidance of IAS 39 – Financial Instruments: Recognition and Measurement to determine, where possible, the fair value of its available-for-sale financial assets. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less or more than its cost; the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.

 

Income taxes and deferred taxation

 

The Group is subject to income taxes in various jurisdictions. Judgment is required in determining the worldwide provision for income taxes. We are subject to tax assessment in certain jurisdictions. Significant judgment is involved in determining the provision for income taxes including judgment on whether the tax positions are probable of being sustained in tax assessments.

 

Judgment is also required when determining whether the Group should recognize a deferred tax asset, based on whether Management considers there is sufficient certainty in future earnings to justify the carry forward of assets created by tax losses and tax credits. Judgment is also required when determining whether the Group should recognize a deferred tax liability on undistributed earnings of subsidiaries. Where the ultimate outcome is different than that which was initially recorded there will be an impact on the income tax and deferred tax provisions.

 

Share-based payments

 

The Group is required to evaluate the terms to determine whether share based payment is equity settled or cash settled. Judgment is required to do this evaluation. Further, the Group is required to measure the fair value of equity settled transactions with employees at the grant date of the equity instruments. The fair value is determined principally by using the Black Scholes model and/or Monte Carlo Simulation Models which require assumptions regarding risk free interest rates, share price volatility, the expected term and other variables. The basis and assumptions used in these calculations are disclosed within Note 28. The aforementioned inputs entered in to the option valuation model that we use to determine the fair value of our share awards are subjective estimates and changes to these estimates will cause the fair value of our share-based awards and related share- based compensations expense we record to vary.

 

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Business combinations

 

Business combinations are accounted for using the acquisition method under the provisions of IFRS 3 (Revised), “Business Combinations”.

 

The cost of an acquisition is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred at the date of acquisition. The cost of the acquisition also includes the fair value of any contingent consideration. Identifiable tangible and intangible assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value on the date of acquisition. Significant estimates are required to be made in determining the value of contingent consideration and intangible assets.

 

Year Ended March 31, 2017 Compared to Year Ended March 31, 2016

 

   Year ended March 31,       As a % of revenue 
   2017   2016   Change %   2017   2016 
   (in thousands)             
Revenue  $252,994   $274,428    (7.8%)   100.0    100.0 
Cost of sales   (164,240)   (172,764)   (4.9%)   64.9    63.0 
Gross profit   88,754    101,664    (12.7%)   35.1    37.0 
Administrative costs   (63,309)   (64,019)   (1.1%)   25.0    23.3 
Operating profit   25,445    37,645    (32.4%)   10.1    13.7 
Net finance costs   (17,156)   (8,010)   114.2%    6.8    2.9 
Other gains/(losses)   14,205    (3,636)   490.7%    5.6    1.3 
Profit before tax   22,494    25,999    (13.5%)   8.9    9.5 
Income tax expense   (11,039)   (12,711)   (13.2%)   4.4    4.6 
Net income  $11,455   $13,288    (13.8%)   4.5    4.8 

 

The following table sets forth, for the period indicated, the revenue by region of domicile of Group’s operation.

 

   Year ended March 31,     
   2017   2016   Change (%) 
   (in thousands)     
India  $121,966   $159,855    (23.7%)
Europe   25,686    34,209    (24.9%)
North America   2,549    14,622    (82.6%)
Rest of the world   102,793    65,742    56.4% 
Total revenue  $252,994   $274,428    (7.8%)

 

Revenue

 

In fiscal year 2017, revenue decreased by 7.8% to $253.0 million, compared to $274.4 million in fiscal year 2016.

 

In fiscal year 2017, Eros film slate comprised 45 films of which 5 were high budget, 10 were medium budget and 30 were low budget as compared to 63 films in fiscal year 2016, of which 6 was high budget, 16 were medium budget and 41 were low budget.

 

In fiscal year 2017, the Company’s slate of 45 films comprised 12 Hindi films, 16 Tamil, 2 Telugu films and 15 other regional films as compared to the same period last year where it was slate of 63 films comprised 33 Hindi films, 19 Tamil, 2 Telugu films and 9 other regional films.

 

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In fiscal year 2017, the aggregate theatrical revenue decreased by 27.0% to $101.0 million as compared to $138.4 in fiscal year 2016. The decrease in theatrical revenue reflects the mix of films released in each period as mentioned above. Theatrical revenue in fiscal year 2016 comprised revenue from Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns which were three out of the top four highest grossing films of 2016 compared to 2017 where Housefull 3 was the only top 10 film so far coupled with the negative impact of demonetisation on the Indian film industry since November 2016, which necessitated the Company to defer some of its Hindi and regional releases indefinitely. As a result, in fiscal year 2017, the Company released only 45 films of which only 12 were Hindi compare to 33 Hindi films out of a total 63 films in fiscal year 2016 which explains the decline in theatrical revenues.

 

In fiscal year 2017, the aggregate revenue from television syndication increased by 22.1% to $88.0 million from $72.1 million in fiscal year 2016. This was due to strong catalogue sales in fiscal year 2017 to offset the weaker new release slate, while in fiscal year 2016, the Company had decided to hold back and sacrifice some catalogue sales which come with longer payment terms to bring about working capital efficiencies.

