Notes to the Condensed Consolidated Financial Statements

for the three months ended 30 June 2019

1. NATURE OF OPERATIONS AND GENERAL INFORMATION

Entertainment One is a leading independent entertainment group focused on the acquisition, production and distribution of family, television, film and music content rights across all media throughout the world. Entertainment One Ltd. (the 'Company') is the Group's ultimate parent company and is incorporated and domiciled in Canada. The registered office of the Company is 134 Peter Street, Suite 700, Toronto, Ontario, M5V 2H2, Canada.

The Company's common shares are listed on the premium listing segment of the Official List of the Financial Conduct Authority.

2. BASIS OF PREPARATION

SIGNIFICANT ACCOUNTING POLICIES

These condensed consolidated financial statements included within the Interim Announcement, have been prepared in accordance with International Accounting Standards (IAS) 34 Interim Financial Reporting, as adopted by the European Union. These condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's consolidated financial statements for the year ended 31 March 2019 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and IFRS Interpretation Committee.

Other than new standards effective during the year as described below and income taxes which are accrued using the tax rate that is expected to be applicable for the full financial year, the policies are consistent with the principal accounting policies which were set out in the Group's consolidated financial statements for the year ended 31 March 2019.

These condensed consolidated financial statements for 30 June 2019 are unaudited but have been reviewed by the Group's auditor and their review opinion is included at the end of these statements. The condensed consolidated financial statements for 30 June 2018 were unaudited and not reviewed.

These condensed consolidated financial statements are presented in pounds sterling, which is also the functional currency of the parent company. All values are shown in millions, rounded to the nearest one hundred thousand pounds, except when otherwise stated.

These condensed consolidated financial statements were approved for issue by the directors on 10 October 2019.

GOING CONCERN

In addition to its senior secured notes (due 2026) the Group meets its day-to-day working capital requirements and funds its investment in production and investment in acquired content rights through its cash in hand and through a revolving credit facility which matures in December 2023 and is secured on certain assets held by the Group. Under the terms of this facility the Group is able to drawdown in the local currencies of its significant operating businesses. The facility and senior secured notes are subject to a series of covenants including interest cover charge and net debt against underlying EBITDA.

The Group has a track record of cash generation and is in full compliance with its bank facility and bond covenant requirements. At 30 June 2019, the Group had £57.6m of cash and cash equivalents (excluding cash held by production subsidiaries), £567.6m of gross debt and undrawn amounts under the revolving credit facility of £53.4m.

The Group is exposed to uncertainties arising from the economic climate and uncertainties in the markets in which it operates. Market conditions could lead to lower than anticipated demand for the Group's products and services and exchange rate volatility could also impact reported performance. The directors have considered the impact of these and other uncertainties and factored them into their financial forecasts and assessment of covenant headroom. The Group's forecasts and projections, taking account of reasonable possible changes in trading performance (and available mitigating actions), show that the Group will be able to operate within the expected limits of its existing financing and provide headroom against the covenants for the foreseeable future. For these reasons the directors continue to adopt the going concern basis of accounting in preparing these condensed consolidated financial statements.

USE OF ADDITIONAL PERFORMANCE MEASURES

The Group uses a number of non-IFRS financial measures that are not specifically defined under IFRS or any other generally accepted accounting principles, including underlying EBITDA, one-off items, adjusted profit before tax and adjusted diluted earnings per share. These non-IFRS financial measures are presented because they are among the measures used by management to measure operating performance and as a basis for strategic planning and forecasting, and the Group believes that these measures are frequently used by investors in analysing business performance. Refer to the Appendix to the Interim Announcement for definitions of these terms.

RESTATEMENTS

Sierra put option

On 27 June 2018, the Group acquired the remaining 49% in Sierra Pictures, LLC ('Sierra/Affinity'). As a result of the acquisition, the put and call options granted over the 49% shares were cancelled. The carrying value of the liability as at 27 June 2018 of £17.9 million was reversed with the corresponding adjustment to the Put option reserve of £12.2 million.

