EXHIBIT 99.1        

Rock City S.A. and subsidiaries


Consolidated Financial Statements as of and
for the Years ended December 31, 2017 and 2016







Content
Independent auditors' report on the consolidated financial statements
2
Consolidated balance sheets
3
Consolidated statements of operations
5
Consolidated statements of comprehensive income (loss)
6
Consolidated statements of changes in shareholders' equity
7
Consolidated statements of cash flows
8
Notes to the consolidated financial statements
9





    






KPMG Auditores Independentes
Rua do Passeio, 38 - Setor 2 - 17º andar - Centro
20021-290 - Rio de Janeiro/RJ - Brasil
Caixa Postal 2888 - CEP 20001-970 - Rio de Janeiro/RJ - Brasil
Telefone +55 (21) 2207-9400, Fax +55 (21) 2207-9000
www.kpmg.com.br

Report of independent registered public accounting firm

To the Shareholders and Board of Directors
Rock City S.A.
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Rock City S.A. (the Company), which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Rock City S.A. and its subsidiaries as of December 31, 2017 and 2016, the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
Rio de Janeiro, Brazil
July 18, 2018
/s/ KPMG Auditores Independentes
KPMG Auditores Independentes


2

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



 
 
December 31,
ASSETS
 
2017
 
2016
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents (note 4)
 
8,856

 
8,466

Restricted cash (note 18)
 

 
7

Accounts receivable (note 5)
 
12,634

 
8,297

Recoverable non-income taxes (note 6)
 
621

 
1,088

Recoverable income taxes (note 7)
 
1,279

 
434

Advances to suppliers
 
261

 
476

Prepaid expenses (note 8)
 
10,592

 
7,944

Deferred tax assets (note 16.2)
 

 
12,670

Deferred service tax
 
53

 
802

Derivative financial instruments
 
69

 

Other accounts receivable
 
664

 
413

 
 
35,029

 
40,597

NON-CURRENT ASSETS
 
 
 
 
Prepaid expenses (note 8)
 
172

 
62

Deferred tax assets (note 16.2)
 
3,323

 
2,230

Related parties receivable (note 19)
 
186

 
203

Other financial assets
 
45

 
27

Equity method investments (note 9)
 
35

 
35

Property, plant & equipment, net (note 10)
 
21,363

 
15,681

Intangible assets, net (note 11)
 
162,714

 
162,747

 
 
187,838

 
180,985

 
 
 
 
 
TOTAL ASSETS
 
222,867

 
221,582


(continued)

The explanatory notes are an integral part of these consolidated financial statements.














3

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



 
 
December 31,
LIABILITIES
 
2017
 
2016
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Suppliers (note 12)
 
13,727

 
3,652

Loans and financing (note 13)
 
15,487

 
34,292

Loans and financing – related parties (note 19)
 
113

 
12,065

Derivative financial instruments (note 25.2)
 
171

 
8,335

Income tax and social contribution
 

 
597

Other taxes payable (note 14)
 
756

 
889

Tax financing (note 15)
 
3,513

 

Deferred revenue (note 17)
 
7,203

 
35,229

Dividends payable
 
3,765

 
3,765

Advances from customers
 
261

 
1

Tax incentives (note 18)
 
210

 
101

Other accounts payable
 
1,526

 
1,735

 
 
46,732

 
100,661

NON-CURRENT LIABILITIES
 
 
 
 
Other liabilities – related parties (note 19)
 
30

 
25

Deferred revenue (note 17)
 
2,259

 

Tax financing program (note 15)
 
13,761

 

Deferred tax liabilities (note 16.2)
 
6,912

 
9,579

Other provisions
 
1,193

 

 
 
24,155

 
9,604

SHAREHOLDERS' EQUITY (note 20)
 
 
 
 
Subscribed capital
 
27,554

 
27,554

Capital reserve
 
53,000

 
53,000

Accumulated other comprehensive loss
 
(1,345
)
 
(609
)
Retained earnings
 
80,045

 
46,039

 
 
 
 
 
Attributable equity to controlling shareholders
 
159,254

 
125,984

 
 
 
 
 
Noncontrolling interest
 
(7,274
)
 
(14,667
)
 
 
 
 
 
Total shareholders' equity
 
151,980

 
111,317

 
 
 
 
 
Total liability and shareholders' equity
 
222,867

 
221,582


The explanatory notes are an integral part of these consolidated financial statements.


4

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



 
 
Year ended December 31,
 
 
2017
 
2016
 
 
 
 
 
Net revenues (note 21)
 
294,454

 
83,290

 
 
 
 
 
Operating expenses:
 
 
 
 
Direct operating expenses (note 22)
 
(206,046
)
 
(74,788
)
Selling, general and administrative expenses (note 23)
 
(14,437
)
 
(22,957
)
Impairment of assets (note 11)
 

 
(81,349
)
 
 
(220,483
)
 
(179,094
)
 
 
 
 
 
Operating profit (loss) before other finance (expenses) and income taxes
 
73,971

 
(95,804
)
 
 
 
 
 
Finance income (expenses)
 
 
 
 
  Finance expenses (note 24)
 
(23,941
)
 
(32,891
)
  Finance income (note 24)
 
15,622

 
15,051

 
 
(8,319
)
 
(17,840
)
 
 
 
 
 
Profit (loss) before income taxes
 
65,652

 
(113,644
)
 
 
 
 
 
Income tax (expense) benefit, including social contribution (note 16)
 
 
 
 
  Current
 
(14,696
)
 
(567
)
  Deferred
 
(9,272
)
 
10,225

 
 
(23,968
)
 
9,658

 
 
 
 
 
Net income (loss) for the year
 
41,684

 
(103,986
)
 
 
 
 
 
Attributable to controlling shareholders
 
34,006

 
(98,916
)
Attributable to noncontrolling interests
 
7,678

 
(5,070
)

The explanatory notes are an integral part of these consolidated financial statements.



5

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)




 
Year ended December 31,
 
2017
 
2016
 
 
 
 
Net income (loss) for the year
41,684

 
(103,986
)
Other comprehensive income (loss) for the year:
 
 
 
  Cumulative translation adjustments
(1,021
)
 
4,343

 
(1,021
)
 
4,343

Total comprehensive income (loss) for the year
40,663

 
(99,643
)
Comprehensive net income (loss) attributable to:
 
 
 
Controlling shareholders
33,270

 
(96,642
)
Noncontrolling interests
7,393

 
(3,001
)
 
40,663

 
(99,643
)


The explanatory notes are an integral part of these consolidated financial statements.



6

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



 
Subscribed capital
 
Capital reserve
 
Accumulated other comprehensive loss
 
Retained earnings
 
Equity attributable to controlling shareholders
 
Noncontrolling interest
 
Total shareholders' equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2016
27,554

 
53,000

 
(2,883
)
 
144,955

 
222,626

 
(11,666
)
 
210,960

Loss for the year

 

 

 
(98,916
)
 
(98,916
)
 
(5,070
)
 
(103,986
)
Cumulative translation adjustments

 

 
2,274

 

 
2,274

 
2,069

 
4,343

Balance as of December 31, 2016
27,554

 
53,000

 
(609
)
 
46,039

 
125,984

 
(14,667
)
 
111,317

Net income for the year

 

 

 
34,006

 
34,006

 
7,678

 
41,684

Cumulative translation adjustments

 

 
(736
)
 

 
(736
)
 
(285
)
 
(1,021
)
Balance as of December 31, 2017
27,554

 
53,000

 
(1,345
)
 
80,045

 
159,254

 
(7,274
)
 
151,980



The explanatory notes are an integral part of these consolidated financial statements.



7

ROCK CITY S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)
________________________________________________________________________________________________



 
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
Net income (loss) for the year
 
41,684

 
(103,986
)
Reconciling items to income (loss) for the year:
 
 
 
 
Depreciation and amortization
 
2,387

 
2,840

Impairment of assets
 

 
81,349

Deferred tax expense (benefit)
 
9,272

 
(10,225
)
Derivative financial instruments (NDF)
 
7,583

 
8,335

Interest and foreign exchange variation
 
813

 
5,574

Write-off of intangible assets
 

 
11

Provisions
 
1,193

 
67

Pis and Cofins litigation to be paid in installments
 
(1,207
)
 

Changes in assets and liabilities
 
 
 
 
(Increase) / decrease in assets
 
 
 
 
Restricted cash
 
7

 
359

Accounts receivable
 
(4,337
)
 
(1,438
)
Recoverable non-income taxes
 
(754
)
 
(285
)
Advances to suppliers
 
201

 
877

Prepaid expenses
 
(2,758
)
 
(6,117
)
Deferred service tax
 
749

 
(802
)
Other financial assets
 
(32
)
 
745

Other assets
 
(227
)
 
113

Increase / (decrease) in liabilities
 
 
 
 
Suppliers
 
10,075

 
(6,773
)
Other taxes payable
 
(133
)
 
1,374

Income tax payable
 
(592
)
 

Advances from customers
 
260

 
(479
)
Deferred revenue
 
(25,767
)
 
24,159

Taxes financing
 
14,157

 

Tax incentives
 
109

 
(2,209
)
Derivative financial instruments (NDF)
 
(11,343
)
 

Other liabilities
 
(91
)
 
(689
)
Net cash flows provided by (used in) operating activities
 
41,249

 
(7,200
)
Cash flow from investing activities
 
 
 
 
Acquisition of property, plant & equipment
 
(8,570
)
 
(354
)
Net cash flows (used in) investing activities
 
(8,570
)
 
(354
)
Cash flows from financing activities
 
 
 
 
Derivative financial instruments (Swap)
 
(4,451
)
 

Proceeds from loans and financing – third parties
 
15,042

 
31,020

Proceeds from loans and financing – related parties
 

 
10,550

Repayment of loans and financing – third parties
 
(32,626
)
 
(32,281
)
Repayment of loans and financing – related parties
 
(10,065
)
 
(36
)
Net cash flows (used in) provided by financing activities
 
(32,100
)
 
9,253

Effect of exchange variation on cash and cash equivalents
 
(189
)
 
(652
)
Net increase in cash and cash equivalents for the year
 
390

 
1,047

Cash and cash equivalents at the beginning of the year
 
8,466

 
7,419

Cash and cash equivalents at the end of the year
 
8,856

 
8,466

Net increase in cash and cash equivalents for the year
 
390

 
1,047

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the year for:
 
 
 
 
Interest
 
3,596

 
2,953

Income taxes
 
14,691

 
47


The explanatory notes are an integral part of these consolidated financial statements.




8

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


1.
OPERATIONS

Rock City S.A. ("Rock City" or "the Company") is a non-public company, established in Rio de Janeiro, State of Rio de Janeiro, Brazil. The Company was incorporated on September 12, 2013, under the corporate name of A.H.O.S.P.E. Empreendimentos e Participações S.A., which was subsequently changed to Rock City S.A. on December 13, 2013. The Company's operations commenced on February 10, 2014, acquisition date of its subsidiary Rock World S.A. ("Rock World"). The operations of subsidiaries and equity method investments are described in Note 3.d.

The Company's business purpose, through its subsidiaries, is: (i) promotion, performance and organization of events open to the general public, which main attraction is music and may include, secondary attractions of various kinds, social activities and commercialization of food and other products, as well as services in general, carried out throughout several days and involving musical attractions, musicians or bands, in Brazil or abroad, under the name Rock in Rio (Festival Rock in Rio); (ii) creation and marketing of the cultural and artistic content related to the Rock in Rio festivals and/or the use of the Rock in Rio brands; (iii) licensing and/or transfer of rights to use the Rock in Rio brand and other brands related to it; (iv) management of loyalty program that uses the Rock in Rio brand (Rock in Rio Club); and (v) marketing campaigns related to the festivals and to the Rock in Rio brands.

The results of operations during the years 2016 and 2017 are mainly related to the Rock in Rio festivals held in Lisboa (Portugal) in May and June 2016 and in Rio de Janeiro (Brazil) in September 2017, respectively. In addition, the Company entered into transactions related to the promotion of Rock in Rio festivals to be held in Lisboa during June 2018, as well as the festival to be held on Rio de Janeiro (Brazil) in 2019.

2.
BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)
Basis of preparation

The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of the Company and its subsidiaries.

U.S. GAAP differs in certain respects from International Financial Reporting Standards (IFRS), as issued by International Financial Reporting Standards Board (IASB) and accounting practices adopted in Brazil, applied by the Company in its statutory financial statements prepared to comply with the Brazilian Corporate Law and used as basis for profit distribution.    

b)
Measurement basis

The consolidated financial statements were prepared based on the historical cost, except for financial instruments measured at fair value, such as derivatives.

c)
Use of estimates and judgments

The preparation of the consolidated financial statements requires that the Company make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are reviewed on an ongoing basis. Changes in accounting estimates are recognized in the year they are revised and in any future periods which may be affected. Given the uncertainties inherent in the estimation process and the use of judgments, actual amounts of settlement of transactions may differ significantly from the amounts recorded in the consolidated financial statements.

The consolidated financial statements include, therefore, estimates of the useful lives and recoverable amount of long-lived assets, with respect to the need and the amount of provisions for contingencies, the valuation allowance of deferred

9

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


tax assets, evaluation of impairment of assets (including accounts receivable) and fair value valuation of derivative financial instruments. Significant estimates and assumptions related to financial instruments used in preparing these consolidated financial statements are presented in Note 25.

d)
Functional and reporting currency

The consolidated financial statements are presented in Brazilian Reais ("R$"), the Company's functional currency. The functional currency of an entity is the currency of the primary economic environment where it operates. By defining the functional currency of each subsidiary, Management considered which currency significantly influences the sales price of its products and services and the currency in which most of the costs is paid or incurred. The subsidiaries in Europe use the Euro as their functional currency and the subsidiaries in the United States of America use the U.S. dollar ("US$") as their functional currency.

e)
Seasonality

Due to the seasonal nature of performance of the festivals, the Company experiences higher revenue in the periods when the festivals occur. The Company's seasonality also results in higher balances in cash and cash equivalents, trade accounts receivable, prepaid expenses, accounts payable to suppliers and deferred revenue for the Company at different times in the year. The list of festivals promoted in 2017 and 2016 and scheduled for the next year is presented in Note 1.

f)
Subsequent events

Events subsequent to December 31, 2017 were evaluated until the issuance of the consolidated financial statements, which occurred on July 18, 2018.

2.1.
Significant accounting policies

The accounting policies described below have been consistently applied to all years presented in these consolidated financial statements:

a)
Principles of consolidation

The consolidated financial statements include the accounts of the Company and all subsidiaries listed in Note 3 in which the Company directly has either a majority of the equity of the subsidiary or otherwise has controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.

b)
Translation of balances denominated in foreign currency

Monetary assets and liabilities denominated in foreign currency are translated into the functional currency of the entity in which transaction is being held, using the exchange rate in effect on the date of the corresponding balance sheets. Exchange rate gains and losses resulting from the translation of these assets and liabilities from the date of the transactions to the end of the period are recognized as finance income or expenses in the statements of operations.

As of December 31, 2017, US$ 1 was equivalent to R$ 3.3080 (R$ 3.2591 as of December 31, 2016) and EUR 1 was equivalent to R$ 3.9693 (R$ 3.4384 as of December 31, 2016).


10

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


(i)
Subsidiaries abroad

Assets and liabilities of foreign operations are translated from their functional currency (Euro or U.S. dollar) into Brazilian reais (Company's functional currency) at the exchange rates as of the reporting dates. Revenues and expenses of foreign operations are translated into Brazilian reais based on the average exchange rate.

Foreign currency differences from the translation into the presentation currency are recognized in other comprehensive income (loss) and presented in shareholders' equity in accumulated other comprehensive income (loss). However, if the subsidiary is not a wholly owned, the corresponding portion of the translation difference is attributable to non-controlling interests.

c)
Cash and cash equivalents

Cash and cash equivalents include cash, checking account balances and financial investments with original maturities of 90 days or less and with insignificant risk of change in market value.

d)
Restricted cash

The balance of restricted cash is comprised by amounts received from tax incentives and not yet disbursed, deposited and held in an escrow account or a financial investment, each related to a specific project, with a financial institution determined by each public agency. These funds can only be used in the specific project to which they were intended.

e)
Accounts receivable

The balance of accounts receivable is comprised primarily of receivables relating to sponsorship contracts signed and tickets sold. Receivables are recognized at amortized cost, less impairment losses on these receivables, which are calculated based on the historical experience and detailed assessment of the collectability of accounts receivable.

f)
Prepaid expenses

Mainly related to amounts disbursed in advance, being allocated to the statements of operations as the corresponding events occur (i.e. artist fees, event production, commission on ticket sales, etc.). Management reviews the carrying amount of these assets periodically to determine and measure impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

g)
Property, plant & equipment, net

Fixed assets items are recorded at historical acquisition or construction cost, less corresponding accumulated depreciation calculated using the straight-line method based on the assets estimated useful lives, as mentioned in Note 10.

Expenses incurred in repairs, renovations or replacement of parts of fixed asset items when they represent an increase in the fixed asset item's efficiency, productivity and/or useful life, are added to the Property, plant & equipment. In such cases, the cost and corresponding accumulated depreciation of the replaced items are written off.

The Company reviews indication of impairment triggers of property, plant & equipment items at least annually (or when there are indicators to perform a review in an earlier date) to identify evidence that indicate the need to change prior estimates. This evidence can include economic events, changes in business or technology, or the way the item is being used, among other factors. When evidence is identified and the net carrying amount exceeds the recoverable amount, an impairment charge is recorded.

11

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


h)
Equity method investments

In the consolidated financial statements, the Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.

i)
Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

j)
Impairment of long lived assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

k)
Income taxes

Deferred taxes are recognized for operating loss carryforwards and temporary differences between the amounts of the assets and liabilities presented on the balance sheet and the corresponding income tax bases, applying the corresponding tax rate enacted for the period when the Company expected that each difference will reverse, and are presented net of any valuation allowance. Deferred taxes are classified as current or non-current on the balance sheet for the period ended December 31 2016, prior to the adoption of ASU 2015-17.

The Company reassesses annually the amounts of deferred tax assets, in order to conclude whether they are expected to be realizable, considering the expected generation of future taxable income approved by Company's management.

(i)
Brazilian income tax and social contribution tax

For companies in Brazil, income tax and social contribution are calculated based on income (loss) for the year, adjusted to arrive at taxable income by additions and exclusions established in the current legislation. To calculate the income tax a 15 percent rate is applied, plus an additional 10 percent on taxable income exceeding R$ 240, while for social contribution on income a 9 percent rate is levied on taxable income, resulting in a combined rate of 34 percent.

In Brazil, the annual tax returns are subject to review and assessment by the tax authorities for five years after period when the tax return is filed.


12

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


(ii)
Corporate Income Tax (IRC) - Europe

For companies in Europe (Portugal and Spain), income tax is determined taking into account the provisions of the Corporate Income Tax Code on the Legal Entities' Income. Payment of Corporate Income Tax is made on the basis of self-liquidation statements, which are subject to reviews, corrections and possible adjustments by the tax authorities during the period of four years counting from the year they refer to, except when there are tax losses, tax benefits might have been granted or there are ongoing inspections, claims or challenges, where, depending on the circumstances, the periods are extended or suspended.

In the calculation of deferred tax assets relating to income tax losses in Portugal and Spain, are being considered the income tax rates of 21 and 25 percent, respectively, and the maximum recoverable term permitted by these jurisdictions. For the deductible or taxable temporary differences, the same tax rates mentioned above are being considered for those companies.

(iii)
Income taxes in the United States of America

Income tax expense represents the amount of income tax the Company has recognized based on the Company's current year activity. In the current year, the Company had a loss that is currently not more-likely-than-not to be realized. Therefore there is no income tax benefit recognized.

During 2016 and 2017, the United States imposes a system of progressive tax rates on income, with federal income tax rates ranging from 15 percent to 35 percent of net taxable income. The incremental rate of 35 percent is not used until net taxable income reaches US$ 10 million. The U.S. federal income tax rate is 21 percent for 2018 and subsequent years. The losses calculated by the Company in one fiscal year can be offset against profits calculated in subsequent years. If the profit calculated exceeds the accumulated losses, the tax will be calculated on the net profit, after offsetting the losses from previous years.

(iv)
Uncertainty in income taxes

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized.

(v)
Deferred tax assets and liabilities

Deferred tax assets and liabilities are recognized for operating loss carryforwards and for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their respective tax bases, and are presented net of valuation allowance.

The Company reassesses the amounts recorded for deferred tax assets at each reporting date in order to conclude whether it is more likely than not that they are realizable, taking into account the estimated generation of future taxable income approved by Management. Deferred tax assets are reduced by a valuation allowance to the amount more likely than not to be realized.

l)
Revenue recognition

Revenue is measured at the fair value of the received or receivable consideration, net of trade discounts. Revenue is recognized when: (i) significant risks and rewards have been transferred to the buyer; (ii) it is likely that the financial economic benefits will flow to the Company; (iii) associated costs and possible return of goods can be reliably estimated; (iv) there is no ongoing involvement with the goods sold; and (v) the amount of revenue can

13

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


be reliably measured. If it is likely that discounts will be granted and the amount can be reliably measured, then the discount is recognized as a reduction of revenues as sales are being recognized.
Revenues from tickets sold, which have their origin in the sale of tickets online or at the point of sale, are recognized upon the delivery of services, i.e., when the festival occur.

Revenues from sponsorship contracts are recognized on completion and/or delivery of each of the most significant benefits from the contract, i.e., when the festival occur.

Revenues from tickets sold and sponsorships before the event are recorded as deferred revenues within liabilities.

In addition to the revenues described above, Company has other revenues such as licensing and loyalty program named Rock in Rio Club, that are deferred as liability and recognized when the festivals occur.

m)
Direct operating expenses

Direct operating expenses include artist performance fees and travel expenses, technical production, show-specific marketing and advertising expenses, show-related production expenses, depreciation and other costs related to producing the events. These expenses are primarily variable in nature.


n)
Selling, general and administrative expenses

Selling, general and administrative expenses include salaries and wages related to employees, legal, consulting and other professional fees, rent, depreciation of administrative fixed assets and other expenses.

o)
Finance income (expenses)

Other finance income comprises primarily the gains on financial investments, increase in fair value of financial assets and gains on monetary and/or exchange rate variations on financial assets and liabilities.

Other finance expenses comprise primarily interest, monetary and exchange variation losses on financial assets and liabilities, decrease in fair value of financial assets and impairment losses on financial assets.

p)
Other current and noncurrent assets and liabilities

An asset is recognized on the balance sheet when it is likely that future economic benefits will be generated for the Company and its cost or amount can be reliably measured.

A liability is recognized on the balance sheet when the Company has a legal or constructive obligation as a result of a past event, and it is likely that an economic outflow of funds will be required to settle it. Provisions are recorded based on the best estimate of the risks involved.

Assets and liabilities are classified as current when their realization or settlement is likely to occur within the next twelve months. Otherwise they are classified as noncurrent.

q)
Financial instruments

Financial instruments, as defined in the FASB Accounting Standards Codification, consist of cash, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity,

14

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity.
 
 Derivative financial instruments, as defined in the FASB Accounting Standards Codification, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Derivative financial instruments were measured at fair value and recorded as assets or liabilities. Fair value represents the price at which the property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Financial instruments are only recognized from the date on which the Company becomes party to the contractual provisions of the financial instruments. They are initially recorded at fair value plus transaction costs that are directly attributable to the acquisition, except for financial assets and liabilities classified at fair value through profit or loss, where such costs are directly recorded in the statement of operations for the year. They are subsequently measured at each balance sheet date in accordance with the rules established for each type of financial assets and liabilities classification.

Unsecured bank overdrafts which have to be paid when required and are an integral part of the Company's cash management are excluded from cash and cash equivalents for purposes of the statement of cash flows and presented as a loan.

r)
Fair value of financial instruments

The Company values its assets and liabilities using the methods of fair value as described in ASC 820, Fair Value Measurements and Disclosures. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of the fair value hierarchy under ASC 820 are described as follows:

Level 1 - inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The fair value of the assets and liabilities are presented in Note 25.2.

s)
Lease contracts

Leases are classified as capital leases whenever the terms of lease transfer substantially all the risks and benefits of the property to the lessee, with the other leases being classified as operating leases. This classification is made at inception of the lease and is not revised unless the lease agreement is modified. Payments made on operating leases are recorded in statement of operations on a straight-line basis over the lease term.


15

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


t)
Tax incentives

Government grants, which are related to cash incentives to support cultural activities promoted by the Company, are recognized in the statements of operations when there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognized in the statement of operations on a systematic basis over the periods in which the Company recognizes as expenses the related costs for which the grants are intended to compensate and are recorded as a reduction of the corresponding costs of services rendered.

u)
Recent accounting standards updates

During 2017, several accounting standards updates were in effect. The Company and its subsidiaries are not listed entities, therefore the standards listed below are being implemented with a one year deferral option. The adoption of the updates did not result in any significant changes in the consolidated financial information.

In May 2014 (with posterior changes and amendments through Accounting Standards Updates - ASU), the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP. The amendments in this Update create Topic 606. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the guidance effective date by one year, but will allow early adoption as of the original adoption date. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company will adopt this standard on January 1, 2019, and it is currently assessing which implementation method it will apply and the impact its adoption will have on its financial position and results of operations.
  
In November 2015, the FASB has issued Accounting Standards Update (ASU) No. 2015-17, "Balance Sheet Classification of Deferred Taxes," Under the ASU, organizations that present a classified balance sheet are required to classify all deferred taxes as noncurrent assets or noncurrent liabilities. For public business entities, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company adopted the ASU prospectively and reclassify all the deferred taxes balances disclosed in current assets as non-current assets for the year ended December 31, 2017.

In February 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-02. The amendments in this Update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments in this Update is permitted for all entities. The Company has not yet assessed the financial impact of this new pronouncement on its financial position and results

16

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


of operations, which will require that a lease obligation (see disclosure of lease transactions in note 27) to be recognized in the balance sheet.

In November 2016, The FASB has issued ASU 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. When adopted, this ASU will require the Company the inclusion of changes in restricted cash (please refer to the amounts presented in note 18) in the presentation of changes in cash flows.

In January 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350)Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification 350, Intangibles - Goodwill and Other ("ASC 350"). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. On January 2017, the Company elected to early adopt ASU 2017-04, and the adoption had no impact on the consolidated financial statements. The Company will perform future goodwill impairment tests according to ASU 2017-04.


3.
CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATION PROCEDURES

a)
Subsidiaries

The subsidiaries' financial information is included in the consolidated financial statements from the date that control commences until the date that control ceases to exist. The subsidiaries' accounting policies are in line with the policies adopted by the Company.


17

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


The consolidated financial statements include the financial information of Rock City S.A. and the following subsidiaries:

 
Percentage of interest
Subsidiary
2017
 
2016
 
 
 
 
Direct subsidiary
 
 
 
Rock World S.A. (Brazil)
80
%
 
80
%
 
 
 
 
Indirect subsidiaries
 
 
 
Better World – Comunicação, Publicidade e Entretenimento, S.A. (Portugal) (1)
80
%
 
80
%
Rock In Rio Madrid S.A. (Spain) (2)
48
%
 
48
%
Better World, Sociedad Unipessoal, SL (Spain) (3)
80
%
 
80
%
Rock in Rio USA, Inc. (United States) (1)
80
%
 
80
%
Rock World USA LLC (United States) (4)
48
%
 
48
%
(1)
Wholly-owned subsidiaries of Rock World S.A.
(2)
Direct subsidiary (60%) of Better World – Comunicação Publicidade e Entretenimento, S.A.
(3)
Wholly-owned subsidiary of Better World – Comunicação Publicidade e Entretenimento, S.A.
(4)
Direct subsidiary (60%) of Rock in Rio USA, Inc.

b)
Intercompany balance and transactions

Intercompany balances and transactions, and any unrealized income and expenses deriving from intragroup transactions, are eliminated when preparing the consolidated financial statements. Unrealized gains arising from transactions with investees recorded using the equity accounting method are eliminated against the investment to the extent of the Company's interest in the investee. Unrealized losses are eliminated in the same way that unrealized gains are eliminated, but only to the extent that there is no evidence of impairment loss.

c)
Equity method investments

Equity method investments are those entities in which the Company, directly or indirectly, has significant influence but no control or joint control over the financial and operating policies. Significant influence generally occurs when the Company, directly or indirectly, holds between 20% and 50% of the entity's voting power.

The consolidated financial statements include the Company's share in the income or loss for the period and other comprehensive income (loss) of the investee, after making adjustments to align the investee's accounting policies with those of the Company, as from the date on which significant influence begins existing up to the date that significant influence ceases to exist.

When the Company's share of losses of an investee exceeds its interest in that entity, the carrying amount of the investment recorded by the equity accounting method is reduced to nil and recognition of additional losses is discontinued, except when the Company has legal or constructive obligations or has made payments on behalf of the investee, in which case, a provision for loss on investments is established.


18

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


As of December 31, 2017 and 2016, the Company has the following equity method investments:

 
Percentage of interest
Equity method investee
2017
 
2016
 
 
 
 
Rock Official Comércio de Roupas Ltda. (Brazil)
50
%
 
50
%

d)
Operation of subsidiaries and equity method investments

In 2012 Rock World became the holder of 100% of the shares of Better World, a Portuguese company, incorporated in 2003, engaged in the promotion, production and performance of music and arts shows and alike, not limited to the production of live events.

Also in 2012, Rock World acquired 50% of the shares of Rock Official Comercio de Roupas Ltda, which has the purpose of developing and selling official products of the "Rock in Rio" brand.

In February 3, 2014, the Company founded a wholly-owned subsidiary in the United States of America, Rock in Rio USA, Inc. (a Delaware Corporation), which purpose is the promotion editions of Rock in Rio events in that country, the first one held in Las Vegas (Nevada) in May 2015. In March 25, 2014 an indirect subsidiary was founded, Rock World USA, LLC, which is 60% owned by Rock in Rio USA, Inc., and has the purpose of promoting the Rock in Rio event in Las Vegas.

The amounts and changes in the equity method investments during the year are presented in Note 9.

4.
CASH AND CASH EQUIVALENTS

As of December 31, 2017 and 2016 the balance of cash and cash equivalents is comprised as follows:

 
2017

 
2016

 
 
 
 
Cash
124

 
80

Bank deposits
7,400

 
3,913

Financial investments
1,332

 
4,473

 
8,856

 
8,466


Financial investments consist of investments in fixed income investment funds with high liquidity. The interest on these investments are substantially based on the percentage change of the Brazilian Interbank Deposit Certificate (CDI) and are immediately convertible into cash.


19

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


5.
ACCOUNTS RECEIVABLE

As of December 31, 2017 and 2016 the balance of accounts receivable is as follows:
 
2017
 
2016
 
 
 
 
Tickets to receive payment installment credit card
4,446

 

Sponsorships receivable
7,887

 
7,815

Other accounts receivable from customers
347

 
528

 
12,680

 
8,343

(-) Allowance for doubtful accounts
(46
)
 
(46
)
 
12,634

 
8,297


The allowance for doubtful accounts is based on the analysis of the loss history monitored by management and is recorded in an amount considered sufficient to cover probable losses on the realization of accounts receivable.

Changes in the allowance for doubtful accounts in the year were as follows:

 
2017
 
2016
 
 
 
 
Opening balance
(46
)
 

Provision recorded during the year

 
(46
)
 
(46
)
 
(46
)


The aging of these receivables is as follows:
 
2017
 
2016
 
 
 
 
Due
5,147

 
4,134

Past due:
 
 
 
Up to 30 days
312

 
271

From 31 to 60 days
4,226

 
364

From 61 to 90 days
85

 
1,568

Over 90 days
2,910

 
2,006

 
12,680

 
8,343



20

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


6.
RECOVERABLE NON-INCOME TAXES

As of December 31, 2017 and 2016 the balance of recoverable non-income taxes is as follows:
 
2017

 
2016

 
 
 
 
COFINS - Contribution for Social Security Financing (a)
165

 
637

PIS - Social Integration Program (a)
135

 
145

Other recoverable non-income taxes
321

 
306

 
621

 
1,088


(a)
The balances of PIS and COFINS are related to credits measured on the non-cumulative method over cost of services and other inputs.

7.
RECOVERABLE INCOME TAXES

As of December 31, 2017 and 2016 the balance of recoverable income taxes is as follows:
 
2017
 
2016
 
 
 
 
Withholding income tax over financial investments

 
52

Withholding and prepaid income tax and social contribution (a)
30

 
382

Income tax recoverable - Portugal
575

 

Income tax recoverable – Brazil
534

 

Social contribution on income recoverable – Brazil
140

 

 
1,279

 
434


(a)
The income tax and social contribution recoverable relate to advance payments made during the year for amounts greater than the income tax and social contribution calculated for the year and withholding income taxes.



21

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


8.
PREPAID EXPENSES

Refer primarily to amounts paid in advance and allocated to the statement of operations at the time the event occurs. As of December 31, 2017 and 2016, the balance is composed as follows:
 
2017

 
2016

 
 
 
 
Artists fees
7,054

 
3,863

Professional services
524

 
2,969

Event production

 
854

Specialized services
1,897

 

Commission on ticket sales
971

 

Other
318

 
320

 
10,764

 
8,006

Classified as:
 
 
 
Current
10,592

 
7,944

Non-current
172

 
62

 
10,764

 
8,006


9.
EQUITY METHOD INVESTMENTS

Below is summarized information about the equity method investments of the Company:

9.1.
Investments breakdown
 
Shareholders' Equity (Deficit)
 
Investment balance
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Rock Official (a)
(411
)
 
(282
)
 
35

 
35

Total
 
 
 
 
35

 
35


(a)
The investment balance of Rock Official includes an amount of R$ 35 related to the goodwill on acquisition of this interest.

9.2.
Summarized financial information of equity method investments
 
December 31, 2017
 
Assets
 
Liabilities
 
Shareholders' deficit
 
 (Loss) for the year
 
 

 
 

 
 

 
 

Rock Official
79

 
490

 
(411
)
 
(129
)



22

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


 
December 31, 2016
 
Assets
 
Liabilities
 
Shareholders' equity
 
Net income for the year
 
 

 
 

 
 

 
 

Rock Official
80

 
362

 
(282
)
 
(121
)

9.3.
Changes in equity method investments for the period

 
Balance as of December 31, 2016
 
Income from equity method investments
 
Distribution of dividends
 
Balance as of December 31, 2017
 
 

 
 

 
 
 
 

Rock Official
35

 

 

 
35

 
35

 

 

 
35


 
Balance as of December 31, 2014
 
Income from equity method investments
 
Distribution of dividends
 
Balance as of December 31, 2017
 
 

 
 

 
 
 
 

Rock Official
36

 
(1
)
 

 
35

 
36

 
(1
)
 

 
35


10.
PROPERTY, PLANT & EQUIPMENT, NET

The Company's fixed assets are comprised as follows:

a)
Property, plant & equipment breakdown
 
Annual
 
2017
 
2016
 
Depreciation
 
 
 
Accumulated
 
 
 
 
 
Accumulated
 
 
 
rate
 
Cost
 
depreciation
 
Net
 
Cost
 
depreciation
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Furniture and fixtures
10-12%
 
1,585

 
(1,071
)
 
514

 
1,488

 
(864
)
 
624

Machinery and equipment
10%
 
12,319

 
(2,896
)
 
9,423

 
10,879

 
(1,709
)
 
9,170

Electronic equipment
12-25%
 
2,631

 
(1,948
)
 
683

 
2,410

 
(1,549
)
 
861

Facilities
10%
 
62

 
(31
)
 
31

 
62

 
(25
)
 
37

Transport equipment
25%
 
489

 
(489
)
 
-

 
440

 
(440
)
 

Leasehold improvements
20%
 
9,490

 
(2,166
)
 
7,324

 
2,056

 
(1,392
)
 
664

Containers
10%
 
3,625

 
(1,016
)
 
2,609

 
3,571

 
(641
)
 
2,930

Scenography
5%
 
1,164

 
(646
)
 
518

 
1,147

 
(407
)
 
740

Other
10%
 
668

 
(424
)
 
244

 
648

 
(293
)
 
355

Construction in progress
 
 
17

 
-

 
17

 
300

 
-

 
300

 
 
 
32,050

 
(10,687
)
 
21,363

 
23,001

 
(7,320
)
 
15,681


The improvements on third party properties are depreciated during the term of the related lease contracts.