 

In fiscal year 2017, the aggregate revenues from digital and ancillary increased by 0.2% to $64 million from $63.9 million in fiscal year 2016 mainly driven by catalogue monetization strategy, revenues from Eros Now and contribution from other ancillary revenues streams.

 

In fiscal year 2017, revenue from India decreased by 23.7% to $122 million, compared to $159.9 million in fiscal  2016. The decrease was mainly due to lower theatrical revenue on the back of weaker slate mix coupled with rupee demonetisation impact whereas fiscal year 2016 slate comprised of highly acclaimed and commercial successful films such as Bajrangi Bhaijaan, Bajirao Mastani and Tanu Weds Manu. The decrease in overall theatrical revenue was offset by a stronger catalogue revenue contribution.

 

In fiscal year 2017, revenue from Europe decreased by 24.9% to $25.7 million, compared to $34.2 million in fiscal year 2016. The decrease is on account of lower theatrical revenues due to weaker mix of films partially offset by catalogue sales.

 

In fiscal year 2017, revenue from North America decreased by 82.9% to $2.5 million, compared to $14.6 million, in fiscal year 2016. The decrease is on account of relatively weaker slate mix  coupled with lower catalogue revenues.

 

In fiscal year 2017, revenue from the rest of the world increased by 56.5% to $102.8 million, compared to $65.7 million in fiscal year 2016, mainly due to increase in catalogue revenues which were muted in last two quarters of fiscal year 2016 to bring-in working capital efficiencies.

 

Cost of sales

 

In fiscal year 2017, cost of sales decreased by 4.9% to $164.2 million compared to $172.8 million in fiscal year 2016, which is attributable to decrease in accrual of overages to $1 million in fiscal year 2017 compared to $10.1 million due to an overall weaker slate mix. Further, decrease in publicity and distribution cost by $5.2 million in fiscal year 2017 compared to fiscal year 2016 contributed to the overall decrease in cost of sales which was partially offset by increase in cumulative amortisation costs of film library by $7 million in fiscal year 2017 as compared to fiscal year 2016.

 

Gross profit

 

In fiscal year 2017 gross profit decreased by 12.68% to $88.8 million, compared to $101.7 million, in fiscal year 2016. As a percentage of revenues, gross profit margin is 35.1% in the fiscal 2017, compared to 37.0% in fiscal year 2016. The decrease in margin is primarily due to an overall weaker slate mix resulting in overall decrease of theatrical revenue by $37.4 million or 27.0% in fiscal year 2017 as compared to fiscal year 2016, offset by increase in television syndication revenue by $15.9 million or 22.1% and increase in amortization charge by $7.0 million or 5.5% in fiscal 2017.

 

Adjusted EBITDA (Non-GAAP)

 

In fiscal year 2017, adjusted EBITDA decreased by 21.4% to $55.7 million, compared to $70.9 million in fiscal year 2016 due to an overall weaker slate mix, reduced theatrical revenues for the films released during the rupee demonetization in India which was partially offset by significant high margin catalogue revenues.

 

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Administrative costs

 

In fiscal year 2017, administrative costs decreased by 1.1% to $63.3 million compared to $64.0 million for the fiscal year 2016, primarily due to decrease in share based payments, of $23.5 million in fiscal year 2017 as compared to $31 million in fiscal year 20l6 which was partially offset by increase in salaries by $4 million in fiscal year 2017 as compared to fiscal year 2016.

 

Net finance costs

 

In fiscal year 2017, net finance costs increased by 115% to $17.2 million, compared to $8 million in fiscal year 2016, mainly due to decrease in finance income by $3.3 million in fiscal year 2017 as compared to fiscal year 2016. Further, the finance cost has increased $5.8 million in fiscal year 2017 as compared to fiscal year 2016 primarily due to high cost of debt due to higher debt within India as well as increased interest for the Revolving Credit Facility and decrease in capitalisation of interest on content assets by $2 million in fiscal year 2017 as compared to fiscal year 2016.

 

Income tax expense

 

In fiscal year 2017, the provisions for income taxes are $11.0 million, compared to $12.7 million in fiscal year 2016. Effective income tax rates were 31% and 21.1% for fiscal year 2017 and 2016, respectively excluding non-deductible share-based payment charges and gain / loss on fair valuation of derivative liabilities. The change in effective tax rate principally reflects a change in the mix of the profits earned from taxable and non-taxable jurisdictions.

 

Net income

 

In fiscal year 2017, net income decreased by 13.5% to 11.5 million compares to 13.3 for the fiscal 2016 as cost of sales remained relatively consistent with fiscal 2016 whereas revenue decreased by 7.8% in fiscal year 2017 as compared to fiscal 2016, which was offset by fair value gain on held for trading derivative liabilities of $10.3 million as compared to loss of $3.6 million in fiscal year 2016.

 

Trade receivables

 

In fiscal year 2017, trade receivables increased to $226.8 million from $169.3 million as of March 31, 2016 mainly due to resumption of catalogue sales from April 2016 compared to muted catalogue sales in fiscal year 2016 primarily due to sales held back during last two quarters of fiscal 2016 to achieve working capital efficiencies. Catalogue sales have payment terms extended up to a year. We have collected approximately $ 35 million of fiscal year 2017 trade receivables subsequent to reporting date.

 

Net debt

 

In fiscal year 2017, net debt increased to $157.6 million compared to $120.4 million in fiscal year 2016 mainly due to decrease in cash and bank balances by $70.5 million and repayment of $33.4 million debt.

 

Year Ended March 31, 2016 Compared to Year Ended March 31, 2015

 

   Year ended March 31,       As a % of revenue 
   2016   2015   Change %   2016   2015 
   (in thousands)             
Revenue  $274,428   $284,175    (3.4)   100.0    100.0 
Cost of sales   (172,764)   (155,777)   10.9    63.0    54.8 
Gross profit   101,664    128,398    (20.8)   37.0    45.2 
Administrative costs   (64,019)   (49,546)   29.2    23.3    17.4 
Operating profit   37,645    78,852    (52.3)   13.7    27.7 
Net finance costs   (8,010)   (5,861)   36.7    2.9    2.1 
Other gains/(losses)   (3,636)   (10,483)   (65.3)   1.3    3.7 
Profit before tax   25,999    62,508    (58.4)   9.5    22.0 
Income tax expense   (12,711)   (13,178)   (3.5)   4.6    4.6 
Net income  $13,288   $49,330    (73.1)   4.8    17.4 

 

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The following table sets forth, for the period indicated, the revenue by region of domicile of Group’s operation.

 

    Year ended March 31,    
    2016   2015   Change (%)
    (in thousands)    
India   $ 159,855     $ 110,015       45.3  
Europe     34,209       29,528       15.9  
North America     14,622       10,014       46.0  
Rest of the world     65,742       134,618       (51.2 )
Total revenue   $ 274,428     $ 284,175       (3.4 )

 

Revenue

 

In fiscal year 2016, Eros film slate comprised 63 films of which 6 were high budget, 16 were medium budget and 41 were low budget as compared to very similar mix of 65 films in fiscal year 2015, of which 6 were high budget, 12 were medium budget and 47 were low budget.

 

In fiscal year 2016, the Company’s slate of 63 films comprised 33 Hindi films, 19 Tamil/Telugu films and 11 regional films as compared to fiscal year 2015 where its slate of 65 films comprised 45 Hindi films, 19 Tamil/Telugu films and one regional film. For the twelve months ended March 31, 2016, revenue decreased marginally by 3.4% to $274.4 million, compared to $284.2 million for the twelve months ended March 31, 2015.

 

In fiscal year 2016, the aggregate theatrical revenues increased by 12.4% to $138.4 million from $123.1 million in fiscal year 2015. Fiscal year 2016 proved to be a successful year for the Company’s films at the box office demonstrating the quality and robustness of its content with three out of the top four Hindi films and seven out of the top 15 Hindi films in Calender year 2015 being Eros films. Some of our successful global releases were Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, Welcome Back, Srimanthudu and overseas releases were Dil Dhadakne Do, Singh is Bling and Gabbar is Back reinforcing the portfolio and film mix strategy.

 

The aggregate revenues from television syndication decreased by 28.8% to $72.1 million in fiscal year 2016 from $101.2 million in fiscal year 2015 mainly as a result of higher television sales in India offset by lower sales in territories outside of India due to the Company’s decision to forego a portion of their potential catalogue revenues that have relatively longer payment cycles, in order to improve days sales outstanding.

 

The aggregate revenues from digital, ancillary and the newly acquired “Techzone” increased 6.7% to $63.9 million in fiscal year 2016 from $59.9 million in fiscal year 2015. This is on account of contribution from Techzone and better realizations from other ancillary revenues such as music sales and in-flight entertainment.

 

We derived approximately 41.7% of our fiscal year 2016 revenues from the exploitation of our films in territories outside of India compared to 61.3% in fiscal year 2015. This percentage is calculated (as required under International Financial Reporting Standards) based on revenue by region of domicile of Group’s operation.

 

Revenue from India increased by 45.3 % to $159.9 million in fiscal year 2016, compared to $110 million in fiscal year 2015. This was account of the stronger Indian box office collection of the Company’s movies and the better realizations with respect to television syndication revenues associated with these movies.

 

Revenue from Europe increased by 15.9 % to $34.2 million in fiscal year 2016, compared to $29.5 million in fiscal year 2015 and North America increased 46 % to $14.6 million in fiscal year 2016, compared to $10 million in fiscal year 2015. This was account of the stronger overseas box office collection of the Company’s movies.

 

Revenue from rest of the world decreased by 51.2 % to $65.7 million in fiscal year 2016, compared to $134.6 million in fiscal year 2015. This was mainly due to lower catalogue sales.

 

We also report percentage of revenue calculated (as required under International Financial Reporting Standards) based on where the customer who entered into a contract with any of its entities is based and not strictly on the geography of the rights being exploited or licensed. Accordingly, this may not be reflective of the potential of any given market because it is not necessarily reflective of where the films are actually distributed. As a result, the Company’s revenue by customer location may vary year on year. On this basis, we derived approximately 42.1% of our Fiscal year 2016 revenues from the exploitation of our films in territories outside of India compared to 61.5% in Fiscal year 2015.

 

Cost of sales

In fiscal year 2016 cost of sales increased by 10.9% to $172.8 million compared to $155.8 million in fiscal year 2015. $11.0 million out of the total $17 million increase or 65% of the increase was primarily on account of increase in film amortization costs associated with mix of the Company’s films of fiscal year 2016 as compared to fiscal year 2015 as well as cumulative amortization costs of its larger film library, and 35% of the increase was due to accrued overages to co-producers from hit films as well as an increase in selling and distribution expenses.

 

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Gross profit

In fiscal year 2016 gross profit decreased by 20.8% to $101.7 million, compared to $128.4 million in fiscal year 2015 primarily due to lower revenue from high margin catalogue sales and higher cost of sales, mainly due to increased amortization charge.

 

Net income

In fiscal year 2016 net income decreased by 73% to $13.3 million, compared to $49.3 million in fiscal year 2015 primarily due to lower high-margin catalogue revenues, lower gross profit and higher administrative cost in fiscal year 2016.

 

Adjusted EBITDA (Non-GAAP)

In fiscal year 2016 adjusted EBITDA decreased by 29.9% to $70.9 million compared to $101.2 million in fiscal year 2015 mainly due to higher theatrical revenues being offset by proportionately higher cost of sales including film amortisation costs and relatively higher margin lower catalogue revenues.

 

Administrative costs

In fiscal year 2016, administrative costs increased by 29.3% to $64 million compared to $49.5 million in fiscal year 2015, which was attributable to an increase in share based payment charges by 41.6% to $31.0 million in fiscal year 2016 compared to $21.9 million in fiscal year 2015 as well as increased personnel cost of $2.7 million on account of expansion of the Eros Now team and newly acquired “Techzone”.

 

Net finance costs

In fiscal year 2016, net finance increased by 35.6% to $8 million, compared to $5.9 million in fiscal year 2015. This was mainly due to the higher blended cost of debt during the year with the full year retail bond costs coming in which was only partial in the previous year.

 

Other losses

In fiscal year 2016, other losses decreased by 65.7% to $3.6 million, compared to $10.5 million in fiscal year 2015. This was primarily due to a decrease in the fair value of derivative liability instruments not designated in a hedging relationship and net foreign exchange losses. In fiscal year 2015 there was also impairment loss on available-for-sale financial asset, while their was no such impairment in fiscal year 2016

 

Income tax expense

The expense for income taxes was $12.7 million and $13.2 million for the twelve months ended March 31, 2016 and 2015, respectively. The decrease for income taxes is due to lower net profit earned in the twelve months ended March 31, 2016. Effective tax rates were 21% and 21.1% for fiscal year 2016 and 2015, respectively, excluding non-deductible share-based payment charges and net loss on held for trading financial liabilities.

 

Exchange rates

 

Our reporting currency is the U.S. dollar. Transactions in foreign currencies are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rates at the date of the applicable statement of financial position. For the purposes of consolidation, all income and expenses are translated at the average rate of exchange during the period covered by the applicable statement of income and assets and liabilities are translated at the exchange rate prevailing on the date of the applicable statement of financial position. When the U.S. dollar strengthens against a foreign currency, the value of our sales and expenses in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales and expenses in that currency converted to U.S. dollars increases.

 

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Recently, there have been periods of higher volatility in the Indian Rupee and U.S. dollar exchange rate. This volatility is illustrated in the table below for the periods indicated:

 

    Period End   Average(1)   High   Low
Fiscal Year                
2011   44.54   45.46   47.49   43.90
2012   50.89   48.01   53.71   44.00
2013   54.52   54.36   57.13   50.64
2014   60.35   60.35   68.80   53.65
2015   62.58   61.15   63.70   58.46
2016   66.25   65.39   68.84   61.99
2017   64.85   67.01    68.86    64.85 
                 
Months                
April 2016   66.39   66.42   66.70   66.05
May 2016   66.96   66.88   67.59   66.36
June 2016   67.51   67.27   67.92   66.51
July 2016   66.77   67.16   67.49   66.77
August 2016   66.94   66.90   67.18   66.63
September 2016   66.58   66.71   67.10   66.28
October 2016   66.72   66.74   66.94   66.49
November 2016   68.56   67.64   68.86   66.39
December 2016   67.92   67.81   68.29   67.38
January 2017   67.48   68.05   68.39   67.48
February 2017   66.67   66.97   67.40   66.67
March 2017   64.85   65.80   66.83   64.85
April 2017   64.27   64.54   65.10   64.08
May 2017   64.50   64.42   64.87   64.03
June 2017   64.62   64.45   64.66   64.23

 

(1) Represents the average of the U.S. dollar to Indian Rupee exchange rates on the last day of each month during the period for all fiscal years presented, and the average of the noon buying rate for all days during the period for all months presented.

 

This volatility in the Indian Rupee as compared to the U.S. dollar and the increasing exchange rate has impacted our results of operations as shown in the table below comparing the reported results against constant currency comparable based upon the average rate of exchange for the year ended March 31, 2017, of INR 67.0 to $1.00. In addition to the impact on gross profit, the volatility during the year ended March 31, 2017 also led to a non-cash foreign exchange gain of 3.9 million principally on our Indian subsidiaries’ foreign currency loans in the year ended March 31, 2017 compared to $0.07 million loss in the year ended March 31, 2016.

 

The following table sets forth our constant currency revenue (a non-GAAP financial measure) for the periods indicated. Constant currency revenue is a non-GAAP financial measure. We present constant currency revenue so that revenue may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Constant currency revenue is presented by recalculating prior period’s revenue denominated in currencies other than in US dollars using the foreign exchange rate used for the latest period. Our non-US dollar denominated revenue includes, but is not limited to, revenue denominated in Indian rupee, pound sterling and United Arab Emirates Dirham.

 

   Year ended March 31, 
   2017   2016   2015 
           (in thousands)         
   Reported   Constant
Currency
(Non-GAAP)
   Reported   Constant
Currency
(Non-GAAP)
   Reported   Constant
Currency
(Non-GAAP)
 
Revenue  $252,994   $252,994   $274,428   $266,853   $284,175   $266,125 
Cost of sales   (164,240)   (164,240)   (172,764)   (168,347)   (155,777)   (145,080)
Gross Profit  $88,754   $88,754   $101,664   $98,506   $128,398   $121,045 

 

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The percentage change for the data comparing the constant currency amounts against the reported results referenced in the table above:

 

   Year ended March 31, 
   2017   2016   2015 
Revenue      (2.8)%   (6.8)%
Cost of sales       (2.6)   (7.4)%
Gross profit    %   (3.1)%   (6.1)%

 

The Indian Rupee experienced an approximately 2% drop in value as compared to the U.S. dollar in fiscal year 2016, in fiscal year 2015 the drop was 9%.

 

B. Liquidity and Capital Resources

 

Our operations and strategic objectives require continuing capital investment, and our resources include cash on hand and cash provided by operations, as well as access to capital from bank borrowings and access to capital markets. Management believes that cash generated by or available to us should be sufficient to fund our capital and liquidity needs for at least the next 12 months.

 

Our future financial and operating performance, ability to service or refinance debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions, the financial health of our customers and suppliers and to financial, business and other factors, many of which are beyond our control. Furthermore, management believes that working capital is sufficient for our present requirements.

 

   Year ended March 31, 
   2017   2016   2015 
   (in thousands) 
Current assets  $362,477   $373,482   $366,592 
Current liabilities   316,101    290,687    128,481 
Working capital  $46,376   $82,795   $238,111 

 

The significant decrease in working capital as at March 31, 2017 as compared to March 31, 2016, principally reflects payables relating to purchases of film rights.

 

Indebtedness

 

As of March 31, 2017, we had aggregate outstanding indebtedness of $271.5 million, and cash and cash equivalents of $112.3 million. At March 31, 2017, the total available facilities were comprised of (i) revolving credit facilities, secured and unsecured term loans, and vehicle loans of $190.9 million at Eros India and Eros Worldwide, (ii) secured overdraft and term loan amounting to $18.0 million at Eros International Limited. In addition, Eros International plc has debt of $62.7 million in relation to a retail bond offering for £50 million in October 2014 and unsecured term loan. As at March 31, 2017, there were undrawn amounts under our facilities of $2.2 million.

 

   As of
March 31, 2017
 
   (in thousands) 
Eros India     
Secured revolving credit facilities  $57,521 
Secured term loans  $35,149 
Vehicle loans  $325 
Unsecured other loan  $7,033 
Total  $100,028 
Eros International plc     
Retail Bond  $62,672 
Total  $62,672 
Eros International Limited, U.K.     
Secured overdraft  $17,982 
Total  $17,982 
      
Eros Worldwide     
Revolving credit facility(1)  $85,000 
Interest swap financing facility  $5,853 
Total  $90,853 
Total  $271,535 

_____________

(1) Borrowers under the revolving credit facility are Eros International Plc, Eros Worldwide FZ LLC, Eros International Limited and Eros International USA Inc.

 

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Certain of our borrowings and loan agreements, including our new credit facility, contain customary covenants, including covenants that restrict our ability to incur additional indebtedness, create or permit liens on our assets or engage in mergers and acquisitions. Such agreements also contain various customary events of default with respect to the borrowings, including the failure to pay interest or principal when due and cross default provisions, and, under certain circumstances, lenders may be able to require repayment of loans to Eros India or Eros Films prior to their maturity. If an event of default occurs and is continuing, the principal amounts outstanding, together with all accrued unpaid interest and other amounts owed may be declared immediately due and payable by the lenders. If such an event were to occur, we would need to pursue new financing that may not be on as favorable terms as our current borrowings. We are currently in full compliance with all of our agreements governing indebtedness.

 

Borrowings under our term loan facilities, overdraft facility and revolving credit facilities at Eros India matures between 2017 and 2021 and bear interest at fluctuating interest rates pursuant to the relevant sanction letter governing such loans.

 

Borrowings under our revolving credit facility maturing in January 2017 bear interest at LIBOR, or in the case of future borrowings in Euros, EURIBOR, floating rates with margins between 1.9% and 2.9% plus mandatory cost.

 

Our revolving credit facility that previously matured in January 2017 was amended and the maturity date was extended up to March 31, 2017. Subsequently, on April 1, 2017 we entered into an amended credit agreement with a revolving credit facility bearing interest at a rate of 7.5% plus LIBOR, which is secured by certain of our assets and is payable in three installments by September 30, 2017.

 

Subsequently, in April 2017, retail bond were fully secured by certain group assets.

 

We expect to renew, replace or extend our borrowings as they reach maturity. As at March 31, 2017, we had net undrawn amounts of $2.2 million available.

 

Sources and uses of cash

 

   Year Ended March 31, 
   2017   2016   2015 
   (in thousands) 
Net cash from operating activities  $98,993   $234,599   $117,955 
Net cash used in investing activities  $(175,191)  $(211,355)  $(279,240)
Net cash from financing activities  $5,929   $7,597   $177,561 

 

Year ended March 31, 2017 Compared to Year Ended March 31, 2016

 

Net cash generated from operating activities in fiscal year 2017 was $99 million, compared to $234.6 million in fiscal year 2016, a decrease of $135.6 million, or 57.9%, primarily due to decrease working capital movement of $ 119,9 million attributable to increase in trade receivables to $91.9 million and decrease in trade payables by $27.3 million. The cash flow from operating activities has also decreased due to increase in interest paid in fiscal 2017 to $18.4 million compared to $12.5 million.

 

Net cash used in investing activities in fiscal year 2017 was $175.2 million, compared to $211.4 million in fiscal year 2016, a decrease of $36.2 million, or 17.1%, reflecting the change in mix of films released in fiscal year 2017 and our investment in upcoming film slate. The purchase of intangible film rights and content rights in fiscal year 2017 was $173.5 million, compared to $211.3 million in fiscal year 2016, a decrease of $37.8 million, or 17.9%.

 

Net cash generated from financing activities in fiscal year 2017 was $5.9 million, compared to $7.6 million in fiscal year 2016, a decrease of $1.7 million, or 22.4%, primarily due to repayment of debt of $118.3 million compared to $99.7 million in fiscal 2016 which is offset by proceeds from debt and equity of $92.8 million and $31.4 million respectively and $95.5 million and $11.8 million respectively in fiscal 2017 and fiscal 2016 .

 

Year ended March 31, 2016 Compared to Year Ended March 31, 2015

 

Net cash from operating activities in fiscal year 2016 was $234.6 million, compared to $118.0 million in fiscal year 2015, an increase of $116.6 million, or 98.8%, primarily due to increase in cash flow from operations, reduction in trade receivables of $28.5 million, increase in trade payables of $31.5 million due to deferred revenue from presales and accrued overages from hit films. This also included an increase in interest paid of $5.6 million and a decrease in income taxes paid of $4.5 million, from fiscal year 2015. There was a decrease in working capital of $51.3 million in fiscal year 2016 mainly because the revolving credit facility of $123,750 million which was part of a long term liability in fiscal year 2015 was classified as a short term liability at the end of fiscal year 2016.

 

Net cash used in investing activities in fiscal year 2016 was $211.4 million, compared to $279.2 million in fiscal year 2015, a decrease of $67.8 million, or 24.3%, reflecting the change in mix of films released in fiscal year 2016 and our investment in film content in future years. Our investment in film content in fiscal year 2016 was $211.3 million, compared to $276.2 million in fiscal year 2015, a decrease of $64.9 million, or 23.5%. Fiscal year 2015 investment in content also contained a stepped one-off investment for Eros Now content with additional funds available from the proceeds from the UK retail bond.

 

Net cash from financing activities in fiscal year 2016 was $7.6 million, compared to $177.6 million in fiscal year 2015, a decrease of $170 million, or 95.7%, primarily because we didn’t access the capital markets in fiscal year 2016 as compared to fiscal year 2015 where we had capital proceeds of $92.3 million from our follow on equity offering in 2015 and proceeds of $77.9 million on account of issuing Retail Bond.

 

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Capital expenditures

 

In fiscal year 2017, we invested $173.5 million in film content, and in fiscal 2018 we expect to invest approximately $180 to $200 million in film content.

 

C. Research and Development

 

Not applicable

 

D. Trend Information

 

New accounting pronouncements issued but not yet effective

 

Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for our accounting periods beginning on or after April 1, 2017 or later periods. Those which are considered to be relevant to Group’s operations are set out below.

 

IFRS 15 Revenue from Contracts with Customers

 

  i) In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue.

 

The five steps in the model under IFRS 15 are : (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 replaces the following standards and interpretations:

 

  · IAS 11 Construction Contracts

 

  · IAS 18 Revenue

 

  · IFRIC 13 Customer Loyalty Programmes

 

  · IFRIC 15 Agreements for the Construction of Real Estate

 

  · IFRIC 18 Transfers of Assets from Customers

 

  · SIC-31 Revenue - Barter Transactions Involving Advertising Services

 

When first applying IFRS 15, it should be applied in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows an option to either:

 

  · apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or

 

  · retain prior period figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period).

 

IFRS 15 is effective for fiscal years beginning on or after January 1, 2018. Earlier application is permitted. The Group expects to apply this standard retrospectively with the cumulative effect of initially applying this standard recognized at April 1, 2018 (i.e. the date of initial application in accordance with this standard). The Group is currently evaluating the impact that this new standard will have on its consolidated financial statements.

 

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IFRS 9 Financial Instruments: In July 2014, the IASB finalized and issued IFRS 9 – Financial Instruments. IFRS 9 replaces IAS 39 “Financial instruments: recognition and measurement, the previous Standard which dealt with the recognition and measurement of financial instruments in its entirety upon the former’s effective date.