Part of this balance had previously been credited as a one-off finance income of £5.7 million in the condensed consolidated financial statements for the six months ended 30 September 2018 and in the consolidated financial statements for the year ended 31 March 2019. However, subsequent to the year-end, it was determined that the appropriate treatment would be to credit the full balance to retained earnings considering that this was a transaction with equity holders.  The Group has restated the prior year amounts disclosed in the consolidated financial statements for the year ended 31 March 2019 and condensed consolidated financial statements for the period ended 30 September 2018 as follows: the profit for the year/loss for the period decreased/increased by £5.7m with a corresponding reduction in the loss on transactions with equity holders in the Statement of Changes in Equity. There was no impact on the consolidated balance sheet at 31 March 2019 or 30 September 2018.

The Group concluded that the restatement was not fundamental to the Group's previously issued financial statements and therefore the accounts were not reissued.

Cash Flow Statement classification

Transactions with equity holders are classified as financing activities. These were previously classified by the Group as investing activities. The change is to appropriately reflect the nature of the transactions.

IMPACT OF NEW ACCOUNTING STANDARDS

Transition to IFRS 16 Leases

IFRS 16 Leases ('IFRS 16') supersedes IAS 17 Leases and sets out the principles for the recognition, measurement presentation and disclosure of leases.

The Group has applied IFRS 16 from 1 April 2019 using the modified retrospective approach on transition. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying IFRS 16 recognised at the date of application (1 April 2019). Accordingly, the comparative information presented for the condensed consolidated income statement for the period-ended 30 June 2018 and the condensed consolidated balance sheet as at 31 March 2019 have not been restated.

IFRS 16 results in both an asset ('right of use asset'), representing the right to use a leased item, and liability ('lease liability'), representing discounted future lease payments, being recognised on balance sheet. Lease costs are now recognised as depreciation and interest, rather than being included within operating costs.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities are measured at the present value of the remaining lease payments, discounted using the interest rate implicit (where that rate can be readily determined) or using an incremental borrowing rate. The finance cost is charged to the income statement over the lease period so as to produce a constant rate of interest on the remaining balance of the liability for each period.

At the transition date the Group has recognised right-of-use assets equal to the lease liability, adjusted for any prepaid or accrued lease payments and any incentives received.

The Group has elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying the previous accounting guidance.

The Group has opted to use the recognition exemptions available under IFRS 16 for leases with a term less than 12 months and for leases relating to low-value assets. The Group will continue to expense the lease payments associated with these leases on a straight-line basis over the lease term.

On transition the Group recognised the following lease liabilities and right-of-use assets:

The table below reconciles the Group's operating lease commitments as at 31 March 2019 to the lease liabilities recognised on transition on 1 April 2019.

When measuring lease liabilities for leases that were previously classified as operating leases, the Group discounted lease payments using its incremental borrowing rate at 1 April 2019. The weighted-average incremental borrowing rate applied is 4.69%.

During the three-months ended 30 June 2019, the Group has recognised £2.2m of depreciation charges and £0.7m of interest in relation to those leases now recognised on balance sheet. The operating lease expense for the 30 June 2018 was £1.5m.

Accounting Policy for Leases

The Group's leases primarily relate to various offices in Australia, China, Canada, the USA and the UK. Rental periods are typically for fixed periods of up to ten years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the fixed payments, less any lease incentives receivable.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right of use assets are measured at cost comprising the following: the amount of initial measurement of lease liability; any lease payments made at or before the commencement date less any lease incentives received; any initial direct costs; and restoration costs.

ESTIMATES

The preparation of condensed consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, income and expenses. Actual results may differ from these estimates. In preparing these condensed consolidated financial statements, the significant judgements made by management in applying the Group accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended 31 March 2019.

3. SEGMENTAL ANALYSIS

SEASONALITY OF OPERATIONS

The Group's business is normally subject to seasonal variations based on the timing of film cinema releases, physical home entertainment and television and digital content releases. Release dates are determined by several factors, including timing of holiday periods, the US release date of films and television series and competition in the market. In addition, revenues for the Group's licensed consumer products are influenced by seasonal consumer purchasing behaviour. Accordingly, if a short-term negative impact on the Group's business occurs during a time of high seasonal demand, the effect could have a disproportionate effect on the Group's results for the period.

