Corporate Information Board of Directors (The Board ) Executive Directors Mr. Wong Pak Ming (Chairman) Ms. Wong Yee Kwan Alvina Mr. Wong Chi Woon Edmo

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2 Contents PEGASUS ENTERTAINMENT HOLDINGS LIMITED INTERIM REPORT 2015/16 Corporate Information 2 Consolidated Statement of Profit or Loss and Other Comprehensive Income 4 Consolidated Statement of Financial Position 6 Consolidated Statement of Changes in Equity 8 Condensed Consolidated Statement of Cash Flows 10 Notes to the Interim Financial Statements 11 Management Discussion and Analysis 33 Other Information 44

3 Corporate Information Board of Directors (The Board ) Executive Directors Mr. Wong Pak Ming (Chairman) Ms. Wong Yee Kwan Alvina Mr. Wong Chi Woon Edmond Independent Non-Executive Directors Mr. Lam Kam Tong Mr. Lo Eric Tien-cheuk Mr. Tang Kai Kui Terence Audit committee Mr. Lam Kam Tong (Chairman) Mr. Lo Eric Tien-cheuk Mr. Tang Kai Kui Terence Nomination committee Mr. Lo Eric Tien-cheuk (Chairman) Mr. Lam Kam Tong Mr. Tang Kai Kui Terence Remuneration committee Mr. Tang Kai Kui Terence (Chairman) Mr. Lam Kam Tong Mr. Lo Eric Tien-cheuk Company secretary Mr. Chan Chi Ming CPA FCCA Compliance officer Ms. Wong Yee Kwan Alvina Authorised representatives Mr. Wong Pak Ming Mr. Chan Chi Ming Principal banker Bank of China (Hong Kong) Limited 1 Garden Road, Central Hong Kong 1 02 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

4 Corporate Information Auditor Deloitte Touche Tohmatsu 35/F, One Pacific Place 88 Queensway Hong Kong Registered office Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Headquarter and principal place of business in Hong Kong Rooms , Westlands Centre 20 Westlands Road Quarry Bay Hong Kong Principal share registrar and transfer office Codan Trust Company (Cayman) Limited Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Codan Trust Company (Cayman) Limited Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Hong Kong branch share registrar and transfer office Tricor Investor Services Limited Level 22 Hopewell Centre 183 Queen s Road East Hong Kong Company s website Stock code ~ 2015/16 03

5 Interim results for the six months ended 31 December The Board is pleased to announce the unaudited results of the Company and its subsidiaries (collectively referred to as the Group ) for the six months ended 31 December 2015 together with the comparative unaudited figures for the corresponding period in 2014 as follows: Consolidated Statement of Profit or Loss and Other Comprehensive Income For the six months ended 31 December Six months ended 31 December Notes HK$ 000 HK$ 000 (Unaudited) (Unaudited) Revenue 3 309,381 40,211 Cost of sales (184,248) (22,658) Gross profit 125,133 17,553 Other income and gain 2, Selling and distribution expenses (49,158) (36,067) Administrative expenses (62,966) (11,336) Finance costs 5 (139) (10) Share of results of an associate Share of results of a joint venture (572) Profit (loss) before tax 15,358 (28,994) Income tax expense 6 (10,181) Profit (loss) for the period 7 5,177 (28,994) Other comprehensive income Items that may be reclassified subsequently to profit or loss Exchange difference on translation of foreign operations 945 Share of exchange difference of an associate 3 Other comprehensive income for the period, net of income tax Total comprehensive income (expense) for the period 6,122 (28,991) 04 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

6 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the six months ended 31 December Six months ended 31 December Note HK$ 000 HK$ 000 (Unaudited) (Unaudited) Profit (loss) for the period attributable to: Owners of the Company 8,025 (28,963) Non-controlling interests (2,848) (31) 5,177 (28,994) Total comprehensive income (expense) for the period attributable to: Owners of the Company 8,970 (28,960) Non-controlling interests (2,848) (31) 6,122 (28,991) (Restated) Earnings (loss) per share 8 Basic (HK cents) 0.3 (1.4) Diluted (HK cent) 0.3 N/A ~ 2015/16 05

7 Consolidated Statement of Financial Position At 31 December December June Notes HK$ 000 HK$ 000 (Unaudited) (Audited) Non-current assets Property, plant and equipment 10 42,451 45,458 Goodwill 43,084 43,084 Intangible assets 31,691 37,268 Interest in an associate 11 54,979 54,092 Interest in a joint venture 12 49,448 Prepayment to an artiste 12,000 18,000 Available-for-sale investment 4,056 4,056 Deferred tax asset 7,945 9, , ,538 Current assets Film rights 28,672 6,931 Film production in progress 82, ,753 Investments in film/drama production 33,638 25,530 Inventories 1, Trade and other receivables 13 18,818 12,881 Prepayment to an artiste 12,000 12,000 Rental deposits 20,062 20,130 Amount due from non-controlling interest 347 Tax recoverable Pledged bank deposits 14 55,105 31,066 Bank balances and cash 78,265 81, , , Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

8 Consolidated Statement of Financial Position At 31 December December June Notes HK$ 000 HK$ 000 (Unaudited) (Audited) Current liabilities Trade and other payables 15 77,578 45,508 Receipts in advance 53, ,683 Amount due to a related company 2, Amount due to non-controlling interest 7 Tax payable 8,278 Bank borrowings due within one year 16 10, , ,892 Net current assets 177, ,304 Total assets less current liabilities 423, ,842 Capital and reserves Share capital 17 6,309 6,040 Reserves 410, ,150 Equity attributable to owners of the Company 416, ,190 Non-controlling interests 6,796 10,652 Total equity 423, ,842 ~ 2015/16 07

9 Consolidated Statement of Changes in Equity For the six months ended 31 December Attributable to owners of the Company Share capital Share premium Share option reserve Other reserve* Exchange reserve Warrants reserve Retained profits (accumulated losses) Sub-total Noncontrolling interests Total * HK$ 000 HK$ 000 HK$000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) At 1 July 2014 (Audited) , , (23) , , ,276 Loss for the period - (28,963) (28,963) (31) (28,994) Share of exchange difference of an associate Total comprehensive expense for the period 3 (28,963) (28,960) (31) (28,991) Capital contribution from non-controlling interests 1,800 1,800 Issue of new shares ,500 63,000 63,000 Cost of issuing new shares (3,050) (3,050) (3,050) Issue of shares upon exercise of warrants (7) At 31 December 2014 (Unaudited) , , (20) , ,196 1, , Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

10 Consolidated Statement of Changes in Equity For the six months ended 31 December Attributable to owners of the Company Share capital Share premium Share option reserve Other reserve* Exchange reserve Warrants reserve Retained profits (accumulated losses) Sub-total Noncontrolling interests Total * HK$ 000 HK$ 000 HK$000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) At 1 July 2015 (Audited) , , (21) 495 (128,647) 357,190 10, ,842 Profit for the period 8,025 8,025 (2,848) 5,177 Exchange difference on translation of foreign operations Total comprehensive income (expense) for the period 945 8,025 8,970 (2,848) 6,122 Acquisition of noncontrolling interest of a subsidiary Recognition of equitysettled share-based payment Transfer upon share options lapsed Issue of shares upon exercise of warrants (1,008) (1,008) 25,272 25,272 25,272 (25,272) 25, ,040 (200) 25,109 25,109 At 31 December 2015 (Unaudited) , , (95,350) 416,541 6, ,337 * Other reserve represents the difference between the aggregate nominal value of the respective share capital of the companies now comprising the subsidiaries of the Company over the nominal value of the shares of the Company issued pursuant to the group reorganisation completed on 5 October 2012 to rationalise the structure of the Group in preparation for the listing of the Company s shares on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the Stock Exchange ) (the Listing ). * ~ 2015/16 09

11 Condensed Consolidated Statement of Cash Flows For the six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Net cash used in operating activities (11,437) (16,877) Net cash used in investing activities (25,011) (33,923) Net cash from financing activities 35,920 60,870 Net (decrease) increase in cash and cash equivalents (528) 10,070 Effect of foreign exchange rate changes (2,957) Cash and cash equivalents at 1 July ,750 17,633 Cash and cash equivalents at 31 December ,265 27,703 Cash and cash equivalents represented by: Bank balances and cash 78,265 27, Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

12 Notes to the Interim Financial Statements For the six months ended 31 December General information 1. The Company is a limited liability company incorporated in the Cayman Islands on 8 March The Company s registered office is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands and its principal place of business is located at Rooms , Westlands Centre, 20 Westlands Road, Quarry Bay, Hong Kong. Its immediate and ultimate holding company is Honour Grace Limited ( Honour Grace ), a company incorporated in the British Virgin Islands (the BVI ) Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1 1111, Cayman Islands The Company is an investment holding company. The Group is principally engaged in film and television ( TV ) series production, distribution and licensing of film rights, film exhibition, postproduction, as well as advertising, marketing and publication. 2. Basis of preparation 2. The unaudited consolidated financial statements for the six months ended 31 December 2015 (the Interim Financial Statements ) have been prepared in accordance with Hong Kong Accounting Standard ( HKAS ) 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants (the HKICPA ) and with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on the Stock Exchange (the Listing Rules ) The Interim Financial Statements have been prepared under the historical cost basis. The principal accounting policies used in the preparation of the Interim Financial Statements are consistent with those used in the annual consolidated financial statements for the year ended 30 June 2015 except for the adoption of the following new and revised significant accounting policies used in the preparation of the Interim Financial Statements ~ 2015/16 11

13 Notes to the Interim Financial Statements For the six months ended 31 December Basis of preparation (Continued) Investment in a joint venture 2. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and assets and liabilities of a joint venture are incorporated in the consolidated financial statements using the equity method of accounting. The financial statements of a joint venture used for equity accounting purposes are prepared using uniform accounting policies as those of the Group for like transactions and events in similar circumstances. Under the equity method, an investment in a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group s share of the profits or loss and other comprehensive income of a joint venture. When the Group s share of losses of a joint venture exceeds the Group s interest in that joint venture (which includes any long-term interests that, in substance, form part of the Group s net investment in the joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that joint venture. The requirements of HKAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group s investment in a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with HKAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases When a group entity transacts with its joint venture, profits and losses resulting from the transactions with the joint venture are recognised in the consolidated financial statements only to the extent of interests in the joint venture that are not related to the Group. 12 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

14 Notes to the Interim Financial Statements For the six months ended 31 December Basis of preparation (Continued) Share-based payment arrangement 2. Equity-settled share-based payment transaction: Share options granted to consultants Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. The fair values of the goods or services received are recognised as expenses, with a corresponding increase in equity (share option reserve), when the Group obtains the goods or when the counterparties render services, unless the goods or services qualify for recognition as assets. The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards. For those which are effective for accounting period beginning on 1 July 2015, the application has no material impact on the reported results and the financial position of the Group for the current and/or prior accounting periods. For those which are not yet effective, the Group is in the process of assessing their impact on the Group s results and financial position The Interim Financial Statements are presented in Hong Kong dollars ( HK$ ), which is the Company s functional and presentation currency. ~ 2015/16 13

15 Notes to the Interim Financial Statements For the six months ended 31 December Revenue 3. Six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Film production, distribution and licensing income 235,048 31,476 Film exhibition income 66,724 7,760 Post-production income Advertising income 2,418 Services income 734 Advertising, marketing and publication income 4, ,381 40, Segment information 4. The Group identifies operating segments on basis of internal reports about components of the Group that are regularly reviewed by the directors of the Company (the Directors ), the chief operating decision makers ( CODM ) in order to allocate resources to the segments and to assess their performance. For the six months ended 31 December 2015, the Group is organised into four main reportable segments as follows: (i) Film and TV series production and distribution; (i) (ii) Film exhibition; (ii) (iii) Post-production; and (iii) (iv) Advertising, marketing and publication. (iv) Segment profit (loss) represent the profit earned or loss incurred by each segment without allocation of unallocated other income and gain, certain of selling and distribution expenses and administrative expenses, finance costs, share of results of an associate and a joint venture and income tax expense. This is the measure reported to the CODM for the purposes of resource allocation and performance assessment. 14 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

16 Notes to the Interim Financial Statements For the six months ended 31 December Segment information (Continued) Segment revenue and results 4. The following is an analysis of the Group s revenue and results by reportable and operating segment. For the six months ended 31 December 2015: Film and TV series production and distribution Film exhibition Postproduction Advertising, marketing and publication Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Segment revenue External customers 237,466 66, , ,381 Segment profit (loss) 69,898 (11,611) (2,016) (8,501) 47,770 Unallocated other income and gain Unallocated head office and corporate expenses Finance costs Share of results of an associate Share of results of a joint venture 859 (33,447) (139) 887 (572) Profit before tax 15,358 Income tax expense (10,181) Profit for the period 5,177 ~ 2015/16 15

17 Notes to the Interim Financial Statements For the six months ended 31 December Segment information (Continued) Segment revenue and results (Continued) 4. For the six months ended 31 December 2014: Film and TV series production and distribution Film exhibition Postproduction Advertising, marketing and publication Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Segment revenue External customers 32,210 7, ,211 Segment profit (loss) 2,622 (28,189) (403) (25,970) Unallocated other income and gain Unallocated head office and corporate expenses Finance costs Share of results of an associate 168 (3,402) (10) 220 Loss before tax (28,994) Income tax expense Loss for the period (28,994) 16 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

18 Notes to the Interim Financial Statements For the six months ended 31 December Segment information (Continued) Geographical information 4. An analysis of the Group s revenue from external customers by geographical market based on where the revenue is derived from are as below: Six month ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Hong Kong and Macau 79,716 18,336 The People s Republic of China (the PRC ) 189,340 18,372 South East Asia region 9,474 1,049 Others 30,851 2, ,381 40, Finance costs 5. Six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Interest on bank borrowings wholly repayable within five years 64 Interest on bank overdrafts ~ 2015/16 17

19 Notes to the Interim Financial Statements For the six months ended 31 December Income tax expense 6. Six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) The income tax expense comprises: Hong Kong Profits Tax current 8,546 Deferred taxation 1,635 10,181 Income tax expense represented Hong Kong Profits Tax payable by the Group for the six months ended 31 December Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit for the six months ended 31 December % No provision for Hong Kong Profits Tax is required as the Group had no estimated assessable profit for the six months ended 31 December Under the Law of the PRC on Enterprise Income Tax (the EIT Law ) and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries are 25% from 1 January 2008 onwards. The PRC subsidiaries had incurred losses for the six months ended 31 December 2014 and 2015 and no provision for Enterprise Income Tax were made for these periods % Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

20 Notes to the Interim Financial Statements For the six months ended 31 December Profit (loss) for the period 7. Six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Profit (loss) for the period has been arrived at after charging: Directors emoluments 8,304 1,908 Other staff costs 11,040 4,313 Retirement benefit scheme contributions, excluding those of Directors Total staff costs 19,794 6,472 Depreciation of property, plant and equipment 3, Amortisation of intangible assets 5,577 Cost of film rights recognised as an expense 148,659 18,987 Cost of services provided 34,385 3,537 Cost of inventories sold 1, Impairment loss on other receivables 2,011 Minimum lease payments under operating leases in respect of: Premises 2, Cinema 28,545 24,718 Contingent rents incurred for cinema Share-based payment expense 25,272 Net exchange losses 3, and after crediting: Bank interest income Handling service income 1,070 ~ 2015/16 19

21 Notes to the Interim Financial Statements For the six months ended 31 December Earnings (loss) per share The calculation of the basic and diluted earnings (loss) per share attributable to owners of the Company for the six months ended 31 December 2014 and 2015 is based on the following data: Six months ended 31 December HK$ 000 HK$ 000 (Unaudited) (Unaudited) Earnings (loss) Profit (loss) for the period attributable to owners of the Company for the purpose of basic and diluted earnings (loss) per share 8,025 (28,963) Six months ended 31 December (Unaudited) (Unaudited) (restated) Number of shares Weighted average number of ordinary shares for the purpose of basic earnings (loss) per share 2,462,834,063 2,042,978,260 Effect of dilutive ordinary shares arising from issue of warrants 128,962,910 Weighted average number of ordinary shares for the purpose of diluted earnings per share 2,591,796,973 The weighted average number of ordinary shares for the purpose of basic and diluted loss per share has been adjusted for the share subdivision effective on 22 July 2015 (as detailed in note 17 below). The basic loss per share for the six months ended 31 December 2014 has been restated accordingly. No adjustment had been made to the basic loss per share presented for the six months ended 31 December 2014 in respect of a dilution as the impact of the warrants outstanding had an anti-dilutive effect on the basic loss per share presented Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

22 Notes to the Interim Financial Statements For the six months ended 31 December Dividends The Board does not recommend the payment of any interim dividend for the six months ended 31 December 2015 (2014: Nil). 10. Property, plant and equipment During the current period, the Group incurred capital expenditure of approximately HK$823,000 (six months ended 31 December 2014: HK$46,703,000) represented mainly the computer equipment in relation to advertising, marketing and publication segment. 11. Interest in an associate , ,703, December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Cost of unlisted investment in an associate 54,000 54,000 Share of post-acquisition profits and other comprehensive expenses ,979 54,092 The Group holds 40% of the entire issued share capital of Jade Dynasty Holdings Limited ( JDH ) and voting power on the board of directors of JDH and therefore, JDH is an associate of the Group. JDH is an investment holding company incorporated in the BVI with limited liability and its subsidiaries (collectively known as JDH Group ), are principally engaged in comic publication and owns the intellectual property rights of a database of comic stories and comic heroes. The management of the Company anticipates that the Group would make use of the intellectual property rights of the associate (including but not limited to the comic stories and comic characters) that the Group consider they are suitable for reproduction as films. 40% ~ 2015/16 21

23 Notes to the Interim Financial Statements For the six months ended 31 December Interest in a joint venture December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Cost of unlisted investment in a joint venture 50,020 Share of post-acquisition loss and other comprehensive expense (572) 49,448 Bounty Productions Limited ( BPL ) is a special purpose entity incorporated in Hong Kong with limited liability for film production and distribution. Pursuant to the Co-Production and Co-Financing Agreement entered into between the Group, Harmonious Entertainment (Shanghai) Co., Ltd. ( HES ) and Bounty Yoohanhwesa ( BY ), the Group, HES and BY held 40.00%, 25.51% and 34.49% equity interest in BPL respectively. The board of directors of BPL, the governing body which directs the relevant activities that significantly affects the returns of BPL, consists of three directors of which the Group, HES and BY can appoint one director each to the board of directors of BPL. The relevant activities required to be approved unanimously by all these three directors. Therefore, BPL is jointly controlled by the Group, HES and BY. As the joint arrangement does not result in either parties having rights to assets and obligations to liabilities of BPL, it is accounted for as a joint venture of the Group. Harmonious Entertainment (Shanghai) Co., Ltd. HES Bounty Yoohanhwesa BY HES BY 40.00% 25.51% 34.49% HES BY HES BY 22 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

24 Notes to the Interim Financial Statements For the six months ended 31 December Trade and other receivables The aged analysis of the Group s trade receivables, net of allowance for doubtful debts, based on the invoice date, which approximates the respective revenue recognition dates at the end of the reporting period is as follows: December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Trade receivables: 0 30 days ,720 1, days , days days days ,100 6,019 Other receivables, deposits and prepayments 14,442 6,454 Other deposits and prepayments for cinema operation ,818 12,881 Generally, with the exception of post-production and advertising, marketing and publication customers, who are generally granted credit period ranging from 30 to 60 days and 90 to 120 days respectively, no credit period is granted to the Group s customers. Distribution and licensing fee from distributors in Hong Kong, the PRC and overseas countries are normally settled upon delivery of film negatives to them. On a case-by-case basis, one to two months of credit period may be granted to its customers with good repayment history ~ 2015/16 23

25 Notes to the Interim Financial Statements For the six months ended 31 December Pledged bank deposits 14. At 31 December 2015, the amounts represent bank deposits of approximately HK$55,105,000 (30 June 2015: HK$31,066,000) in which an amount of HK$54,450,000 (30 June 2015: HK$30,414,000) pledged to a bank to secure short-term banking facilities granted to the Group and the remaining amount of HK$655,000 (30 June 2015: HK$652,000) pledged to a bank to secure for the 4Dx s equipment rental fees payable to a supplier of 4Dx equipment for the Group s operation in the cinema in accordance with the 4Dx Equipment Rental Agreement dated on 20 August The bank deposits are carried interests at a fixed rate of 0.35% 2.30% (30 June 2015: 0.70% 0.80%) per annum and they will be matured between 5 January 2016 and 15 April Trade and other payables ,105, ,066,000 54,450, ,414, , , Dx 4Dx 4Dx 0.35% 2.30% % 0.80% The aged analysis of the Group s trade payables at the end of the reporting period is as follows: 31 December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Trade payables: Within 60 days 60 23,627 17,058 23,627 17,058 Other payables and accruals 53,389 26,602 Deposits received 562 1,848 77,578 45,508 The average credit period on purchases of goods is 60 to 90 days. The aging analysis of trade payables presented is based on the invoice date at the end of the reporting period Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

26 Notes to the Interim Financial Statements For the six months ended 31 December Bank borrowings At 31 December 2015, bank borrowings represent the bank loan which was secured by the pledged bank deposits of approximately HK$24,000,000 for a term of six months (30 June 2015: Nil). The bank loan carries interest at 3% per annum over the Hong Kong Interbank Offered Rate of Bank of China (Hong Kong) Limited on the first business day of such interest period. The effective interest rate of the bank loan approximates 3.4% per annum. The bank loan is denominated in HK$. The bank loan was fully repaid in January Share capital ,000, % 3.4% Notes Number of shares Share capital HK$ 000 Ordinary shares: Authorised: At 1 July 2015, of HK$0.01 each (Audited) ,000,000,000 80,000 Effect of share subdivision (a) 24,000,000,000 At 31 December 2015, of HK$ each (Unaudited) ,000,000,000 80,000 Issued and fully paid: At 1 July 2015, of HK$0.01 each (Audited) ,000,000 6,040 Effect of share subdivision (a) 1,812,000,000 Issue of shares upon exercise of warrants (b) 107,768, At 31 December 2015, of HK$ each (Unaudited) ,523,768,239 6,309 ~ 2015/16 25

27 Notes to the Interim Financial Statements For the six months ended 31 December Share capital (Continued) Notes: 17. (a) Pursuant to the ordinary resolution passed by the shareholders of the Company at the extraordinary general meeting of the Company held on 21 July 2015, a share subdivision was approved and effective from 22 July 2015, each of the existing issued and unissued ordinary shares of the Company of par value of HK$0.01 subdivided into four subdivided ordinary shares of the Company of par value of HK$ each (the Share Subdivision ). Please refer to the circular of the Company dated 3 July 2015 for the details. (a) (b) During the six months ended 31 December 2015, register holders of 107,768,239 warrants exercised their rights to subscribe for 107,768,239 ordinary shares of the Company at HK$0.233 per share. (b) ,768, ,768, At 1 July 2015, 67,000,000 warrants were outstanding. As a result of the Share Subdivision, based on the relevant terms of the warrants, the exercise price of the warrants was adjusted from HK$0.93 per share to HK$0.233 per subdivided share, where such adjustment was effective from the close of business of the business day immediately preceding the date on which the Share Subdivision became effective. In accordance with the adjustment of the exercise price of the warrants as aforesaid, the number of shares falling to be issued upon exercise of the warrants changed from 67,000,000 shares to 267,424,892 subdivided shares ,000, ,000, ,424,892 At 31 December 2015, the Company had outstanding 159,656,653 warrants to be exercised at any time on or before 11 December Exercise in full of such warrants would result in the issue of 159,656,653 additional ordinary shares of HK$ each ,656, ,656, Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

28 Notes to the Interim Financial Statements For the six months ended 31 December Share-based payment transactions Share option scheme 18. The Company s share option scheme (the Scheme ), was approved and adopted by the sole shareholder on 5 October 2012 for the primary purpose to grant options to eligible persons as incentives or rewards for their contribution to the Group Under the Scheme, the Board may, at its discretion, grant options pursuant to the Scheme to the Directors (including executive directors, non-executive directors and independent non-executive directors), employees, advisors and consultants of the Company and its subsidiaries who the Board considers, in its absolute discretion, have contributed or will contribute to the Group (the Participants ). The total numbers of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of the Company in issue at any point in time, without prior approval from the Company s shareholders. The number of shares issued and to be issued in respect of which options granted and may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company s shareholders. 10% 1% The Scheme shall be valid and effective for a period of 10 years commencing on 5 October Options granted during the life of the Scheme shall continue to be exercisable in accordance with their terms of grant. The exercise price is determined by the Directors, and will not be less than the highest of (i) the closing price of the shares as stated in the daily quotation sheets issued by the Stock Exchange on the date of grant, which must be a trading day; (ii) the average closing price of the shares as stated in the daily quotation sheets issued by the Stock Exchange for the five trading days immediately preceding the date of grant; and (iii) the nominal value of the Company s shares. Upon acceptance of the option, the Participants shall pay HK$1.00 to the Company by way of consideration for the grant. The option will be offered for acceptance for a period of 28 days from the date of grant (i) (ii) (iii) As at 30 June 2015, there was no share options granted under the Scheme by the Company ~ 2015/16 27

29 Notes to the Interim Financial Statements For the six months ended 31 December Share-based payment transactions (Continued) Share option scheme (Continued) 18. Details of the share options granted under the Scheme for the six months ended 31 December 2015 are as follows: Number of share options * * Granted Adjustment Exercised Lapsed Categories of Exercise Outstanding during the during the during the during the Outstanding participants Date of grant Exercisable period price* at period period* period period at * * HK$ Consultants ,000,000 36,000,000 (48,000,000) ,000,000 84,000,000 (112,000,000) ,000, ,000,000 (160,000,000) * As a result of the Share Subdivision, based on the relevant terms of the Scheme, the exercise price and number of shares falling to be issued upon exercise of the share options were adjusted from HK$2.18 per share to HK$0.545 per subdivided share and 40,000,000 shares to 160,000,000 subdivided shares, where such adjustments were effective from the date on which the Share Subdivision became effective. * ,000,000160,000, Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

30 Notes to the Interim Financial Statements For the six months ended 31 December Share-based payment transactions (Continued) Share option scheme (Continued) 18. For share options granted during the current period, the Binomial Model had been used to estimate the fair value of the share options. The variables and assumptions used in computing the fair value of the share options are based on the Company s best estimate. The value of an option varies with different variables of certain subjective assumptions. The significant inputs into the model are as follows: Date of grant 13 July 2015 Closing price of share at grant date HK$2.18 Exercise price HK$2.18 Expected volatility 64.65% Risk-free rate 0.36% Expected dividend yield 0% Included in administrative expenses, the Group recognised the total expense of HK$25,272,000 for the six months ended 31 December 2015 (31 December 2014: Nil) in relation to share options granted by the Company % 0.36% 0% ,272, ~ 2015/16 29

31 Notes to the Interim Financial Statements For the six months ended 31 December Related party transactions During the periods, the Group entered into the following significant transactions with related parties: 19. Six months ended 31 December Name of related parties Notes Nature of transaction HK$ 000 HK$ 000 (Unaudited) (Unaudited) PM Motion Pictures Limited ( PM Motion ) (a) Service income Pegasus Laboratory (International) Limited ( Pegasus Laboratory ) (b) Film processing services fee 527 Pure Project Limited (c) Rental expense Pure Project Limited Chili Advertising & Promotions Limited ( Chili ) (d) Advertising and promotion services fee Chili Advertising & Promotions Limited ( Chili ) 81 ( Pegasus Ying Lian ) ( Hangzhou Pegasus ) Notes: (e) Management fee 113 (f) Management fee 76 (a) The service income was received from PM Motion for the Group s provision of film distribution and post-production services. Mr. Wong Pak Ming ( Mr. Wong ), Mr. Wong Chi Woon Edmond and Ms. Wong Yee Kwan Alvina (collectively referred to as the Controlling Shareholders ) all being the Directors, collectively have controlling interest over this company. (a) (b) The film processing services fee was paid to Pegasus Laboratory in which it is beneficiary owned by a company collectively controlled by the Controlling Shareholders at 31 December 2014 and (b) (c) The rental expense was paid to Pure Project Limited for the office premise leased by the Group. Mr. Wong has controlling interests in this company. (c) Pure Project Limited (d) The advertising and promotion services fee was paid to Chili during the six months ended 31 December 2014 in which Ms. Wong Kit Fong, the sister of Mr. Wong, has controlling interest in Chili. Chili had become a subsidiary of the Company upon the acquisition of Chili completed on 12 June (d) Chili Chili Chili Chili (e) The management fee was paid to Pegasus Ying Lian in which Mr. Wong has controlling interests. (e) (f) The management fee was paid to Hangzhou Pegasus in which a member of the key management of the Group has controlling interests. (f) 30 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

32 Notes to the Interim Financial Statements For the six months ended 31 December Operating lease commitment The Group as lessee 20. As at 30 June 2015 and 31 December 2015, the Group leased certain of its office premises and cinemas under operating lease arrangements At the end of the reporting period, the Group had committed for future minimum lease payments under non-cancellable operating leases which fall due as follows: 31 December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Within one year 66,269 61,027 In the second to fifth year inclusive 282, ,280 Over five years 320, , , ,894 Operating lease payments represent rentals payable for the Group s office premises and cinemas. Leases are negotiated for terms ranging from one to twenty years. Certain non-cancellable operating leases included in the above are subject to contingent rent payments, which are charged at progressive rates from 11% to 38% of the excess of the annual gross box-office takings of the related cinema premise over certain level of box-office income as determined in the respective lease agreements. In addition, 12% to 38% of the sales of goods and services generated in the cinemas are also charged as payments under certain leases. 11% 38% 12% 38% ~ 2015/16 31

33 Notes to the Interim Financial Statements For the six months ended 31 December Commitments 21. At the end of the reporting period, the Group had outstanding commitments as follows: 31 December 30 June HK$ 000 HK$ 000 (Unaudited) (Audited) Capital commitments: Capital expenditure authorised but not contracted for: the cinema operation in the PRC 41,640 43,722 Other commitment: In addition, the Group entered into a contract of investment in a TV series production with an independent third party in the PRC for a contractual amount of Renminbi ( RMB ) 18,500,000 (equivalent to approximately HK$22,220,000). As at 31 December 2015, the Group paid RMB12,445,000 (equivalent to approximately HK$15,681,000) (30 June 2015: RMB12,200,000 (equivalent to approximately HK$15,372,000)) for the investment and the amount was included in a TV series production in progress as the film right which will be jointly controlled by the Group and the independent third party upon completion of the TV series production. 18,500,000 22,220, ,445,000 15,681, ,200,000 15,372, Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

34 Management Discussion and Analysis Business Review The Group is principally engaged in (i) film and TV series production, distribution and licensing of film rights, (ii) film exhibition, (iii) postproduction, and (iv) advertising, marketing and publication. The Group produces films and TV series in Chinese language with Hong Kong and the PRC as its major markets, and operates a cinema and a post-production house both in Hong Kong. (i) (ii) (iii) (iv) During the six months ended 31 December 2015, the Group has taken important steps towards its expansion into a diversified cultural business and established a strong foothold in the film sector. With the successful positioning of the Company and implementation of corporate strategies, the Group has made remarkable achievements by recording increases in revenue for all of its business segments as abovementioned During the period under review, the Group generated total revenue of approximately HK$309.4 million and gross profit of approximately HK$125.1 million, representing an increase of approximately 669.4% and 612.9% respectively as compared to that of the corresponding period in the previous financial year. The Group s profit and total comprehensive income attributable to owners of the Company for the six months ended 31 December 2015 amounted to approximately HK$8.0 million and HK$9.0 million respectively, as compared to a loss or total comprehensive expense attributable to owners of the Company of approximately HK$29.0 million during the same period of the previous financial year. The positive change in the financial performance for the period under review was primarily resulted from the outstanding performance of the film and TV series production and distribution segment % 612.9% ~ 2015/16 33

35 Management Discussion and Analysis Film and TV series production and distribution The increase in the Group s revenue was mainly driven by the considerable income derived from the distribution and licensing of the large-scale film produced by the Group that was released during the period under review, namely, Ip Man 3 ( 3), which accounted for approximately 71.9% of the total revenue for the six months ended 31 December Being the third sequel in the Ip Man ( ) film series and starring Donnie Yen ( ) and boxing legend Mike Tyson (), the film was released in late December 2015 as scheduled, achieving impressive box office receipts exceeding HK$60.2 million in Hong Kong as at the date of this report according to the statistics from Hong Kong Box Office Limited and ranking top among all local films showed during the period from the film s official release date and up to the date of this report. In geographical regions outside Hong Kong (excluding the PRC where the film is expected to be released in March 2016), according to the data provided by the Group s respective film distributors, the film had achieved aggregate box office receipts exceeding HK$198.4 million as at the date of this report, which was contributed predominantly by the South East Asia region. As at the date of this report, Ip Man 3 ( 3) had successfully grossed over HK$258.6 million in total box office receipts worldwide (which had not included the PRC). Riding on the success of the box office performance thus far, the Directors have confidence that Ip Man 3 ( 3) will perform well in the PRC market. Given the film was still showing after 31 December 2015, the complete performance of the film will be reflected in the results of the full financial year ending 30 June % Apart from Ip Man 3 ( 3), the Group also released a general-scale film, namely, Wong Ka Yan ( ), during the period under review. Since the revenue for the six months ended 31 December 2015 was still mainly contributed by the aforementioned large-scale film which incurred relatively higher production costs, as opposed to revenue in the corresponding period of the previous financial year being mostly contributed by a general-scale film, the overall gross profit margin for the six months ended 31 December 2015 slightly decreased to approximately 37.4% from approximately 41.1% in the corresponding period of the previous financial year % 37.4% 34 Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16

36 Management Discussion and Analysis Currently, the Group has a number of films and TV series in its production pipeline which are scheduled to be completed and released within 2016, including S Storm (S ), a general-scale action film which is a sequel to the Group s previously released film called Z Storm (Z ), starring Louis Koo () and Julian Cheung (); and Bounty Hunters ( ), a large-scale adventure action film produced by a joint venture formed between the Group and production companies from Korea and the PRC, starring Lee Min Ho ( ) and Wallace Chung ( ). The Directors believe these films when released will contribute considerable revenue to the Group S Z Other than film production, the Group has also invested in an international sci-fi movie entitled Inversion (tentative name) which is slated for worldwide theatrical distribution in the first half of Since additional time is required for preparation due to changes to the film director s schedule and the shooting location, the principal photography of the film is expected to commence on or before 30 June With the outstanding pre-sale performance track record, the Directors expect that the film will receive a positive market response upon its release. Meanwhile, the Group will continue to identify quality investment opportunities in film and TV series projects worldwide to diversify the revenue base of the Group. The Directors believe that, in the long term, such participation in projects with prominent production houses will enhance the Group s network span in the sector and provide the Group access to the latest industry knowledge and practices of overseas market players Inversion Film exhibition The increase in the Group s revenue for the period under review was also attributable to the remarkable box office performance of Cinema City Langham Place, the Group s flagship cinema complex (with approximately 1,100 seats) which officially commenced operations in January 2015 and is the only cinema in Hong Kong that is equipped with 4Dx viewing technology. According to the statistics from Hong Kong Box Office Limited, the cinema had accumulated over HK$121 million in box office receipts for the last 12-month period from 1 February 2015 to 31 January 2016, and ranked top among all cinemas in Hong Kong for such 12 consecutive months. The revenue contributed by film exhibition from Cinema City Langham Place accounted for approximately 21.6% of the total revenue for the period under review as compared to revenue of only one month being recorded during the same period of the previous financial year, whereas the gross profit margin for film exhibition remained stable at approximately 54.0% for both the six months ended 31 December 2014 and Cinema City1, Dx Cinema City 21.6% % ~ 2015/16 35

37 Management Discussion and Analysis As for film exhibition in the PRC, the Group s next cinema (with approximately 1,400 seats) to be located in Vivo City, a new large-scale retail complex in the Central Business District (CBD) of southwest Shanghai, has its construction work currently proceeding as planned and the expected commencement of operations will be in the second half of The Group will continue to explore suitable sites in Hong Kong and the PRC for further expansion of its film exhibition business. The Directors believe the income derived from film exhibition and the sales of related goods and services will continue to grow steadily and contribute significantly to the future revenue of the Group. 1, Post-production As an integral part of the Group s integrated film production value chain, the post-production business, which was established in September 2014, recorded a growth in revenue of approximately 310.0% for the six months ended 31 December 2015 as compared to that of the corresponding period in the previous financial year. Apart from providing the post-production services to external customers which increases the Group s revenue stream, the Directors believe that having an in-house post-production arm is also able to benefit the Group s film production business in terms of production efficiency and cost control, thereby achieving economies of scale and operational synergies in the long term % Advertising, marketing and publication The acquisition by the Group of the film advertising and marketing business, as well as the publication operations of a monthly luxury lifestyle magazine called Platinum of UnionPay ( ), had completed in June 2015 during the previous financial year. Accordingly, the income derived from such businesses started to contribute to the Group s revenue during the period under review. The Directors believe that the film marketing expertise acquired will help to further strengthen the Group s film production and distribution business by increasing the flexibility and cost effectiveness when formulating promotional strategies for the Group s films, which forms an important part of the Group s film production value chain As disclosed in the prospectus of the Company dated 9 October 2012 (the Prospectus ) and the reports published in previous financial years, due to the limited number of films distributed by the Group, the scale, schedule of release and the result of one film could have significant impact on the Group s results. Given the distinctive business model of the Group, the Group s interim financial results may not be indicative of the Group s financial results of a full year and the Group s financial performance might fluctuate from period to period Pegasus Entertainment Holdings Limited ~ Interim Report 2015/16