 

The Key requirements of IFRS 9:

 

Replaces IAS 39’s measurement categories with the following three categories:

·fair value through profit or loss
·fair value through other comprehensive income
·amortized cost

 

Eliminates the requirement for separation of embedded derivatives from hybrid financial assets, the classification requirements to be applied to the hybrid financial asset in its entirety.

 

Requires an entity to present the amount of change in fair value due to change in entity’s own credit risk in other comprehensive income.

 

Introduces new impairment model, under which the “expected” credit loss are required to be recognized as compared to the existing “incurred” credit loss model of IAS 39.

 

Fundamental changes in hedge accounting by introduction of new general hedge accounting model which:

 

·Increases the eligibility of hedged item and hedging instruments;
·Introduces a more principles–based approach to assess hedge effectiveness.

 

IFRS 9 is effective for annual periods beginning on or after January 1, 2018.

 

Earlier application is permitted provided that all the requirements in the Standard are applied at the same time with two exceptions:

 

·The requirement to present changes in the fair value of a liability due to changes in own credit risk may be applied early in isolation;

 

·Entity may choose as its accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of new general hedge accounting model as provided in IFRS 9.

 

The Group is currently evaluating the impact of this new standard on its consolidated financial statements.

 

IFRS 16 Leases: On January 13, 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related Interpretations. The Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e., the lessee and the lessor. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the statement of comprehensive income. The Standard also contains enhanced disclosure requirements for lessees. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.

 

The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, though early adoption is permitted for companies applying IFRS 15 Revenue from Contracts with Customers. The Group is yet to evaluate the requirements of IFRS 16 and the impact on the consolidated financial statements.

 

IFRIC 22, Foreign currency transactions and Advance consideration: On December 8, 2016, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 22, Foreign currency transactions and Advance consideration which clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, when an entity has received or paid advance consideration in a foreign currency. The effective date for adoption of IFRIC 22 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group is currently evaluating the effect of IFRIC 22 on the consolidated financial statements.

 

IFRIC 23, Uncertainty over Income Tax Treatments: In June 2017, the International Accounting Standards Board (IASB) issued IFRS interpretation IFRIC 23 — Uncertainty over Income Tax Treatments which is to be applied while performing the determination of taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. According to IFRIC 23, companies need to determine the probability of the relevant tax authority accepting each tax treatment, or group of tax treatments, that the companies have used or plan to use in their income tax filing which has to be considered to compute the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.

 

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The standard permits two possible methods of transition:

 

·Full retrospective approach – Under this approach, IFRIC 23 will be applied retrospectively to each prior reporting period presented in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

 

·Retrospectively with cumulative effect of initially applying IFRIC 23 recognized by adjusting equity on initial application, without adjusting comparatives

 

The effective date for adoption of IFRIC 23 is annual periods beginning on or after January 1, 2019, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.

 

Amendments to IAS 7, Statement of cash flows: In January 2016, the International Accounting Standards Board issued the amendments to IAS 7, requiring the entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, to meet the disclosure requirement. The effective date for adoption of the amendments to IAS 7 is annual reporting periods beginning on or after January 1, 2017, though early adoption is permitted. The Company is currently evaluating the effect of this amendment on its consolidated financial statements.

 

Amendments to IFRS 2, Share-based payment: In June 2016, the International Accounting Standards Board issued the amendments to IFRS 2, providing specific guidance for measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. It clarifies that the fair value of cash-settled awards is determined on a basis consistent with that used for equity-settled awards. Market-based performance conditions and non-vesting conditions are reflected in the ‘fair values’, but non-market performance conditions and service vesting conditions are reflected in the estimate of the number of awards expected to vest. Also, the amendment clarifies that if the terms and conditions of a cash-settled share-based payment transaction are modified with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as such from the date of the modification. Further, the amendment requires the award that includes a net settlement feature in respect of withholding taxes to be treated as equity-settled in its entirety. The cash payment to the tax authority is treated as if it was part of an equity settlement. The effective date for adoption of the amendments to IFRS 2 is annual reporting periods beginning on or after January 1, 2018, though early adoption is permitted. The Group does not believe that this amendment will have a material impact on its consolidated financial statements.

 

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Quarterly Financial Information

 

The table below presents our selected unaudited quarterly results of operations for the four quarters in the fiscal year ended March 31, 2017. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. We have prepared the unaudited financial data for the quarters presented on the same basis as our audited consolidated financial statements. The historical quarterly results presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.

 

   Three Months Ended 
   June 30,
2016
   September 30,
2016
   December 31,
2016
   March 31,
2017
 
   (dollars in thousands) 
Selected Quarterly Results of Operations                
Revenue  $71,095   $71,876   $57,348   $52,675 
Cost of sales   (48,010)   (48,935)   (35,029)   (32,266)
Gross profit   23,085    22,941    22,319    20,409 
Administrative costs   (15,905)   (17,447)   (14,119)   (15,839)
Operating profit   7,180    5,494    8,200    4,570 
Net finance costs   (3,193)   (4,374)   (3,415)   (6,174)
Other gains/(losses)   2,032    1,534    10,264    376 
(Loss)/profit before tax   6,019    2,654    15,049    (1,228)
Income tax expense   (2,580)   (4,049)   (3,565)   (845)
Net (loss)/income  $3,439   $(1,395)  $11,484   $(2,073)
                     
OTHER NON-GAAP MEASURES                    
EBITDA(1)  $10,116   $7,287   $18,920   $6,226  
Adjusted EBITDA (1)  $18,123   $13,691   $14,497   $9,354 
                     
OPERATING DATA                    
High budget film releases(2)   3    2         
Medium budget film releases(2)   2    4    3    1 
Low budget film releases(2)   9    12    5    4 
Total new film releases(2)   14    18    8    5 

 

(1) We use EBITDA and Adjusted EBITDA as supplemental financial measures. EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization (excluding amortization of capitalized film content and debt issuance costs).  Adjusted EBITDA is defined as EBITDA adjusted for impairments of available-for-sale financial assets, profit/loss on held for trading liabilities (including profit/loss on derivatives), transaction costs relating to equity transactions and share based payments.  EBITDA, as used and defined by us, may not be comparable to similarly-titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.  EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures and working capital movement or tax position.  However, our management team believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our results of operations because these measures:

 

  · are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

 

  · help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and

 

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  · are used by our management team for various other purposes in presentations to our board of directors as a basis for strategic planning and forecasting.

 

There are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies.

 

The following table sets forth the reconciliation of our net income to EBITDA and Adjusted EBITDA:

 

   Three Months Ended 
   June 30,
2016
   September 30,
2016
   December 31,
2016
   March 31,
2017
 
   (in thousands) 
Net (loss)/income  $3,439   $(1,395)  $11,484   $(2,073)
Income tax expense   2,580    4,049    3,565    845 
Net finance costs   3,193    4,374    3,415    6,174 
Depreciation   210    183    197    492 
Amortization(a)   694    76    259    788 
EBITDA (Non-GAAP)   10,116    7,287    18,920    6,226 
Gain on sale of available-for-sale financial assets   (58)            
Share based payments(b)   6,021    8,505    4,119    4,826 
Net loss/(gain) on held for trading derivative instruments   2,044    (2,101)   (8,542)   (1,698)
Transaction costs relating to equity transactions                
Adjusted EBITDA (Non-GAAP)  $18,123   $13,691   $14,497   $9,354 

 

  a) Includes only amortization of intangible assets other than intangible content assets.

 

  b) Consists of compensation costs recognized with respect to all outstanding plans and all other equity settled instruments.

 

2) Includes films that were released by us directly and licensed by us for release.

 

Our revenues and operating results are significantly affected by the timing, number and breadth of our theatrical releases and their budgets, the timing of television syndication agreements, and our amortization policy for the first 12 months of commercial exploitation for a film. The timing of releases is determined based on several factors. A significant portion of the films we distribute are delivered to Indian theaters at times when theater attendance has traditionally been highest, including school holidays, national holidays and the festivals. This timing of releases also takes into account competitor film release dates, major cricket events in India and film production schedules. Significant holidays and festivals, such as Diwali, Eid and Christmas, occur during July to December each year, and the Indian Premier League cricket season generally occurs during April and May of each year. The Tamil New Year, called Pongal, falls in January each year making the quarter ending March an important one for Tamil releases.

 

In the fiscal year 2017, revenue fluctuations primarily reflected the timing of major theatrical releases, with our highest quarterly revenues of $71.9 million in the three months ended September 30, 2016 as a result of the two high budget theatrical releases of Dishoom (Hindi), Janata Garage (Telugu) and four medium budget theatrical releases of Baar Baar Dekho (Hindi), Banjo (Hindi), Happy Bhag Jayegi (Hindi) and White (Malayalam). The lowest quarterly revenues was of $52.7 million in the three months ended March 31, 2017. The fluctuations in other gains or losses reflect the changes in mark to market values of our interest derivative liabilities.

 

Our quarterly results can vary from one period to the next, and the results of one quarter are not necessarily indicative of results for the next or any future quarter. Our revenue and operating results are therefore seasonal in nature due to the impact on income of the timing of new releases as well as timing and quantum of catalogue revenues.

 

 80

 

 

E. Off-Balance Sheet Arrangements

 

From time to time, to satisfy our filmed content purchase contracts, we obtain guarantees or other contractual arrangements, such as letters of credit, as support for our payment obligations.

 

As of March 31, 2017, the Group has provided certain stand-by letters of credit amounting to $80.6 million (2016: $96.0 million) which are in the nature of performance guarantees issued while entering into film co-production contracts and are valid until funding obligations under these contracts are met. These guarantees, issued in connection with outstanding content commitments, have varying maturity dates.

 

In addition, the Group issued financial guarantees amounting to $2.2 million (2016: $2.4 million) in the ordinary course of business, having varying maturity dates up to the next 12 months. The Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations.

 

The Group did not earn any fee to provide such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused.

 

F. Contractual Obligations

 

We have commitments under certain firm contractual arrangements, or firm commitments, to make future payments. These firm commitments secure future rights to various assets and services to be used in the normal course of our operations. The following table summarizes our firm commitments as of March 31, 2017.

 

<
   As of March 31, 2017 
   Total   Less than
1 year
   1-3
years
   3-5
years
   More than
5 years
 
   (in thousands) 
Recorded contractual obligations                         
Debt  $271,535   $180,722   $18,079   $71,881   $853