The Group's exposure to seasonality varies by Division. The results of the Family & Brands Division are affected by the timing of royalties earned on properties driven by timing of holiday periods. Within the Film, Television & Music Division, revenues from are driven by contracted delivery dates/release dates with primary broadcasters and can fluctuate significantly from period-to-period. Film release dates are not entirely in the control of the Group and are determined largely by the production and release schedules of each film's producer and the timing of holiday periods.

OPERATING SEGMENTS

The Group is organised for internal reporting and management purposes into:

- Family & Brands - the production, acquisition and exploitation, including licensing and merchandising, of family content rights across all media

- Film, Television & Music - the production, acquisition and exploitation and trading of television, film and music content rights across all media

The Group's operating segments are identified on the basis of internal reports that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Chief Executive Officer has been identified as the chief operating decision maker.

Inter-segment sales are charged at prevailing market prices.

Segment information for the period ended 30 June 2019 is presented below:

Segment information for the period ended 30 June 2018 is presented below:

Segment assets for the year ended 31 March 2019 is presented below:

4. REVENUE

In the following table, revenue is disaggregated by major service lines. The table also includes a reconciliation of the disaggregated revenue with the Group's reportable segments. See Note 3.

DISAGGREGATION OF REVENUE

5. ONE-OFF ITEMS

Items of income or expense that are considered by management for designation as one-off are as follows:

Restructuring costs

Restructuring charges for the three months ended 30 June 2019 include the following:

·      Severance charges of £3.0m associated with the integration of the Film and Television Divisions.

·      Severance charges and staff costs of £1.9m associated with the outsourcing arrangements implemented in certain of the Group's Film Distribution territories.

·      Severance charges of £0.7 relating to the closure of the Group's home entertainment business in Canada.  

Other items

·      Acquisition costs of £6.1m primarily relates to the acquisition of Audio Network Limited which was completed on 18 April 2019.

·      Other one-off costs of £0.5m relate to legal fees incurred on aborted projects.

Prior period Costs

In the prior period, one-off items consisted of £1.5m of costs associated with the integration of the Film and Television Divisions, £0.2m of acquisition costs in relation to Round Room and Whizz Kid and the remaining £0.1m related to legal fees on aborted projects.

6. ONE-OFF FINANCING ITEMS

Items of income or expense that are considered by management for designation as one-off financing items are as follows:

Refinancing costs

On 26 June 2019 the Group issued £425.0m of Senior Secured Notes due 2026. The proceeds were used to redeem the £355.0m of Senior Secured Notes due 2022 and repay the £52.0m term loan due December 2020. The early redemption of the 2022 Notes resulted in the Group incurring a call premium of £12.2m which has been recorded as a one-off financing cost. Unamortised deferred finance costs (net of premium) relating to the 2022 Notes and the term loan amounting to £3.4m were written off as a one-off financing cost. See Note 12 for details.

Put options

A charge of £0.3m related to the unwinding of discounting on liabilities relating to put options issued over the non-controlling interest of subsidiary companies.

Prior period

One-off finance income consisted of a credit of £0.4m in respect of fair value gains on hedge contracts.

7. EARNINGS PER SHARE

The weighted average number of shares used in the earnings per share calculations are set out below:

ADJUSTED DILUTED EARNINGS PER SHARE

The directors believe that the presentation of adjusted diluted earnings per share, being the fully diluted earnings per share adjusted for amortisation of acquired intangibles, share-based payment charge, tax, finance costs and depreciation related to joint ventures, operating one-off items, finance one-off items and one-off tax items, helps to explain the underlying performance of the Group. A reconciliation to the adjusted (loss)/profit for the period is set out below: 

A reconciliation of the earnings used in the fully diluted earnings per share calculation to earnings used in the adjusted earnings per share calculation is set out below: