STARZ ENTERTAINMENT CORP /CN/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” "Lions Gate," “we,” “us” or “our”) encompasses world-class motion picture and television studio operations aligned with the STARZ premium global subscription platform to bring a unique and varied portfolio of entertainment to consumers around the world. The Company’s film, television, subscription and location-based entertainment businesses are backed by a 17,000-title library and a valuable collection of iconic film and television franchises. We classify our operations through three reporting segments: Motion Picture, Television Production, and Media Networks (see further discussion below). COVID-19 Global Pandemic Since fiscal 2020, the economic, social and regulatory impacts associated with the ongoing COVID-19 global pandemic (including its variants), continued measures to prevent its spread, and the resulting economic uncertainty, have affected our business in a number of ways. We experienced delays in theatrical distribution of our films, both domestically and internationally, as well as delays in the production of film and television content (resulting in continued changes in future release dates for some titles and series). Although film and television production have generally resumed, we continue to see disruption of production activities depending on local circumstances. We also cannot predict whether productions that have resumed will be paused again, or the impact of incremental costs required to adhere to health and safety protocols. Additionally, although the lifting of the quarantines have enabled many theaters to reopen, we are unable to predict how shifting government mandates or guidance regarding COVID-19 restrictions will impact patronage and theater capacity. In turn, production delays (and fewer theatrical releases) have limited the availability of film content to be sold in distribution windows subsequent to the theatrical release, and have resulted in delays of release of new television content, including on our STARZ platform. The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19 and its variants, and among other things, the impact of governmental actions imposed in response to COVID-19 and individuals’ and companies’ responses regarding health matters going forward. The full extent of impacts related to the COVID-19 global pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Part I, Item 1A. “Risk Factors” found in our Annual Report on Form 10-K filed with the SEC on May 26, 2022, as updated by any risk factors found under Part II, Item 1A. "Risk Factors" herein. In connection with the disruptions associated with the COVID-19 global pandemic and measures to prevent its spread and mitigate its effects both domestically and internationally, and the related economic disruption, certain incremental costs were incurred and expensed, as presented in the table below: Three Months Ended June 30, 2022 2021 (Amounts in millions) COVID-19 related charges (benefit) included in: Direct operating expense (1) $ (1.0) $ 1.6 Restructuring and other (2) 0.1 0.3 Total COVID-19 related charges (benefit) $ (0.9) $ 1.9 ___________ (1) Amounts reflected in direct operating expense include incremental costs associated with the pausing and restarting of productions including paying/hiring certain cast and crew, maintaining idle facilities and equipment costs, net of insurance recoveries of $1.0 million in the three months ended June 30, 2022 (three months ended June 30, 2021 - $5.9 million). In the three months ended June 30, 2022, insurance recoveries exceeded the incremental costs expensed in the quarter, resulting in a net benefit included in direct operating expense. (2) Amounts reflected in restructuring and other represent certain incremental general and administrative costs associated with the COVID-19 global pandemic, such as costs related to transitioning the Company to a remote-work 41 Table of Contents environment, costs associated with return-to-office safety protocols and other incremental general and administrative costs associated with the COVID-19 global pandemic. We expect to incur additional incremental costs related to the COVID-19 global pandemic in future periods, especially if there is a continued spread of recent and new variants. We are in the process of seeking additional insurance recovery for some of the costs already incurred and expect to seek insurance recovery for any additional incremental costs. The ultimate amount of insurance recovery cannot be estimated at this time. See further discussion in the Results of Operations section below. The economic impact of the COVID-19 global pandemic and resulting societal changes will depend on numerous evolving factors that cannot be predicted with certainty. There are a number of ways in which these uncertainties resulting from the COVID-19 global pandemic have impacted our current results of operations and could continue to impact our future results of operations. These impacts include the incremental costs and losses presented in the table above, lower revenues from the closure or reopening of movie theaters and postponement of theatrical releases, partially offset by lower theatrical production and marketing costs, or lower box office revenues from pre-pandemic levels due to shifts in viewing; increased expenses associated with new health and safety protocols on motion picture and television productions; changes in the timing of revenues for motion pictures and television productions associated with delays in production, delivery and/or release; and while STARZ initially experienced an increase in viewership during the fiscal year ended March 31, 2021 of its content, future growth could be impacted by whether productions that have resumed will be paused again, and future consumer viewing patterns as the pandemic eases. We expect that the ultimate impact of these disruptions, including the extent of any adverse impact on our business, results of operations and financial condition, will depend on, among other things, the duration and spread of the pandemic (including recent and new variants), the impact of governmental regulations that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak (including the availability, effectiveness and/or public acceptance of any U.S. Food and Drug Administration ("FDA")-approved COVID-19 vaccines), and global economic conditions related to the COVID-19 global pandemic. All of these impacts could place limitations on our ability to execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We have implemented policies, procedures and protocols to address the situation and expect to continue to adjust our current policies and procedures as more information and guidance become available. In addition, resurgences of COVID-19, and the discovery and spread of recent and new variants of the virus, may result in the re-imposition of certain restrictions and may lead to more restrictions being implemented again to reduce the spread of COVID-19. These measures could result in further interruptions to our operations. Due to the evolving and uncertain nature of this situation, we are not able to estimate the full extent of the impact on our operating results, cash flows and financial position, particularly over the near to medium term. Revenues Our revenues are derived from the Motion Picture, Television Production and Media Networks segments, as described below. We refer to our Motion Picture and Television Production segments collectively as our Studio Business. Our revenues are derived from the U.S., Canada, the United Kingdom and other foreign countries. None of the non-U.S. countries individually comprised greater than 10% of total revenues for the three months ended June 30, 2022 and 2021. Studio Business Motion Picture: Our Motion Picture segment includes revenues derived from the following: • Theatrical. Theatrical revenues are derived from the domestic theatrical release of motion pictures licensed to theatrical exhibitors on a picture-by-picture basis (distributed by us directly in the U.S. and through a sub-distributor in Canada). The revenues from Canada are reported net of distribution fees and release expenses of the Canadian sub-distributor. The financial terms that we negotiate with our theatrical exhibitors in the U.S. generally provide that we receive a percentage of the box office results. • Home Entertainment. Home entertainment revenues are derived from the sale or rental of our film productions and acquired or licensed films and certain television programs (including theatrical and direct-to-video releases) on packaged media and through digital media platforms (including pay-per-view and video-on-demand platforms, electronic sell through, and digital rental). In addition, we have revenue sharing arrangements with certain digital media platforms which generally provide that, in exchange for a nominal or no upfront sales price, we share in the rental or sales revenues generated by the platform on a title-by-title basis. • Television. Television revenues are primarily derived from the licensing of our theatrical productions and acquired films to the linear pay, basic cable and free television markets. In addition, when a license in our traditional pay 42 Table of Contents television window is made to a subscription video-on-demand ("SVOD") or other digital platform, the revenues are included here. • International. International revenues are derived from (1) licensing of our productions, acquired films, our catalog product and libraries of acquired titles to international distributors, on a territory-by-territory basis; and (2) the direct distribution of our productions, acquired films, and our catalog product and libraries of acquired titles in the United Kingdom. • Other. Other revenues are derived from, among others, the licensing of our film and television and related content (games, music, location-based entertainment royalties, etc.) to other ancillary markets. Television Production: Our Television Production segment includes revenues derived from the following. • Television. Television revenues are derived from the licensing to domestic markets (linear pay, basic cable, free television and syndication) of scripted and unscripted series, television movies, mini-series and non-fiction programming. Television revenues include fixed fee arrangements as well as arrangements in which we earn advertising revenue from the exploitation of certain content on television networks. Television revenues also include revenue from licenses to SVOD platforms in which the initial license of a television series is to an SVOD platform. • International. International revenues are derived from the licensing and syndication to international markets of scripted and unscripted series, television movies, mini-series and non-fiction programming. • Home Entertainment. Home entertainment revenues are derived from the sale or rental of television production movies or series on packaged media and through digital media platforms. • Other. Other revenues are derived from, among others, the licensing of our television programs to other ancillary markets, the sales and licensing of music from the television broadcasts of our productions, and from commissions and executive producer fees earned related to talent management. Media Networks Our Media Networks segment includes revenues derived from the following: • Starz Networks. Starz Networks’ revenues are derived from the domestic distribution of our STARZ branded premium subscription video services through over-the-top ("OTT") platforms and U.S. multichannel video programming distributors (“MVPDs”) including cable operators, satellite television providers and telecommunications companies (collectively, “Distributors”), and on a direct-to-consumer basis through the Starz App. • STARZPLAY International. STARZPLAY International revenues are primarily derived from OTT distribution of the Company's STARZ branded premium subscription video services outside of the U.S. Our primary operating expenses include direct operating expenses, distribution and marketing expenses and general and administration expenses. Direct operating expenses include amortization of film and television production or acquisition costs, amortization of programming production or acquisition costs and programming related salaries, participation and residual expenses, provision for doubtful accounts, and foreign exchange gains and losses. Participation costs represent contingent consideration payable based on the performance of the film or television program to parties associated with the film or television program, including producers, writers, directors or actors. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild - American Federation of Television and Radio Artists, Directors Guild of America, and Writers Guild of America, based on the performance of the film or television program in certain ancillary markets or based on the individual’s (i.e., actor, director, writer) salary level in the television market. Distribution and marketing expenses primarily include the costs of theatrical prints and advertising (“P&A”) and premium video-on-demand ("Premium VOD") expense and of DVD/Blu-ray duplication and marketing. Theatrical P&A includes the costs of the theatrical prints delivered to theatrical exhibitors and the advertising and marketing cost associated with the theatrical release of the picture. Premium VOD expense represents the advertising and marketing cost associated with the Premium VOD release of the picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising. Marketing costs for Media Networks includes advertising, consumer marketing, distributor marketing support and other marketing costs. In addition, distribution and 43 Table of Contents marketing costs includes our Media Networks segment operating costs for the direct-to-consumer service, transponder expenses and maintenance and repairs. General and administration expenses include salaries and other overhead. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty of the estimate. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. In addition, the evolving and uncertain nature of the COVID-19 global pandemic could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 26, 2022. Accounting for Films and Television Programs and Licensed Program Rights Capitalized costs for films or television programs are amortized and tested for impairment based on whether the content is predominantly monetized individually or as a group. Film and Television Programs Monetized Individually. For films and television programs monetized individually, film cost amortization, participations and residuals expense are based on management's estimates. Costs of acquiring and producing films and television programs and of acquired libraries that are monetized individually are amortized and estimated liabilities for participations and residuals costs are accrued using the individual-film-forecast method, based on the ratio of the current period's revenues to management’s estimated remaining total gross revenues to be earned ("ultimate revenue"). Management's judgment is required in estimating ultimate revenue and the costs to be incurred throughout the life of each film or television program. Management estimates ultimate revenues based on historical experience with similar titles or the title genre, the general public appeal of the cast, audience test results when available, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change. For motion pictures, ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release of the motion picture. The most sensitive factor affecting our estimate of ultimate revenues for a film intended for theatrical release is the film's theatrical performance, as subsequent revenues from the licensing and sale in other markets have historically been highly correlated to its theatrical performance. After a film's release, our estimates of revenue from succeeding markets are revised based on historical relationships and an analysis of current market trends. For an episodic television series, the period over which ultimate revenues are estimated cannot exceed ten years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later. The most sensitive factors affecting our estimate of ultimate revenues for a television series is whether the series will be ordered for a subsequent season and estimates of revenue in secondary markets other than the initial license fee. The initial estimate of ultimate revenue may include estimates of revenues outside of the initial license window (i.e., international, home entertainment and other distribution platforms) and are based on historical experience for similar programs (genre, duration, etc.) based on the estimated number of seasons. We regularly monitor the performance of each season, and evaluate whether impairment indicators are present (i.e., low ratings, cancellations or the season is not reordered), and based upon our review, we revise our estimates as needed and perform an impairment assessment if impairment indicators are present (see below). For titles included in acquired libraries, ultimate revenue includes estimates over a period not to exceed twenty years following the date of acquisition. 44 Table of Contents Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of our business, some films and titles are more successful or less successful than anticipated. Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value (see below). An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization expense, and also periodically results in an impairment requiring a write-down of the film cost to the title’s fair value. These write-downs are included in amortization expense within direct operating expenses in our consolidated statements of operations. See further discussion below under Impairment Assessment . Film and Television Programs Monetized as a Group. Licensed programming rights may include rights to more than one exploitation window under the Company's output and library agreements. For films with multiple windows, the license fee is allocated between the windows based upon the proportionate estimated fair value of each window which generally results in the majority of the cost allocated to the first window on newer releases. The cost of program rights for films and television programs (including original series) exhibited by the Media Networks segment are generally amortized on an accelerated or straight-line basis based on the historical viewership patterns, the current and anticipated number of exhibitions expected or the license period on a title-by-title or episode-by-episode basis. The number of exhibitions is estimated based on the number of exhibitions allowed in the agreement (if specified) and the expected usage of the content. Participations and residuals are expensed in line with the amortization of production costs. Changes in management’s estimate of the anticipated exhibitions and viewership patterns of films and original series on our platforms could result in the earlier recognition of our programming costs than anticipated. Conversely, scheduled exhibitions and expected viewership patterns may not capture the appropriate usage of the program rights in current periods which would lead to the write-off of additional program rights in future periods and may have a significant impact on our future results of operations and our financial position. Impairment Assessment. A film group or individual film or television program is evaluated for impairment when events or changes in circumstances indicate that the fair value of an individual film or film group is less than its unamortized cost. If the result of the impairment test indicates that the carrying value exceeds the estimated fair value, an impairment charge will then be recorded for the amount of the difference. Estimate of Fair Value. For content that is predominantly monetized individually (primarily investment in film and television programs related to the Motion Picture and Television Production segments), the fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the title. For motion pictures intended for theatrical release, the discounted cash flow analysis used in the impairment evaluation prior to theatrical release is subjective as key inputs include estimates of future anticipated revenues, estimates of box office performance, which may differ from future actual results. These estimates are based in part on the historical performance of similar films, test audience results when available, information regarding competing film releases, and critic reviews. See further discussion of Valuation Assumptions below. For content that is predominantly monetized as a group (primarily licensed program rights in the Media Networks segment and internally produced programming, as discussed above), the fair value is determined based on the present value of the discounted cash flows of the group using the lowest level for which identifiable cash flows are independent of other produced and licensed content. The Company's film groups are generally aligned along the Company's networks and digital content offerings domestically (i.e., Starz Networks) and by territory or groups of territories internationally, wherein content assets are shared across the various territories and therefore, the territory or group of territories is the film group. Content removed from the service and abandoned is written down to its fair value, if any, determined using a discounted cash flow approach. Valuation Assumptions. The discounted cash flow analysis includes cash flows estimates of ultimate revenue and costs as well as a discount rate (a Level 3 fair value measurement, see Note 7 to our unaudited condensed consolidated financial statements). The discount rate utilized in the discounted cash flow analysis is based on the weighted average cost of capital of the Company plus a risk premium representing the risk associated with producing a particular film or television program or film group. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue estimates. Revenue Recognition. Our Motion Picture and Television Production segments generate revenue principally from the licensing of content in domestic theatrical exhibition, home entertainment (e.g., digital media and packaged media), television, 45 Table of Contents and international market places. Our Media Networks segment generates revenue primarily from the distribution of our STARZ branded premium subscription video services. Our content licensing arrangements include fixed fee and minimum guarantee arrangements, and sales or usage based royalties. Our fixed fee or minimum guarantee licensing arrangements in the television, digital media and international markets may, in some cases, include multiple titles, multiple license periods (windows) with a substantive period in between the windows, rights to exploitation in different media, or rights to exploitation in multiple territories, which may be considered distinct performance obligations. When these performance obligations are considered distinct, the fixed fee or minimum guarantee in the arrangement is allocated to the title, window, media right or territory as applicable, based on estimates of relative standalone selling prices. The amounts related to each performance obligation (i.e., title, window, media or territory) are recognized when the content has been delivered, and the window for the exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content. Sales or usage based royalties represent amounts due to us based on the “sale” or “usage” of our content by the customer, and revenues are recognized at the later of when the subsequent sale or usage occurs, or the performance obligation to which some or all the sales or usage-based royalty has been allocated has been satisfied (or partially satisfied). Generally, when we license completed content (with standalone functionality, such as a movie, or television show), our performance obligation will be satisfied prior to the sale or usage. When we license intellectual property that does not have stand-alone functionality (e.g., brands, themes, logos, etc.), our performance obligation is generally satisfied in the same period as the sale or usage. The actual amounts due to us under these arrangements are generally not reported to us until after the close of the reporting period. We record revenue under these arrangements for the amounts due and not yet reported to us based on estimates of the sales or usage of these customers and pursuant to the terms of the contracts. Such estimates are based on information from our customers, historical experience with similar titles in that market or territory, the performance of the title in other markets and/or available data in the industry. While we believe these estimates are reasonable estimates of the amounts due under these arrangements, such estimated amounts could differ from the actual amounts to be subsequently reported by the customer, which could be higher or lower than our estimates, and could result in an adjustment to revenues in future periods. Revenue from the theatrical release of feature films are treated as sales or usage-based royalties and recognized starting at the exhibition date and based on our participation in box office receipts of the theatrical exhibitor . Digital media revenue sharing arrangements are recognized as sales or usage based royalties. Revenue from the sale of physical discs (DVDs, Blu-ray or 4K Ultra HD), referred to as "Packaged Media", in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). We estimate reserves for Packaged Media returns based on previous returns experience, point-of-sale data available from certain retailers, current economic trends, and projected future sales of the title to the consumer based on the actual performance of similar titles on a title-by-title basis in each of the Packaged Media businesses. Factors affecting actual returns include, among other factors, limited retail shelf space at various times of the year, success of advertising or other sales promotions, and the near term release of competing titles. We believe that our estimates have been materially accurate in the past; however, due to the judgment involved in establishing reserves, we may have adjustments to our historical estimates in the future. Our estimate of future returns affects reported revenue and operating income. If we underestimate the impact of future returns in a particular period, then we may record less revenue in later periods when returns exceed the estimated amounts. If we overestimate the impact of future returns in a particular period, then we may record additional revenue in later periods when returns are less than estimated. An incremental change of 1% in our estimated sales returns rate (i.e., provisions for returns divided by gross sales of related product) for home entertainment products would have had an impact of approximately $0.3 million on our total revenue in the three months ended June 30, 2022 (2021 - $0.5 million). Revenue from commissions are recognized as such services are provided. Media Networks revenues may be based on a variable fee (i.e., a fee based on number of subscribers who receive our networks or other subscriber based factors) or to a lesser extent, may be based on a monthly fixed fee or minimum guarantee, subject to nominal annual escalations. Media Networks revenue is also generated through the distribution of our SVOD service directly to consumer through the Starz App. The variable distribution fee arrangements represent sales or usage based royalties, which are recognized over the period of such sales or usage by our distributor, which is the same period that the content is provided to the distributor. Estimates of revenue generated but not yet reported to us by our distribution partners are made based on the estimated number of subscribers using historical trends and recent reporting. Media Networks fixed fee or minimum guarantee programming revenue is recognized over the contract term based on the continuous delivery of the content to the distributor. Subscribers through the Starz App are billed in advance of the start of their monthly or annual membership and revenues are recognized ratably over each applicable membership period. Payments to distributors for marketing support 46 Table of Contents costs for which Starz receives a discrete benefit are recorded as distribution and marketing costs, and payments to distributors for which Starz receives no discrete benefit are recorded as a reduction of revenue. Goodwill and Indefinite-Lived Intangibles. At June 30, 2022, the carrying value of goodwill and indefinite-lived intangible assets was $2.8 billion and $250.0 million, respectively. Our indefinite-lived intangible assets consist of trade names primarily representing the estimated fair value of the Starz brand name determined in connection with the acquisition of Starz as of December 8, 2016. Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments (component level). Reporting units are determined by the discrete financial information available for the component and whether that information is regularly reviewed by segment management. Components are aggregated into a single reporting unit if they share similar economic characteristics. Our reporting units for purposes of goodwill impairment testing, along with their respective goodwill balances at June 30, 2022, were Motion Picture (goodwill of $394 million), Media Networks (goodwill of $1.97 billion), and our Television (goodwill of $309 million) and Talent Management (goodwill of $93 million) businesses, both of which are part of our Television Production segment. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment each fiscal year or between the annual tests if an event occurs or circumstances change that indicates it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value. We perform our annual impairment test as of January 1 in each fiscal year. A goodwill or indefinite-lived intangible asset impairment loss would be recognized for the amount that the carrying amount of a reporting unit, including goodwill or an indefinite-lived intangible asset, exceeds its fair value. An entity may perform a qualitative assessment of the likelihood of the existence of a goodwill or indefinite-lived intangible asset impairment. The qualitative assessment is an evaluation, based on all identified events and circumstances which impact the fair value of the reporting unit or indefinite-lived intangible asset, of whether or not it is more-likely-than-not that the fair value is less than the carrying value of the reporting unit or indefinite-lived intangible asset. If we believe that as a result of our qualitative assessment it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, a quantitative impairment test is not required but may be performed at the option of the Company. A quantitative assessment requires determining the fair value of our reporting units or indefinite-lived intangible assets. The determination of fair value requires considerable judgment and requires assumptions and estimates of many factors, including revenue and market growth, operating margins and cash flows, market multiples and discount rates. In performing a quantitative assessment of goodwill, we determine the fair value of our reporting units by using a combination of discounted cash flow ("DCF") analyses and market-based valuation methodologies. The models rely on significant judgments and assumptions surrounding general market and economic conditions, short-term and long-term growth rates, discount rates, income tax rates, and detailed management forecasts of future cash flow and operating margin projections, and other assumptions, all of which are based on our internal forecasts of future performance as well as historical trends. The market-based valuation method utilizes EBITDA multiples from guideline public companies operating in similar industries and a control premium. The results of these valuation methodologies are weighted as to their relative importance and a single fair value is determined. The fair value of our reporting units is reconciled to the market value of our equity, determined based on the average prices of our common shares just prior to the period end. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual or interim goodwill impairment tests will prove to be an accurate prediction of the future. Goodwill Impairment Assessment: For our annual goodwill impairment test for fiscal 2022, due to overall macroeconomic conditions, including the uncertainty of the longer-term economic impacts of the COVID-19 global pandemic, the competitive environment for subscribers and its impact on subscriber growth rates and our businesses, we performed a quantitative impairment assessment for all of our reporting units as of January 1, 2022. The DCF analysis components of the fair value estimates were determined primarily by discounting estimated future cash flows, which included weighted average perpetual nominal growth rates ranging from 1.5% to 3.5%, at a weighted average cost of capital (discount rate) ranging from 10.5% to 11.8%, which considered the risk of achieving the projected cash flows, including the risk applicable to the reporting unit, industry and market as a whole. Based on our annual quantitative impairment assessment for fiscal 2022, the Company determined that one of our reporting units (Media Networks) was at risk for impairment due to relatively small changes in certain key assumptions that could cause an impairment of goodwill. The fair value analysis of our Media Networks reporting unit indicated that the fair value exceeded the related carrying value by approximately 10%. We evaluated the sensitivity of our most critical assumptions used in the fair value analysis of our Media Networks reporting unit, including the discount rate, perpetual nominal growth rate and annual revenue growth rates. For our Media Networks reporting unit, we determined that an increase in the discount rate of up to 0.7% or a reduction of the perpetual nominal growth rate of up to 1.4% would not have impacted the test results, assuming no changes to other factors. 47 Table of Contents During the three months ended June 30, 2022, we evaluated the current macroeconomic and microeconomic environments in relation to the current and expected performance of our reporting units. Based on this evaluation, we determined there were no events or circumstances that would have resulted in changes to the underlying key assumptions and judgments used in our goodwill impairment test at a significance level that would indicate that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. Management will continue to monitor all of its reporting units for changes in the business environment that could impact the recoverability in future periods. The recoverability of goodwill is dependent upon the continued growth of revenue and cash flows from our business activities. Examples of events or circumstances that could result in changes to the underlying key assumptions and judgments used in our goodwill impairment tests, and ultimately impact the estimated fair value of our reporting units may include the duration of the COVID-19 global pandemic, its impact on the global economy and the creation and consumption of our content; continued and increasingly adverse macroeconomic conditions related to higher inflation and interest rates and currency rate fluctuations, and the impact on the global economy from Russia's invasion of Ukraine; volatility in the equity and debt markets which could result in higher weighted-average cost of capital; capital market transactions; the commercial success of our television programming and motion pictures; our continual contractual relationships with our customers; including our affiliate agreements of our Media Networks business; our subscriber growth rates domestically and internationally across our traditional and OTT platforms and changes in consumer behavior. While historical performance and current expectations have resulted in fair values of our reporting units in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future. Indefinite-Lived Intangibles Other Than Goodwill Impairment Assessment: For fiscal 2022, we performed a qualitative impairment assessment of our indefinite-lived trade names. Based on the qualitative impairment assessment of our trade names, we concluded that it is more-likely-than-not that the fair value of our trade names was more than its carrying amount, and therefore our trade names were not considered at risk of impairment. This qualitative analysis considered the relative impact of market-specific and macroeconomic factors. The market-specific factors considered included recent projections of revenues and growth in OTT subscribers, both domestic and internationally, associated with the STARZ brand name. The Company also considered the macroeconomic impact including the uncertainty around the COVID-19 global pandemic, and the resulting uncertain long-term economic impact on discount rates and growth rates, as well as the impact from tax law changes inclusive of the reduction of the federal tax rate since the acquisition of Starz. During the three months ended June 30, 2022, there were no events or circumstances that would indicate that it is more-likely-than-not that the fair value of our indefinite-lived trade names is less than its carrying value. Finite-Lived Intangible Assets. At June 30, 2022, the carrying value of our finite-lived intangible assets was approximately $1.16 billion. Our finite-lived intangible assets primarily relate to customer relationships associated with U.S. MVPDs, including cable operators, satellite television providers and telecommunications companies ("Traditional Affiliate"), which amounted to $1.15 billion. The amount of our customer relationship asset related to these Traditional Affiliate relationships reflects the estimated fair value of these customer relationships determined in connection with the acquisition of Starz on December 8, 2016, net of amortization recorded since the date of the Starz acquisition. Identifiable intangible assets with finite lives are amortized to depreciation and amortization expense over their estimated useful lives, ranging from 5 to 16 years. The Starz Traditional Affiliate customer relationship intangible asset is amortized in the proportion that current period revenues bear to management’s estimate of future revenue over the remaining estimated useful life of the asset, which results in greater amortization in the earlier years of the estimated useful life of the asset than the latter years. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. The impairment test is performed at the lowest level of cash flows associated with the asset. If the carrying value of the asset exceeds the undiscounted future cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. The Company monitors its finite-lived intangible assets and changes in the underlying circumstances each reporting period for indicators of possible impairments or a change in the useful life or method of amortization of our finite-lived intangible assets. For fiscal 2022, due to changes in the industry related to the migration from linear to OTT and direct-to-consumer consumption, and the economic uncertainty from the COVID-19 global pandemic, we performed an impairment analysis of our amortizable intangible assets. The impairment analysis requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. Based on our impairment analysis, the estimated undiscounted cash flows exceeded the carrying amount of the assets and therefore no impairment charge was required. 48 Table of Contents During the three months ended June 30, 2022, there were no events or circumstances that would indicate that the carrying amount of our finite-lived intangible assets may not be recoverable. Determining whether an intangible asset is recoverable or impaired requires various estimates and assumptions, including whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining estimates of future cash flows for the assets involved and, when applicable, the assumptions applied in determining fair value, including discount rates, growth rates, market risk premiums and other assumptions about the economic environment. Should the revenues from our Traditional Affiliate relationships decline more than the assumed attrition rates used in our current estimates, either as a result of decreases in subscriber rates or changes of the terms of our renewals of our Traditional Affiliate contracts, we may have indicators of impairment which could result in an impairment of our customer relationships intangible assets, or we may need to further shorten the useful life or adopt a more accelerated method of amortization both of which would increase the amount of amortization expense we record. Income Taxes. We are subject to federal and state income taxes in the U.S., and in several foreign jurisdictions. We record deferred tax assets related to net operating loss carryforwards and certain temporary differences, net of applicable reserves in these jurisdictions. We recognize a future tax benefit to the extent that realization of such benefit is more likely than not on a jurisdiction-by-jurisdiction basis; otherwise, a valuation allowance is applied. In order to realize the benefit of our deferred tax assets, we will need to generate sufficient taxable income in the future in each of the jurisdictions which have these deferred tax assets. However, the assessment as to whether there will be sufficient taxable income in a jurisdiction to realize our net deferred tax assets in that jurisdiction is an estimate which could change in the future depending primarily upon the actual performance of our Company. We will be required to continually evaluate the more likely than not assessment that our net deferred tax assets will be realized, and if operating results deteriorate in a particular jurisdiction, we may need to record a valuation allowance for all or a portion of our deferred tax assets through a charge to our income tax provision. As of March 31, 2022, we had a valuation allowance of $362.8 million against certain U.S. and foreign deferred tax assets that may not be realized on a more likely than not basis. Our quarterly income tax provision and our corresponding annual effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual effective tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the expected annual effective tax rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected annual effective tax rate for the year. When this occurs, we adjust our income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax provision reflects the expected annual effective tax rate. Significant judgment is required in determining our expected annual effective tax rate and in evaluating our tax positions. Our effective tax rates differ from the federal statutory rate and are affected by many factors, including the overall level of pre-tax income (loss), the mix of our pre-tax income (loss) generated across the various jurisdictions in which we operate, any changes in tax laws and regulations in those jurisdictions, changes in uncertain tax positions, changes in valuation allowances against our deferred tax assets, tax planning strategies available to us and other discrete items. RESULTS OF OPERATIONS Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Consolidated Results of Operations The following table sets forth our consolidated results of operations for the three months ended June 30, 2022 and 2021: 49 Table of Contents Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Revenues Studio Business Motion Picture $ 278.8 $ 291.2 $ (12.4) (4.3) % Television Production 432.3 386.1 46.2 12.0 % Total Studio Business 711.1 677.3 33.8 5.0 % Media Networks 381.2 382.3 (1.1) (0.3) % Intersegment eliminations (198.4) (158.4) (40.0) 25.3 % Total revenues 893.9 901.2 (7.3) (0.8) % Expenses: Direct operating 596.5 486.2 110.3 22.7 % Distribution and marketing 211.5 217.6 (6.1) (2.8) % General and administration 103.7 130.6 (26.9) (20.6) % Depreciation and amortization 42.4 43.3 (0.9) (2.1) % Restructuring and other 8.0 3.2 4.8 150.0 % Total expenses 962.1 880.9 81.2 9.2 % Operating income (loss) (68.2) 20.3 (88.5) nm Interest expense (46.1) (41.7) (4.4) 10.6 % Interest and other income 1.3 3.9 (2.6) (66.7) % Other expense (5.0) (1.7) (3.3) 194.1 % Loss on extinguishment of debt (1.3) (26.6) 25.3 n/a Gain (loss) on investments 1.8 (0.1) 1.9 nm Equity interests income 0.9 0.7 0.2 28.6 % Loss before income taxes (116.6) (45.2) (71.4) 158.0 % Income tax provision (6.0) (6.5) 0.5 (7.7) % Net loss (122.6) (51.7) (70.9) 137.1 % Less: Net loss attributable to noncontrolling interest 3.6 6.3 (2.7) (42.9) % Net loss attributable to Lions Gate Entertainment Corp. shareholders $ (119.0) $ (45.4) $ (73.6) 162.1 % _______________________ nm - Percentage not meaningful. 50 Table of Contents Revenues. Consolidated revenues decreased $7.3 million in the three months ended June 30, 2022 reflecting a slight decrease of $1.1 million from our Media Networks business, and an increase in intersegment eliminations, which primarily relate to the licensing of product from our Studio Business (primarily our Television Production segment) to the Media Networks segment, offset by an increase of $33.8 million from our Studio Business. Motion Picture revenue decreased $12.4 million in the current quarter due primarily to fewer theatrical slate releases generating revenue in the quarter, lower packaged media home entertainment revenue, and decreased television revenue. These decreases were offset by increased digital media home entertainment revenue and international revenue. Motion Picture revenue included $3.5 million of revenue from licensing Motion Picture segment product to the Media Networks segment, representing a decrease of $0.9 million from the three months ended June 30, 2021. Television Production revenue increased $46.2 million due to increased intersegment revenues from the licensing of Starz original series, and increased third-party revenue from reality television programs. Television Production revenue included $194.9 million of revenue from licensing Television Production segment product to our Media Networks segment, representing an increase of $40.9 million from the three months ended June 30, 2021. The increase in Television Production revenue was partially offset by increased intersegment eliminations associated with higher Television Production revenues for licenses of original series to Starz Networks and STARZPLAY International, both in the Media Networks segment. Media Networks revenue decreased $1.1 million reflecting a decrease of $8.6 million at Starz Networks, partially offset by increased revenue at STARZPLAY International of $7.5 million. See further discussion in the Segment Results of Operations section below. Direct Operating Expenses. Direct operating expenses by segment were as follows for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 Increase (Decrease) Amount % of Segment Revenues Amount % of Segment Revenues Amount Percent (Amounts in millions) Direct operating expenses Studio Business Motion Picture $ 150.2 53.9 % $ 127.1 43.6 % $ 23.1 18.2 % Television Production 393.2 91.0 365.2 94.6 28.0 7.7 % Total Studio Business 543.4 76.4 492.3 72.7 51.1 10.4 % Media Networks 247.2 64.8 158.8 41.5 88.4 55.7 % COVID-19 related charges (1.0) nm 1.6 nm (2.6) (162.5) % Other 0.2 nm 0.5 nm (0.3) (60.0) % Intersegment eliminations (193.3) nm (167.0) nm (26.3) 15.7 % $ 596.5 66.7 % $ 486.2 54.0 % $ 110.3 22.7 % _______________________ nm - Percentage not meaningful. Direct operating expenses increased in the three months ended June 30, 2022 due to higher direct operating expenses of the Media Networks segment and our Studio Business, partially offset by higher intersegment eliminations. The increase in Media Networks direct operating expense was driven by increases at Starz Networks of $72.8 million and STARZPLAY International of $15.6 million. The increase at the Studio Business reflects higher direct operating expenses of the Television Production segment due to higher revenues, and higher direct operating expenses of the Motion Picture segment due to higher direct operating expense as a percentage of Motion Picture revenue due to the mix of product in the current quarter. The increase in intersegment eliminations is due to increased revenue from licenses of original series to Starz Networks and STARZPLAY International, as discussed above. See further discussion in the Segment Results of Operations section below. COVID-19 Related Charges. As discussed previously, we incurred certain incremental costs associated with the COVID-19 global pandemic. In the three months ended June 30, 2022, direct operating expense included a benefit of $1.0 51 Table of Contents million from insurance recoveries in excess of incremental costs associated with the pausing and restarting of productions including paying/hiring certain cast and crew, maintaining idle facilities and equipment costs resulting from circumstances associated with the COVID-19 global pandemic (three months ended June 30, 2021 - charges of $1.6 million). We may incur additional incremental costs for direct operating expenses related to the COVID-19 global pandemic in future periods, depending on if there is a continued spread of recent and new variants. We are in the process of seeking additional insurance recovery for some of the costs already incurred and expect to seek insurance recovery for any additional incremental costs. The ultimate amount of insurance recovery cannot be estimated at this time. Other. Other direct operating expenses in the table above includes share-based compensation, and the three months ended June 30, 2021 also includes the amortization of the non-cash fair value adjustments on film and television assets associated with the application of purchase accounting related to recent acquisitions. Distribution and Marketing Expenses. Distribution and marketing expenses by segment were as follows for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Distribution and marketing expenses Studio Business: Motion Picture $ 55.5 $ 95.4 $ (39.9) (41.8) % Television Production 8.4 7.9 0.5 6.3 % Total Studio Business 63.9 103.3 (39.4) (38.1) % Media Networks 147.5 114.2 33.3 29.2 % Other 0.1 0.1 — — % $ 211.5 $ 217.6 $ (6.1) (2.8) % U.S. theatrical P&A and Premium VOD expense included in Motion Picture distribution and marketing expense $ 26.3 $ 57.9 $ (31.6) (54.6) % Distribution and marketing expenses decreased in the three months ended June 30, 2022, due to lower Studio Business distribution and marketing expense, offset by increased Media Networks distribution and marketing expense. The decrease at the Studio Business reflects lower Motion Picture theatrical P&A and Premium VOD expense associated with fewer releases in the current quarter. The increase in Media Networks distribution and marketing expense was due to an increase at Starz Networks of $24.8 million resulting from an increase in spend to increase awareness of first season original series premieres and drive growth in subscribers, and an increase at STARZPLAY International of $8.5 million. See further discussion in the Segment Results of Operations section below. 52 Table of Contents General and Administrative Expenses. General and administrative expenses by segment were as follows for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Increase (Decrease) 2022 % of Revenues 2021 % of Revenues Amount Percent (Amounts in millions) General and administrative expenses Studio Business Motion Picture $ 22.6 $ 24.4 $ (1.8) (7.4) % Television Production 11.1 10.0 1.1 11.0 % Total Studio Business 33.7 34.4 (0.7) (2.0) % Media Networks 23.5 21.1 2.4 11.4 % Corporate 23.0 24.3 (1.3) (5.3) % 80.2 9.0% 79.8 8.9% 0.4 0.5 % Share-based compensation expense 7.5 34.4 (26.9) (78.2) % Purchase accounting and related adjustments 16.0 16.4 (0.4) (2.4) % Total general and administrative expenses $ 103.7 11.6% $ 130.6 14.5% $ (26.9) (20.6) % General and administrative expenses decreased in the three months ended June 30, 2022, resulting from decreased share-based compensation expense, Corporate, and Motion Picture general and administrative expenses, and purchase accounting and related adjustments, partially offset by increases in Media Networks and Television Production general and administrative expenses. See further discussion in the Segment Results of Operations section below. Corporate general and administrative expenses decreased $1.3 million, or 5.3%, primarily due to a decrease in incentive based compensation. The decrease in share-based compensation expense included in general and administrative expense in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021 is primarily due to lower fair values associated with performance-based stock option and other equity awards that are revalued at each reporting period until the stock option or equity award vests and the applicable performance goals are achieved. The following table presents share-based compensation expense by financial statement line item: Three Months Ended June 30, 2022 2021 (Amounts in millions) Share-based compensation expense by expense category General and administrative expense $ 7.5 $ 34.4 Restructuring and other (1) 0.6 — Direct operating expense 0.2 0.1 Distribution and marketing expense 0.1 0.1 Total share-based compensation expense $ 8.4 $ 34.6 _______________________ (1) Represents share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of certain vesting schedules for equity awards pursuant to certain severance arrangements. Purchase accounting and related adjustments represent the charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the amortization of the recoupable portion of the purchase price and the expense associated with earned distributions related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense. Purchase accounting and related adjustments decreased $0.4 million, or 2.4%, primarily due to the expense associated with the earned distributions related to 3 Arts Entertainment. 53 Table of Contents Depreciation and Amortization Expense. Depreciation and amortization of $42.4 million for the three months ended June 30, 2022 decreased $0.9 million from $43.3 million in the three months ended June 30, 2021 due to lower amortization expense related to our customer relationship intangible assets. Restructuring and Other. Restructuring and other increased $4.8 million in the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, and includes restructuring and severance costs, certain transaction and related costs, and certain unusual items, when applicable. Restructuring and other costs were as follows for the three months ended June 30, 2022 and 2021 (see Note 13 to our unaudited condensed consolidated financial statements): Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Restructuring and other: Severance (1) Cash $ 2.8 $ 2.4 $ 0.4 16.7 % Accelerated vesting on equity awards (see Note 11 to our unaudited condensed consolidated financial statements) 0.6 — 0.6 n/a Total severance costs 3.4 2.4 1.0 41.7 % COVID-19 related charges (2) 0.1 0.3 (0.2) (66.7) % Transaction and related costs (3) 4.5 0.5 4.0 nm $ 8.0 $ 3.2 $ 4.8 150.0 % _______________________ nm - Percentage not meaningful. (1) Severance costs in the three months ended June 30, 2022 and 2021 were primarily related to restructuring activities in connection with cost-saving initiatives. (2) Amounts represent certain incremental general and administrative costs associated with the COVID-19 global pandemic, such as costs related to transitioning the Company to a remote-work environment, costs associated with return-to-office safety protocols, and other incremental general and administrative costs associated with the COVID-19 global pandemic. (3) Transaction and related costs in the three months ended June 30, 2022 and 2021 reflect transaction, integration and legal costs associated with certain strategic transactions, restructuring activities and legal matters. Interest Expense. Interest expense of $46.1 million in the three months ended June 30, 2022 increased $4.4 million from the three months ended June 30, 2021. The following table sets forth the components of interest expense for the three months ended June 30, 2022 and 2021: 54 Table of Contents Three Months Ended June 30, 2022 2021 (Amounts in millions) Interest Expense Cash Based: Revolving credit facility $ 2.8 $ 1.4 Term loans 9.3 8.6 Senior Notes 13.8 13.4 Other (1) 13.0 6.3 38.9 29.7 Amortization of debt financing costs and other non-cash interest (2) 7.2 12.0 Total interest expense $ 46.1 $ 41.7 ______________________ (1) Amounts include payments associated with the Company's interest rate swaps (see Note 16 to our unaudited condensed consolidated financial statements). (2) Amounts include the amortization of unrealized losses in accumulated other comprehensive income (loss) related to de-designated interest rate swaps which are being amortized to interest expense. The decrease is due to the amortization of unrealized gains in accumulated other comprehensive income (loss) related to the termination of certain of our interest rate swaps on May 20, 2022 (see Note 16 to our unaudited condensed consolidated financial statements). Interest and Other Income. Interest and other income of $1.3 million for the three months ended June 30, 2022 compared to interest and other income of $3.9 million for the three months ended June 30, 2021, due to insurance recoveries on prior shareholder litigation of $2.5 million in the prior year's quarter (see Note 15 to our unaudited condensed consolidated financial statements). Other Expense. Other expense of $5.0 million for the three months ended June 30, 2022 compared to other expense of $1.7 million for the three months ended June 30, 2021, and represented the loss recorded related to our monetization of accounts receivable programs (see Note 17 to our unaudited condensed consolidated financial statements). Loss on Extinguishment of Debt. Loss on extinguishment of debt of $1.3 million for the three months ended June 30, 2022 represented a loss for the write-off of debt issuance costs associated with the voluntary prepayment of the entire outstanding amount of Term Loan A due March 22, 2023. In the three months ended June 30, 2021, the loss on extinguishment of debt of $26.6 million related to the write-off of a portion of debt issuance costs (including a portion of call premiums) associated with the redemption of the 5.875% Senior Notes and 6.375% Senior Notes and associated issuance of the 5.500% Senior Notes, the amendment of our credit agreement to extend the maturity of a portion of our revolving credit commitments and a portion of our outstanding term A loans, and repurchases of the Term Loan B. See Note 5 to our unaudited condensed consolidated financial statements. Gain on Investments. Gain on investments of $1.8 million for the three months ended June 30, 2022 compared to a loss on investments of $0.1 million for the three months ended June 30, 2021 due to equity securities sold in the current quarter. Equity Interests Income. Equity interests income of $0.9 million in the three months ended June 30, 2022 compared to equity interests income of $0.7 million in the three months ended June 30, 2021. Income Tax Provision. We had an income tax provision of $6.0 million in the three months ended June 30, 2022, compared to an income tax provision of $6.5 million in the three months ended June 30, 2021. Our income tax provision differs from the federal statutory rate multiplied by pre-tax income (loss) due to the mix of our pre-tax income (loss) generated across the various jurisdictions in which we operate, changes in the valuation allowance against our deferred tax assets, and certain minimum taxes and foreign withholding taxes. Our income tax provision for the three months ended June 30, 2022 and 2021 was also impacted by an interest accrual on uncertain tax benefits. Net Loss Attributable to Lions Gate Entertainment Corp. Shareholders. Net loss attributable to our shareholders for the three months ended June 30, 2022 was $119.0 million, or basic and diluted net loss per common share of $0.53 on 225.6 million weighted average common shares outstanding. This compares to net loss attributable to our shareholders for the three 55 Table of Contents months ended June 30, 2021 of $45.4 million, or basic and diluted net loss per common share of $0.20 on 221.8 million weighted average common shares outstanding. Segment Results of Operations The segment results of operations presented below do not include the elimination of intersegment transactions which are eliminated when presenting consolidated results, and exclude items separately identified in the restructuring and other line item in the unaudited condensed consolidated statements of operations. The Company's primary measure of segment performance is segment profit. See Note 14 to the unaudited condensed consolidated financial statements for our definition of segment profit and a reconciliation of segment profit to the Company's consolidated loss before income taxes. Segment Presentation We refer to our Motion Picture and Television Production segments collectively as our Studio Business. The table below sets forth the revenues, gross contribution and segment profit of our collective Studio Business and Media Networks segment. Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Revenue Studio Business Motion Picture $ 278.8 $ 291.2 $ (12.4) (4.3) % Television Production 432.3 386.1 46.2 12.0 % Total Studio Business $ 711.1 $ 677.3 $ 33.8 5.0 % Media Networks 381.2 382.3 (1.1) (0.3) % Intersegment eliminations (198.4) (158.4) (40.0) 25.3 % $ 893.9 $ 901.2 $ (7.3) (0.8) % Gross Contribution Studio Business Motion Picture $ 73.1 $ 68.7 $ 4.4 6.4 % Television Production 30.7 13.0 17.7 136.2 % Total Studio Business $ 103.8 $ 81.7 $ 22.1 27.1 % Media Networks (13.5) 109.3 (122.8) (112.4) % Intersegment eliminations (5.1) 8.6 (13.7) (159.3) % $ 85.2 $ 199.6 $ (114.4) (57.3) % Segment Profit Studio Business Motion Picture $ 50.5 $ 44.3 $ 6.2 14.0 % Television Production 19.6 3.0 16.6 553.3 % Total Studio Business $ 70.1 $ 47.3 $ 22.8 48.2 % Media Networks (37.0) 88.2 (125.2) (142.0) % Intersegment eliminations (5.1) 8.6 (13.7) (159.3) % $ 28.0 $ 144.1 $ (116.1) (80.6) % See the following discussion for further detail of our individual segments. 56 Table of Contents Motion Picture The table below sets forth Motion Picture gross contribution and segment profit for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Motion Picture Segment: Revenue $ 278.8 $ 291.2 $ (12.4) (4.3) % Expenses: Direct operating expense 150.2 127.1 23.1 18.2 % Distribution & marketing expense 55.5 95.4 (39.9) (41.8) % Gross contribution 73.1 68.7 4.4 6.4 % General and administrative expenses 22.6 24.4 (1.8) (7.4) % Segment profit $ 50.5 $ 44.3 $ 6.2 14.0 % U.S. theatrical P&A and Premium VOD expense included in distribution and marketing expense $ 26.3 $ 57.9 $ (31.6) (54.6) % Direct operating expense as a percentage of revenue 53.9 % 43.6 % Gross contribution as a percentage of revenue 26.2 % 23.6 % _______________________ nm - Percentage not meaningful. 57 Table of Contents Revenue. The table below sets forth Motion Picture revenue by media and product category for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 Total Increase (Decrease) Lionsgate Original Releases (1) Other Film (2) Total Lionsgate Original Releases (1) Other Film (2) Total (Amounts in millions) Motion Picture Revenue Theatrical $ 10.3 $ 0.6 $ 10.9 $ 27.8 $ 0.6 $ 28.4 $ (17.5) Home Entertainment Digital Media 85.8 46.4 132.2 72.2 40.0 112.2 20.0 Packaged Media 13.6 8.5 22.1 20.9 13.1 34.0 (11.9) Total Home Entertainment 99.4 54.9 154.3 93.1 53.1 146.2 8.1 Television 34.9 10.4 45.3 45.7 5.1 50.8 (5.5) International 55.1 10.6 65.7 53.4 9.4 62.8 2.9 Other 1.5 1.1 2.6 1.5 1.5 3.0 (0.4) $ 201.2 $ 77.6 $ 278.8 $ 221.5 $ 69.7 $ 291.2 $ (12.4) ____________________ (1) During the quarter ended March 31, 2022, we changed the presentation of the categories in the table above to "Lionsgate Original Releases" and "Other Film", and changed the definitions of these categories as described further below, in order to be consistent with how management is now reviewing the Motion Picture segment. Through December 31, 2021, we had previously presented a "Feature Film" and "Other Film" category. Accordingly, amounts presented in the table above for the three months ended June 30, 2021 have been conformed to the current period presentation. (2) Lionsgate Original Releases: Includes titles originally planned for a wide theatrical release by Lionsgate, including titles that have changed from a planned wide theatrical release to an initial direct-to-streaming release. These releases include films developed and produced in-house, films co-developed and co-produced and films acquired or licensed from third parties. In addition, Lionsgate Original Releases also includes multi-platform and direct-to-platform motion pictures originally released or licensed by Lionsgate, and the licensing of our original release motion picture content to other ancillary markets (location-based entertainment, games, etc.). (3) Other Film: Includes acquired and licensed brands and libraries originally released by other parties such as third-party library product, including our titles released by acquired companies prior to our acquisition of the company (i.e., Summit Entertainment library), and titles released with our equity method investees, Roadside Attractions and Pantelion Films, and other titles. Theatrical revenue decreased $17.5 million in the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to a decrease of $17.5 million from Lionsgate Original Releases driven by fewer theatrical slate releases generating revenue in the quarter. Home entertainment revenue increased $8.1 million, or 5.5%, in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, due to higher digital media revenue of $20.0 million, offset by lower packaged media revenue of $11.9 million driven by Lionsgate Original Releases. The increase in digital media revenue was due to an increase of $13.6 million from Lionsgate Original Releases due to higher revenue from direct-to-platform (i.e., SVOD) releases, and an increase of $6.4 million from Other Film due to higher revenue from our acquired library titles. Television revenue decreased $5.5 million, or 10.8%, in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, due to a decrease from Lionsgate Original Releases of $10.8 million due to fewer television windows opening for our theatrical slate titles than in the prior year's quarter, offset by an increase from Other Film of $5.3 million due to higher revenue from our acquired library titles. International revenue increased $2.9 million, or 4.6%, in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021 due to an increase from Lionsgate Original Releases, and from our Other Film acquired library titles. 58 Table of Contents Direct Operating Expense. The increase in direct operating expenses is due to higher expense as a percentage of motion picture revenue in the current quarter. The increase in direct operating expenses as a percentage of motion picture revenue is driven by the change in the mix of titles and product categories generating revenue in the current quarter as compared to the prior year's quarter, including higher expense related to direct-to-platform Lionsgate Original Releases (which require less marketing cost and generally carry less risk, and thus the film cost is higher as a percentage of revenue) representing approximately 3.7% of the increase, and increased development write-offs on Lionsgate Original Releases in the current quarter, representing approximately 4.7% of the increase. Investment in film write-downs included in Motion Picture segment direct operating expense in the three months ended June 30, 2022 were $0.5 million, as compared to none in the three months ended June 30, 2021. Distribution and Marketing Expense. The decrease in distribution and marketing expense in the three months ended June 30, 2022 is due to lower theatrical P&A and Premium VOD expense associated with fewer releases in the current quarter. In the three months ended June 30, 2022 approximately $5.3 million of P&A and Premium VOD expense was incurred in advance for films to be released in subsequent quarters, compared to approximately $2.7 million in the three months ended June 30, 2021 in the Motion Picture segment. Gross Contribution. Gross contribution of the Motion Picture segment for the three months ended June 30, 2022 increased as compared to the three months ended June 30, 2021 due to lower Motion Picture distribution and marketing expense, partially offset by lower Motion Picture revenue and higher direct operating expense as a percentage of Motion Picture revenue. General and Administrative Expense. General and administrative expenses of the Motion Picture segment in the three months ended June 30, 2022 decreased $1.8 million, or 7.4%, primarily due to a decrease in incentive based compensation. Television Production The table below sets forth Television Production gross contribution and segment profit for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Television Production Segment: Revenue $ 432.3 $ 386.1 $ 46.2 12.0 % Expenses: Direct operating expense 393.2 365.2 28.0 7.7 % Distribution & marketing expense 