23

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


b)
Changes in historical cost

 
Balance as of Dec 31, 2016
 
Additions
 
Translation adjustments
 
Balance as of Dec 31, 2017
 
 
 
 
 
 
 
 
Furniture and fixtures
1,488

 
5

 
92

 
1,585

Machinery and equipment
10,879

 
1,372

 
68

 
12,319

Electronic equipment
2,410

 
50

 
171

 
2,631

Facilities
62

 

 

 
62

Transport equipment
440

 

 
49

 
489

Leasehold improvements
2,056

 
7,426

 
8

 
9,490

Containers
3,571

 

 
54

 
3,625

Scenography
1,147

 

 
17

 
1,164

Other
648

 

 
20

 
668

Construction in progress
300

 
(283
)
 

 
17

 
23,001

 
8,570

 
479

 
32,050



 
Balance as of Jan 1, 2016
 
Additions
 
Translation adjustments
 
Balance as of Dec 31, 2016
 
 
 
 
 
 
 
 
Furniture and fixtures
1,678

 

 
(190
)
 
1,488

Machinery and equipment
11,783

 

 
(904
)
 
10,879

Electronic equipment
2,876

 

 
(466
)
 
2,410

Facilities
62

 

 

 
62

Transport equipment
544

 

 
(104
)
 
440

Leasehold improvements
2,110

 
54

 
(108
)
 
2,056

Containers
4,279

 

 
(708
)
 
3,571

Scenography
1,374

 

 
(227
)
 
1,147

Other
779

 

 
(131
)
 
648

Construction in progress

 
300

 

 
300

 
25,485

 
354

 
(2,838
)
 
23,001


The depreciation expense was R$ 2,387 for the year ended December 31, 2017 (R$ 2,840 for the year ended December 31, 2016).

The Company assessed and did not identify impairment indicators for any period presented. Company's management understands that the recovery of funds invested in the acquisition of fixed assets is probable through future cash flows from its use in the operations.


24

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


11.
INTANGIBLE ASSETS, NET
 
2017
 
2016
 
 
 
 
"Rock in Rio" trademark acquired in a business combination
28,174

 
28,174

Goodwill – Rock World acquisition
134,343

 
134,343

Others
197

 
230

 
162,714

 
162,747


 
Balance as of Jan 1, 2016
 
Impairment recognized
 
Other changes
 
Balance as of Dec 31, 2016
 
Other changes
 
Balance as of Dec 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Trademark
28,174

 

 

 
28,174

 

 
28,174

Goodwill
215,692

 
(81,349
)
 

 
134,343

 

 
134,343

Other
249

 

 
(19
)
 
230

 
(33
)
 
197

 
244,115

 
(81,349
)
 
(19
)
 
162,747

 
(33
)
 
162,714


The recoverable amount of the Rock World reporting unit (where the goodwill was allocated) was determined based on the discounted future cash flows to be generated by the continuous use of this reporting unit. At December 31, 2016, the carrying amount of this reporting unit was greater than its recoverable amount of R$ 137,384 and therefore, an impairment loss of R$ 81,349 was recognized. The impairment loss was allocated to the goodwill, as shown below. At December 31, 2017, the carrying amount of the reporting unit is lower than its recoverable amount and, therefore, there was no recognition of new impairment by the Company.
 
2017
 
2016
 
 
 
 
Goodwill - Rock World acquisition
215,692

 
215,692

"Rock in Rio" trademark acquired in a business combination
28,174

 
28,174

Investment (Provision for losses on investments)
6,414

 
(25,133
)
Impairment recognized in previous years
(81,349
)
 

Asset group carrying amounts
168,931

 
218,733

Fair value amounts based on future cash flows
230,748

 
137,384

Impairment of assets recognized in that year

 
(81,349
)

The main assumptions used in estimating the value in use are presented as follows
 
2017
 
2016
 
 
 
 
Discount rate
16.9
%
 
16.0
%
Projected EBITDA growth rate
20.7
%
 
37.0
%
Growth rate in perpetuity
4.0
%
 
4.6
%


25

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


The discount rate is an after-tax rate based on 10-year government bonds issued in the relevant market and in the same currency as the projected cash flows, adjusted by a risk premium that reflects the additional risks of equity investments and the specific risks of the reporting unit.

Six years of cash flows were included in the discounted cash flow model, based on management's best estimate, in which understands reasonable to consider the occurrence of six festivals, three of them to be held in Lisboa (Portugal) and the remaining three in Rio de Janeiro (Brazil). A perpetuity growth rate was determined by the lower of the nominal gross domestic product (GDP) of the countries where the reporting unit operates and the long-term compound annual growth rate of EBITDA (earnings before interest, taxes, depreciation and amortization) projected by the Company.

Projected EBITDA is based on expectations of future results, taking into account past experience, adjusted for expected revenue growth. Revenue growth was projected taking into account the average growth levels experienced over the past few years, the estimated sales volume and the price increase for the next six years.

The analysis of the recoverable amount of the "Rock in Rio" trademark was determined based on the discounted future cash flows applying a royalty discount rate. Benchmark comparable licenses were considered to determine the royalty discount rate. At December 31, 2017, the recoverable amount was greater than the carrying amount of R$ 28,174 and, therefore, no impairment loss was recognized.

The discount rate is an after-tax rate based on 10-year government bonds issued in the relevant market and in the same currency as the projected cash flows for six years (and IPCA index was considered for the subsequent years), adjusted by a risk premium of 1% that reflects the additional risk.

12.
SUPPLIERS

As of December 31, 2017 and 2016 the aging of accounts payable to suppliers is as follows:
 
2017
 
2016
 
 
 
 
Due
8,355

 
727

Past due:
 
 
 
Up to 30 days
1,158

 
840

From 31 to 60 days
139

 
7

From 61 to 90 days
786

 
65

Over 90 days
3,289

 
2,013

 
13,727

 
3,652



26

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


13.
LOANS AND FINANCING

As of December 31, 2017 and 2016 the balance of loans and financing is as follows:
 
 
 
 
 
 
Amount
 
 
 
 
Interest per year
 
 
 
in foreign currency
 
Amount in R$
Financial institution
 
 
Due date
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Itau/Unibanco
 
Floating
 
Overdraft
 
n.a
 

 
5,021

Itau/Unibanco
 
7.0%
 
April 2018
 
US$3,082
 
10,325

 

BTG Pactual
 
Floating
 
September 2018
 
n.a
 
5,162

 

Itau/Unibanco
 
8.3%
 
March 2017
 
US$5,691
 

 
19,494

BTG Pactual
 
7.9%
 
March 2017
 
US$3,000
 

 
9,777

 
 
 
 
 
 
 
 
15,487

 
34,292


All loans and financing obligations of the Company and its subsidiaries are converted into the presentation currency (Real) when received in other currencies

On loans with Itaú/Unibanco, two shareholders of the Company appear as joint debtors (guarantors).

14.
OTHER TAXES PAYABLE

The balance of other taxes payable as of December 31, 2017 and 2016 is comprised as follows:
 
2017
 
2016
 
 
 
 
Withholding income tax
145

 
59

Social security contributions
62

 
45

COFINS - Contribution for Social Security Financing
387

 
20

PIS - Social Integration Program
77

 
2

Service tax
3

 
717

Other
82

 
46

 
756

 
889


15.
TAX FINANCING

In 2017, the Company financed the PIS and Cofins taxes on revenues related to the 2017 Rock in Rio, which will be paid in 60 monthly installments starting January 2018, and will include interest equivalent to the Brazilian basic interest rate (SELIC).



27

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


16.
INCOME TAXES, INCLUDING SOCIAL CONTRIBUTION

16.1 Reconciliation of income taxes

The reconciliation of income taxes expense recognized in the statements of operations for the years ended December 31, 2017 and 2016 is as follows:
 
2017
 
2016
 
 
 
 
Profit (loss) before income taxes
65,652

 
(113,644
)
Nominal rate
34
%
 
34
%
Income taxes (expense) benefit at nominal rate
(22,322
)
 
38,639

Effect of different rates of foreign subsidiaries
(494
)
 
106

Adjustments to obtain effective rate:
 
 
 
Non-deductible expenses
(1,134
)
 

Impairment of goodwill

 
(27,659
)
Effect of decrease in USA tax rate
(10,891
)
 
 
Valuation allowance
9,975

 
(830
)
Others
898

 
(598
)
 
 
 
 
Income tax (expense) benefit for the year
(23,968
)
 
9,658

 
 
 
 
Current
(14,696
)
 
(567
)
Deferred
(9,272
)
 
10,225

 
 
 
 
Effective income tax rate for the year
37
%
 
8
%

For the years ended December 31, 2017 and 2016, profit (loss) from continuing operations before income taxes consists of the following:    
 
2017
 
2016
 
 
 
 
Brazilian operations
72,811

 
(113,288
)
Foreign operations
(7,159
)
 
(356
)
 
65,652

 
(113,644
)



28

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


Income tax income (expense) attributable to profit (loss) from continuing operations consists of:

 
Year ended December 31, 2017
 
Current
 
Deferred
 
Total
 
 
 
 
 
 
Federal – Brazil
(14,565
)
 
(10,003
)
 
(24,568
)
Foreign jurisdictions
(131
)
 
731

 
600

 
(14,696
)
 
(9,272
)
 
(23,968
)
 
Year ended December 31, 2016
 
Current
 
Deferred
 
Total
 
 
 
 
 
 
Federal – Brazil

 
10,615

 
10,615

Foreign jurisdictions
(567
)
 
(390
)
 
(957
)
 
(567
)
 
10,225

 
9,658


Each year the Company and subsidiaries file income tax returns. We are open to income tax examinations until the applicable statute of limitations expire. The statute of limitations has expired for periods ending before 2013 in Brazil, Spain and Portugal and for periods ending before 2015 in the United States. Positions challenged by the taxing authorities may be settled or appealed by the Company.

29

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



16.2 Composition of deferred tax assets and liabilities

The composition of deferred tax assets and liabilities balance as of December 31, 2017 and 2016 is as follows:
 
2017
 
2016
Deferred tax assets
 
 
 
Tax loss carryforwards:
 
 
 
Rock World S.A. (Brazil) (a)
1,549

 
7,757

Better World S.A. (Portugal)
3,323

 
2,230

Rock in Rio USA, Inc. (United States)
16,336

 
26,319

Rock in Rio Madrid (Spain)
10,511

 
10,503

Temporary differences:
 
 
 
Deferred revenue

 
1,138

Derivative financial instruments

 
2,834

Others
1,118

 
941

Total gross deferred tax assets
32,837

 
51,722

Less valuation allowance
(26,847
)
 
(36,822
)
Net deferred tax assets
5,990

 
14,900

 
 
 
 
Deferred tax liabilities
 
 
 
Temporary differences:
 
 
 
Intangible assets (a)
9,579

 
9,579

Deferred tax liabilities
9,579

 
9,579

 
 
 
 
Total net deferred tax assets classified as:
 
 
 
Current

 
12,670

Non-current
3,323

 
2,230

 
3,323

 
14,900

 
 
 
 
Total net deferred tax liabilities classified as:
 
 
 
Current

 

Non-current
6,912

 
9,579

 
6,912

 
9,579


(a)
These assets were presented in the balance sheet net of deferred tax liabilities, since Rock World S.A. (Brazil) is the beneficial owner of the intangible assets. The deferred tax liabilities amount R$ 9,579 in 2017 and in 2016. Therefore, the net amount of the deferred tax was a liability of R$ 6,912 in 2017 and R$ 9,579 in 2016 as presented in the table above.
The valuation allowance was primarily related to United States and Spanish federal net operating loss carryforwards that, in the judgment of management, are not more-likely-than-not to be realized. The net change in the total valuation allowance was a decrease of R$ 9,975 in 2017 and an increase of R$ 830 in 2016. The reduction on valuation allowance in 2017 was due to the decrease in the U.S. tax rate from 35% to 21%, enacted in 2017 and effective at the beginning of 2018. The Company recognized a deferred tax benefit of R$ 5,702 in 2016 in Rock World S.A. and R$ 1,093 in 2017 for the increase of net operating losses in

30

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


Better World S.A., as the Company and subsidiaries expect to generate sufficient future taxable profits against which these tax assets could be offset.
 
The Company recognized the deferred tax liability in a business combination since part of the acquisition price was allocated to an intangible asset with indefinite useful life, the brand of the Rock in Rio festival. This deferred tax liability was recognized considering the difference of the accounting and tax bases. This deferred tax liability will only be consumed in case of recognition of any impairment of the Rock in Rio brand since this intangible asset has an indefinite useful life and, consequently, is not amortized.

In assessing the realizability of deferred tax assets, which relates to Portugal and Brazil, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately R$ 13,292 in Portugal and R$ 7,844 in Brazil. Taxable income (loss) in Portugal for the years ended December 31, 2017 and 2016 was R$ (4,132) and R$ 2,272, respectively. Taxable income (loss) in Brazil for the year ended December 31, 2017 was R$ 42,838 and R$ (28,406) in 2016. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of December 31, 2017. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.The amounts of deferred tax assets are presented as current assets based on their expected realization.

As of December 31, 2017, the Company has net operating loss carryforwards for Brazilian (R$ 4,556), U.S. (R$ 77,790), Spanish (R$ 42,044) and Portuguese (R$ 15,824) for federal income tax purposes, which are available to offset future federal taxable income, if any. In Spain, they will expire beginning in 2024, while in Portugal they will expire beginning in 2025, in the United States they will expire beginning in 2036 and in Brazil they do not have an expiration date.

The Company does not have a liability for unrecognized tax benefits nor a liability for interest and penalties for an underpayment of income taxes.

17.
DEFERRED REVENUE

The Company recognizes revenues from ticket sales from the Rock in Rio festivals, as well as its respective sponsorship and other revenues, at the time of the corresponding festival.

The balance of deferred revenue as of December 31, 2017 and 2016 is as follows:

 
2017
 
2016
 
 
 
 
Sponsorships
1,776

 
19,192

Ticket sales
6,627

 
14,491

Other revenue – Licensing and Rock in Rio Club
1,059

 
1,546

 
9,462

 
35,229

 
 
 
 
Classified as:
 
 
 
Current
7,203

 
35,229

Non-current
2,259

 



31

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


The deferred revenue balances as of December 31, 2017 were related to the revenue from ticket sales and sponsorships of the Rock in Rio festival to be held in Lisboa (Portugal) during June 2018 and will be recorded as revenue in the statements of operation when this event occurs.
 
18.
TAX INCENTIVES

The Company is entitled to raise funds, which must be invested in cultural projects conducted by the Company, as follows:

- Rio de Janeiro State incentive by the State Culture Secretariat (Decree No. 44,013 of January 2, 2013 and Decree No. 44,133 of March 22, 2013), and

- Rio de Janeiro municipal incentive by the Municipal Culture Secretariat (Law No. 5.553, of January 14, 2013)

The amounts received by the Company are deposited and held in a checking account or a financial investment, each related to a specific project, with a financial institution determined by each public agency. Such amounts are presented as "Restricted cash" in these consolidated financial statements.

The contra-entry of the amounts received is also recorded in a specific account for each project in current liabilities and is represented by the Company's obligation to use those resources in the execution of the approved projects. Payments for expenses incurred in each project are debited from this account. Any amounts not used are returned to the corresponding public agencies.

The difference presented between the balance of the specific account in current liabilities and the restricted cash relates to the project costs, paid using the parent company's cash to be reimbursed in the future using the resources obtained from tax incentives.

The recording of these incentives is temporary, with no impact on the statements of operations.

As of December 31, 2017 and 2016 the balances related to tax incentives are as follows:

 
2017
 
2016
 
 
 
 
Restricted cash

 
7

 

 
7

 
 
 
 
Tax incentives
210

 
101

 
210

 
101


19.
RELATED PARTIES

The main transactions with related parties refer to the rendering of technical and operational support services for the performance of the events. Amounts with related parties are presented in the following line items of the statements of operations and balance sheet:
 
Statement of operations
 
2017
 
2016
Direct operating expenses:
 
 
 
Rock Official
15

 


32

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



 
 
Balance sheet
 
 
2017
 
2016
Receivables from related parties:
 
 
 
 
Rock Official
 
15

 
15

Rock World LLC.
 
64

 
50

Live Nation
 
56

 
52

Better World SGPS
 

 
51

SFX Entretenimento
 
51

 
35

 
 
 
 
 
Payables to related parties:
 
 
 
 
Better World SGPS
 

 
25

Others
 
30

 

Loans and financing:
 
 
 
 
Better World SGPS
 

 
155

River Side Investimentos
 

 
5,740

Others
 
113

 
6,170


The compensation of key management personnel related to wages compensation was R$ 467 in the year ended December 31, 2017 (R$ 266 in the year ended December 31, 2016).


20.
SHAREHOLDERS' EQUITY

a)
Capital

As of December 31, 2017, the Capital is represented by 6,909,750 common shares, all of them nominative and without par value.

b)
Dividends distribution

As per the Company’s Corporate Bylaws, by resolution of the general meeting, the Company can declare the payment of dividends on net income for the year or in an interim period, adjusted in accordance with Article 202 of Brazilian Law No. 6,404/76. For the year ended December 31, 2017, the shareholders agreed not to receive dividends.

c)
Retained earnings
 
2017
 
2016
 
 
 
 
Opening balance
46,039

 
144,955

Net income (loss) for the year – controlling shareholders'
34,006

 
(98,916
)
 
80,045

 
46,039


33

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)




d)
Accumulated other comprehensive loss

The changes in accumulated other comprehensive loss by nature is as follows:
 
Foreign currency translation adjustments
 
2017
 
2016
 
 
 
 
Opening balance
(609
)
 
(2,883
)
Cumulative translation adjustments for the year
(736
)
 
2,274

 
(1,345
)
 
(609
)

Cumulative translation adjustments

Include translation differences to Brazilian reais from the subsidiaries' financial statements with functional currency (Euro and U.S. dollar) different from the parent company.

21.
REVENUES
 
2017
 
2016
 
 
 
 
Sponsorship
76,147

 
43,560

Ticket sales
245,306

 
29,912

Others
15,690

 
10,786

(-) Taxes on sales
(42,689
)
 
(968
)
Net revenue
294,454

 
83,290



34

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


22.
DIRECT OPERATING EXPENSES
 
 
 
 
 
2017
 
2016
 
 
 
 
Artists' fees
(92,776
)
 
(32,831
)
Marketing
(13,518
)
 
(7,836
)
Specialized professional services
(11,638
)
 
(3,206
)
Sales costs
(10,862
)
 
(597
)
Associations (Copyright — ECAD)
(9,611
)
 
(1,490
)
Infrastructure
(9,580
)
 
(695
)
Equipment rental
(9,578
)
 
(1,744
)
Professional services
(7,583
)
 
(4,115
)
Accommodation and travel tickets
(5,905
)
 
(1,961
)
"Cidade do Rock" (City of Rock) rent
(5,750
)
 

Rock in Rio staff
(5,551
)
 

Security
(4,544
)
 
(1,798
)
Scenography costs
(4,494
)
 
(3,864
)
Food and drinks
(4,147
)
 
(1,906
)
Vehicles rental and parking
(2,309
)
 
(127
)
Maintenance
(1,463
)
 
(113
)
Social projects
(1,210
)
 
(492
)
Materials
(1,118
)
 
(3,029
)
Depreciation
(633
)
 
(606
)
Freight
(587
)
 
(227
)
Communication actions
(530
)
 
(3,765
)
Legal services
(313
)
 
(55
)
Other costs
(2,346
)
 
(4,331
)
 
(206,046
)
 
(74,788
)



35

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


23.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
2017
 
2016
 
 
 
 
Personnel expenses
(5,074
)
 
(6,099
)
Administrative expenses
(2,758
)
 
(2,735
)
Third-party services
(2,893
)
 
(9,865
)
Depreciation
(2,387
)
 
(2,235
)
Taxes and fees
(115
)
 
(1,408
)
Others
(1,172
)
 
(367
)
Selling expenses
(38
)
 
(248
)
Total selling, general and administrative expenses
(14,437
)
 
(22,957
)

24.
FINANCE INCOME (EXPENSES)
 
2017
 
2016
 
 
 
 
Finance income
 
 
 
Interest on financial investments
2,252

 
325

Gains on derivative financial instruments
6,180

 
2,666

Exchange rate variation income
5,674

 
10,099

Other finance income
1,516

 
1,961

 
15,622

 
15,051

Finance expenses
 
 
 
IOF – Tax on financial transactions
(737
)
 
(390
)
Interest on loans
(2,492
)
 
(7,447
)
Bank expenses
(80
)
 
(58
)
Losses on derivative financial instruments
(13,640
)
 
(11,001
)
Exchange rate variation losses
(3,496
)
 
(13,220
)
Interest and fines over tax financing
(3,117
)
 
-

Other finance expenses
(379
)
 
(775
)
 
(23,941
)
 
(32,891
)
 
 
 
 
 
(8,319
)
 
(17,840
)

25.
FINANCIAL INSTRUMENTS

25.1.
Derivative financial instruments

The Company and its subsidiaries have as policy of contracting operations, including derivatives, aiming at mitigating the risks inherent to their operations, especially those related to expenditures on the production of the events.


36

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


Non-deliverable forwards

Non-Deliverable Forward (NDF) operations are contracted aiming at mitigating the risks of variation in the U.S. dollar against the Brazilian Real in relation to the costs of producing the Rock in Rio event in Rio de Janeiro, all NDF operations contracted by the Company were settled in 2017. During the year ended December 31, 2017, the Company recorded a loss in the amount of R$ 6,244 (a loss of R$ 5,099 for the year ended December 31, 2016).

Swaps

These swap operations aim to offset the exchange risk arising from borrowings denominated in foreign currency (U.S. dollars), changing the net financial effect of these transactions into local currency (Brazilian real) and interest rates, having equal amounts and interest rates and maturities on the same dates of corresponding loans and are taken from the same financial institution as the loans.

2017
 
 
 
 
 
 
 
 
Bank
 
Start date
 
Maturity date
 
Notional amount
 
Gain / (Loss) in R$
 
 
 
 
 
 
 
 
 
Itau
 
October 27, 2017
 
April 27, 2018
 
US$ 3,082 / R$ 10,000
 
47

 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
Bank
 
Start date
 
Maturity date
 
Notional amount
 
Gain / (Loss) in R$
 
 
 
 
 
 
 
 
 
Itau
 
May 17, 2016
 
March 23, 2017
 
US$ 5,691 / R$ 19,920
 
(3,236
)

25.2.
Management of financial risks

The Company is exposed to risks arising from financial instruments related to its operations As of December 31, 2017 and 2016, Management assessed that the Company is exposed to the following risks:

Credit risk;
Exchange rate risk;
Liquidity risk; and
Market risk;


37

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


The Company's risk management strategy is set by the senior management jointly with the Board of Directors. The executive board is responsible for overseeing the management of those risks. Risk policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities. The fair value of financial assets and financial liabilities, together with the carrying amounts shown in the consolidated financial statements, are as follows:

 
December 31, 2017
 
December 31, 2016
 
Carrying amount
 
Fair
Value
 
Carrying amount
 
Fair
value
ASSETS
 
 
 
 
 
 
 
Not measured at fair value:
 
 
 
 
 
 
 
Cash and cash equivalents
8,856

 
8,856

 
8,466

 
8,466

Restricted cash

 

 
7

 
7

Accounts receivable
12,634

 
12,634

 
8,297

 
8,297

Other accounts receivable
664

 
664

 
413

 
413

Other accounts receivable – related parties
186

 
186

 
203

 
203

Other financial assets
45

 
45

 
27

 
27

 
 
 
 
 
 
 
 
Measured at fair value:
 
 
 
 
 
 
 
Derivative financial instruments
69

 
69

 

 

 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Not measured at fair value:
 
 
 
 
 
 
 
Suppliers
13,727

 
13,727

 
3,652

 
3,652

Other liabilities – related parties
30

 
30

 
25

 
25

Loans and financing
15,487

 
15,487

 
34,292

 
34,292

Loans and financing – related parties
113

 
113

 
12,065

 
12,065

Advances from customers
261

 
261

 
1

 
1

Other accounts payable
1,526

 
1,526

 
1,735

 
1,735

 
 
 
 
 
 
 
 
Measured at fair value:
 
 
 
 
 
 
 
Derivative financial instruments
171

 
171

 
8,335

 
8,335


Considering the short-term maturity of the loans, the carrying amount is a reasonable approximation of fair value.

The fair values of the financial assets and financial liabilities above have been determined based on Level 2 inputs from similar instruments available in the market. There were no transfers between levels 1, 2 and 3 during the year.

The tables below shows the main financial risks the Company is exposed to, the risk management strategies used and their effects in the consolidated financial statements.

The Company also has a risk related to the geographical concentration of its operations in Brazil, Europe (Portugal and Spain) and United States of America, being subject to negative effects of the economic and political forces within these markets/geographic areas. The amount of net assets located in Europe and United States of America are disclosed in item b) "Exchange rate risk" below.

38

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)



a)
Credit risk

Credit risk is the risk that the Company may incur losses from the failure of a customer, or a counterparty to a financial instrument, to comply with their contractual obligations. Financial instruments that expose the Company to credit risk are related to balances of cash and cash equivalents, restricted cash, accounts receivable, derivative financial instruments and other financial assets. In order to mitigate this risk, the Company only makes deposits and financial investments in financial institutions with recognized liquidity, upon the Management's determination. Credit risk related to the balances of trade receivables is managed through careful selection of clients, mostly nationally and internationally reputed companies. Management constantly monitors client balances and evaluates, at each reporting date, the need to record estimated losses. Historically, the default rate observed is virtually nil. The carrying value of financial assets represents the Company's maximum exposure to credit risk. As of December 31, 2017 and 2016 the maximum exposure presented the following amounts:
        
 
2017
 
2016
 
 
 
 
Cash and cash equivalents
8,856

 
8,466

Restricted cash

 
7

Accounts receivable
12,634

 
8,297

Other accounts receivable
664

 
413

Other accounts receivable – related parties
186

 
203

Other financial assets

 
27

 
22,340

 
17,413


The credit risk in accounts receivable is generally not diversified due to the limited number of sponsors and ticket sellers that the Company works with. Due to the seasonal operations of the Company and its subsidiaries, the concentration of accounts receivable also is variable on each balance sheet date. The following table represents a breakdown of the concentrations in relation to the total accounts receivable at each balance sheet date:
        
Percentage of main accounts receivable from sponsorship balances:
2017
 
2016
 
 
 
 
Sponsor A
8
%
 
%
Sponsor B
6
%
 
0
%
Sponsor C
2
%
 
28
%
Sponsor D
%
 
19
%
Sponsor E
%
 
17
%

b)
Exchange rate risk

Exchange rate risk arises from the possibility of variations in exchange rates, which affect the reported amounts of assets and liabilities in foreign currency and, thus, revenues and expenses.

The Company is exposed to fluctuations in the exchange rate, deriving from the acquisition of equipment and services abroad, of the balances with related parties based in Europe and United States of America, investment in overseas subsidiaries and the balances of loans and financing contracted by those subsidiaries.


39

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


Management has the practice of contracting derivatives aiming at hedging itself from changes in exchange rates arising from the products and services purchased from abroad, as detailed in note 25.1 above.

As of December 31, 2017 and 2016, the Company and its subsidiaries have the following foreign currency balances recorded on the balance sheet (amounts below are presented in Brazilian reais):

 
Carrying amount
 
2017
 
2016
 
 
 
 
Cash and cash equivalents
2,935

 
1,232

Accounts receivable
5,378

 
2,487

Recoverable non-income taxes
728

 
555

Prepaid expenses
10,587

 

Other accounts receivable – related parties
524

 
152

Other accounts receivable
650

 
277

Deferred taxes
3,324

 
2,230

Other financial assets
59

 
47

Property, plant & equipment
7,850

 
9,291

Intangibles
7

 
6

Suppliers
(9,608
)
 
(2,950
)
Loans and financing
(15,487
)
 
(29,271
)
Loans and financing – related parties

 
(155
)
Deferred revenue
(7,203
)
 

Derivative financial instruments
(171
)
 
(8,335
)
Taxes and social contributions
(152
)
 
(688
)
Other accounts payable
(1,087
)
 
(1,472
)
Other liabilities – related parties
(30
)
 

Other provisions
(1,194
)
 

 
 
 
 
Net exposure
(2,890
)
 
(26,594
)


40

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


c)
Liquidity risk

The financial department has mechanisms to timely forecast and control cash flow projections, in order to ensure that the Company has full capacity to meet its obligations. For that, the Group's levels of indebtedness are constantly monitored. Below are presented the contractual maturities of financial liabilities at the date of the financial statements. These amounts are presented gross and undiscounted and include contractual interest payments:
 
Contractual maturities
 
6 months or less
 
6 to 12 months
 
Total
 
 
 
 
 
 
Non derivative financial liabilities:
 
 
 
 
 
Suppliers
8,354

 
5,373

 
13,727

Suppliers – related parties
30

 

 
30

Loans and financing – related parties
113

 

 
113

Loans and financing
15,487

 

 
15,487

Other accounts payable
1,526

 

 
1,526

 
25,510

 
5,373

 
30,883

 
 
 
 
 
 
Derivative financial liabilities
 
 
 
 
 
Swaps
47

 

 
47

 
 
 
 
 
 
Total
25,557

 
5,373

 
30,930


d)
Interest rate risk

The Company has no significant assets subject to changes in interest rates. The interest rate risk arises from loans and financing transactions contracted by its subsidiaries which do not bring interest rate risks once the rates for the most significant transactions are preset. See Note 13.

26.
LEGAL CONTINGENCIES

During the normal course of business, the Company is occasionally involved with claims and litigation. Provisions are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. As of December 31, 2017 and 2016, no provisions were recorded. No provisions are established for losses which are only reasonably possible. The Company is involved in various claims and legal actions amounting to R$ 4,418 as of December 31, 2017 (R$ 1,352 as of December 31, 2016) for which no provision was recorded because the chance of loss is considered at least a reasonable possibility by the Company. The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could be different from the amount presented above. Based upon the Company's experience, current information and applicable law, it does not believe it is reasonably possible that any proceedings or possible related claims will have a material effect on its consolidated financial statements.

On December 14, 2017, the Company was assessed by the Municipal Treasury of Rio de Janeiro, seeking, in summary, the collection of tax on services - ISS on the importation of services, of which the musicians contracted abroad for the period of 2012 to 2016. The amount of the principal of the tax assessment notice is R$ 6,688, and according to the assessment by the Company, with the assistance of its legal advisors, the portion with a possible probability of loss is an estimated value of 10

41

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


percent of the total amount of the tax assessment notice, plus fines and interest, amounting to R$ 1,516. The remaining of the discussion was considered as a remote probability of loss.

Additionally, as of December 31, 2017, the Company was involved in labor and civil lawsuits in progress and is discussing these issues in both the administrative and judicial areas. Proceedings for possible losses arising from these processes are estimated and updated by the Company, with the assistance of its legal advisors. The increase in civil lawsuits in 2017 resulted from the cancellation of the presentation, shortly before the festival, of one of the main attractions of the Rock in Rio festival held in Rio de Janeiro in 2017.

27.
OPERATING LEASES

The Company leases its office facilities in Rio de Janeiro under an operating lease agreement without purchase option, which expires in January 2022 and with a monthly rental payment of R$ 47. The lease payment is adjusted annually based on the variation of a Brazilian inflation index (IGP-M).

The Company also has a rental agreement signed in February 2017, with the Rio Mais Concessionaire, which owns the properties that currently make up the Olympic Park in Rio de Janeiro, where the 2017 Rock in Rio festival was held and also the 2019 event will be held. The agreement provides for that in the future, in the event that the concessionaire agrees, in its sole discretion, with the renewal of the conditions to be subsequently adjusted for the realization of 2021 Rock in Rio. This agreement provides that the Company pays the minimum rent of R$ 3,500, for each of the editions of Rock in Rio, and the amount of variable rent due to the amount of tickets sold for each of the scheduled editions.

28.
SUBSEQUENT EVENTS

Acquisition of shares by Live Nation

On May 4, 2018, Live Nation Entertainment, Inc. ( "Live Nation"), through Live Nation International Holdings B.V., an indirect, wholly-owned subsidiary of Live Nation incorporated in the Netherlands ("LNIH"), completed an acquisition of 50% of the outstanding share capital of the Company, pursuant to a Share Subscription Agreement and Other Covenants entered into as of May 1, 2018 (the "Subscription Agreement"), by and among the Company, Live Nation, LNIH, and Medina and Chulam family members (collectively, the "Founding Shareholders").

LNIH made a capital increase in the Company pursuant to the Subscription Agreement, and contributed an additional capital of the Company to finance the repayment of certain indebtedness of its subsidiary Rock World S.A. In addition, under the terms of the Subscription Agreement, Live Nation paid the Founding Shareholders an amount in exchange for the right to acquire an additional 1% of the outstanding shares of the Company for nominal consideration and thereby become its controlling shareholder, with such option exercisable (i) during the 60-day period beginning 120 days prior to the Rock in Rio festival event in Rio de Janeiro, Brazil to be held in 2019, (ii) during the 60-day period commencing on January 1, 2020 and (iii) thereafter from time to time upon the occurrence of certain triggering events. Live Nation also made a one-time payment to the Founding Shareholders concurrently with the closing of the transactions contemplated by the Subscription Agreement as an advance against certain contingent payments that will become payable to the Founding Shareholders in 2020, 2021 or 2022 in the event that either the Founding Shareholders elect to sell their remaining shares of the Company to Live Nation, or Live Nation elects to acquire such shares.

Game Experience joint-venture
On April 21, 2018, Rock World formed with CCXP Eventos Ltda. a new joint-venture called Game Experience Eventos Ltda. (each investor will have 50% of shares of this entity). The purpose of this entity is to organize and promote events related to games and e-sports. The first event to be promoted by Game Experience will be the Game XP event in the Olympic Park of Rio de Janeiro, in September 2018.


42

ROCK CITY S.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In thousands of Brazilian Reais)


Net profit allocation and capital increase
On May 4, 2018, the shareholders have approved the allocation of the net profit of the Company, in the amount of R$32,238, to the following reserves: (i) R$1,611 to the legal reserve; and (ii) R$30,626 to the reserve for realizable profits. On this same date were approved the issuance of 4,272,559 new ordinary shares, a capital increase of R$ 29,930 and the increase in profit reserves amounting R$ 121,244 made by Company’s shareholders, including Live Nation International Holdings B.V., holder of 3,863,717 ordinary shares of the Company since May 4, 2018.






43