8.4 7.9 0.5 6.3 % Gross contribution 30.7 13.0 17.7 136.2 % General and administrative expenses 11.1 10.0 1.1 11.0 % Segment profit $ 19.6 $ 3.0 $ 16.6 553.3 % Direct operating expense as a percentage of revenue 91.0 % 94.6 % Gross contribution as a percentage of revenue 7.1 % 3.4 % 59 Table of Contents Revenue. The table below sets forth Television Production revenue and changes in revenue by media for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent Television Production (Amounts in millions) Television $ 301.3 $ 272.2 $ 29.1 10.7 % International 79.3 67.5 11.8 17.5 % Home Entertainment Digital 31.3 24.5 6.8 27.8 % Packaged Media 0.9 2.3 (1.4) (60.9) % Total Home Entertainment 32.2 26.8 5.4 20.1 % Other 19.5 19.6 (0.1) (0.5) % $ 432.3 $ 386.1 $ 46.2 12.0 % The primary component of Television Production revenue is domestic television revenue. Domestic television revenue increased in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, due to an increase of $14.0 million from intersegment revenues from the licensing of Starz original series (Power Book III: Raising Kanan, The Serpent Queen Season 1 , P-Valley Season 2 , Party Down Season 3 , among others) to Starz Networks, and increased third-party revenue from reality television programs. International revenue in the three months ended June 30, 2022 increased $11.8 million, or 17.5% as compared to the three months ended June 30, 2021 due to an increase of $12.9 million from intersegment revenues from the licensing of Starz original series ( The Serpent Queen Season 1, Power Book III: Raising Kanan Season 2, Party Down Season 3, P-Valley Season 2) to STARZPLAY International. Home entertainment revenue in the three months ended June 30, 2022 increased $5.4 million, or 20.1% as compared to the three months ended June 30, 2021 due to digital media revenue from Heels Season 1 and The First Lady Season 1 in the current quarter, which compared to digital media revenue in the prior year's quarter for Weeds Seasons 1 to 8 and Welcome to Flatch Season 1. Other revenue in the three months ended June 30, 2022 was comparable to the three months ended June 30, 2021, and primarily includes revenue of 3 Arts Entertainment. Direct Operating Expense. Direct operating expense of the Television Production segment in the three months ended June 30, 2022 increased $28.0 million, or 7.7% due to the increase in Television Production revenues. Direct operating expenses as a percentage of television production revenue decreased slightly as compared to the prior year's quarter, which included higher write-downs to fair value of investment in film and television programs. The current quarter included write-downs to fair value of investment in film and television programs amounting to $1.2 million in aggregate, as compared to $25.0 million in the prior year's quarter. Gross Contribution. Gross contribution of the Television Production segment for the three months ended June 30, 2022 increased as compared to the three months ended June 30, 2021, due to increased television production revenue and lower direct operating expenses as a percentage of television production revenue. General and Administrative Expense. General and administrative expenses of the Television Production segment increased $1.1 million, or 11.0% primarily due to an increase in salaries and related expenses. Media Networks The table below sets forth Media Networks gross contribution and segment profit for the three months ended June 30, 2022 and 2021: 60 Table of Contents Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount Percent (Amounts in millions) Media Networks Segment: Revenue $ 381.2 $ 382.3 $ (1.1) (0.3) % Expenses: Direct operating expense 247.2 158.8 88.4 55.7 % Distribution & marketing expense 147.5 114.2 33.3 29.2 % Gross contribution (13.5) 109.3 (122.8) (112.4) % General and administrative expenses 23.5 21.1 2.4 11.4 % Segment profit $ (37.0) $ 88.2 $ (125.2) (142.0) % Direct operating expense as a percentage of revenue 64.8 % 41.5 % Gross contribution as a percentage of revenue (3.5) % 28.6 % The following table sets forth the Media Networks segment profit by product line: Three Months Ended Three Months Ended June 30, 2022 June 30, 2021 Starz Networks STARZPLAY International Total Media Networks Starz Networks STARZPLAY International Total Media Networks (Amounts in millions) Media Networks Segment: Revenue $ 349.6 $ 31.6 $ 381.2 $ 358.2 $ 24.1 $ 382.3 Expenses: Direct operating expense 200.9 46.3 247.2 128.1 30.7 158.8 Distribution & marketing expense 119.9 27.6 147.5 95.1 19.1 114.2 Gross contribution 28.8 (42.3) (13.5) 135.0 (25.7) 109.3 General and administrative expenses 16.6 6.9 23.5 15.5 5.6 21.1 Segment profit $ 12.2 $ (49.2) $ (37.0) $ 119.5 $ (31.3) $ 88.2 61 Table of Contents Subscriber Data. The number of period-end service subscribers is a key metric which management uses to evaluate a non-ad supported subscription video service. We believe this key metric provides useful information to investors as a growing or decreasing subscriber base is a key indicator of the health of the overall business. Service subscribers may impact revenue differently depending on specific distribution agreements we have with our distributors which may include fixed fees, rates per basic video household or a rate per STARZ subscriber. The table below sets forth, for the periods presented, subscriptions to our Media Networks and STARZPLAY Arabia services. June 30, June 30, 2022 2021 (Amounts in millions) Starz Domestic Linear Subscribers 9.2 10.4 OTT Subscribers 12.2 9.7 Total 21.4 20.1 STARZPLAY International Linear Subscribers 1.8 1.8 OTT Subscribers 12.2 5.2 Total 14.0 7.0 Total Starz Linear Subscribers 11.0 12.2 OTT Subscribers 24.4 14.9 Total Starz 35.4 27.1 STARZPLAY Arabia (1) 1.9 1.8 Total Domestic and International Subscribers (2) 37.3 28.9 Subscribers by Platform: Linear Subscribers 11.0 12.2 OTT Subscribers (2) 26.3 16.7 Total Global Subscribers 37.3 28.9 ___________________ (1) Represents subscribers of STARZPLAY Arabia, a non-consolidated equity method investee. (2) OTT subscribers includes subscribers of STARZPLAY Arabia, as presented above. Revenue. Media Networks revenue decreased $1.1 million reflecting a decrease of $8.6 million at Starz Networks, partially offset by increased revenue at STARZPLAY International of $7.5 million as a result of subscriber and revenue growth in the international territories previously launched, and additional territories launched since June 30, 2021. Starz Networks' revenue decreased as a result of declines in revenue of $37.0 million from traditional linear services, which were mostly offset by higher OTT revenue of $27.8 million resulting from increased subscriptions. 62 Table of Contents During the three months ended June 30, 2022 and 2021, the following original series premiered on STARZ: Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Title Premiere Date Title Premiere Date First Quarter: First Quarter: Gaslit April 24, 2022 The Girlfriend Experience Season 3 May 2, 2021 P-Valley Season 2 June 3, 2022 Run the World Season 1 May 16, 2021 Becoming Elizabeth Season 1 June 12, 2022 Blindspotting Season 1 June 13, 2021 Who is Ghislaine Maxwell June 26, 2022 Direct Operating and Distribution and Marketing Expenses . Direct operating and distribution and marketing expenses primarily represent programming cost amortization and advertising and marketing costs, respectively. The level of programming cost amortization and advertising and marketing costs and thus the gross contribution margin for the Media Networks' segment can fluctuate from period to period depending on the number of new original series and first-run output theatrical movies premiering on the network during the period. Programming cost amortization and advertising and marketing costs generally increase in periods where new original series premiere. In addition, the launch of the STARZPLAY international service has and will continue to result in an increase in expenses as the service continues to expand. The increase in Media Networks direct operating expenses is due to increases at Starz Networks of $72.8 million and STARZPLAY International of $15.6 million in the three months ended June 30, 2022. The increase in Starz Networks direct operating expense was primarily due to higher programming cost amortization related to our Starz Originals of $79.5 million primarily related to higher cost original series premieres, partially offset by lower programming amortization of $13.3 million related to theatrical releases under our programming output agreements. Direct operating expenses at STARZPLAY International increased as a result of the continued expansion of STARZPLAY International and foreign currency fluctuations related to the strengthening U.S. dollar. The increase in Media Networks distribution and marketing expense is due to an increase of $24.8 million at Starz Networks and $8.5 million at STARZPLAY International, resulting from an increase in spend to increase awareness of first season original series premieres and drive growth in subscribers. Gross Contribution. The decrease in gross contribution compared to the three months ended June 30, 2021 was due to decreases at Starz Networks of $106.2 million and STARZPLAY International of $16.6 million, driven by higher direct operating expense and distribution and marketing expense, partially offset by higher STARZPLAY International revenue, all as described above. General and Administrative Expense. General and administrative expenses in the three months ended June 30, 2022 increased slightly from the prior year's quarter, due to increases of $1.1 million at Starz Networks, and $1.3 million at STARZPLAY International. 63 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Sources of Cash Our liquidity and capital requirements in the three months ended June 30, 2022 were provided principally through cash generated from operations, corporate debt, our film related financing and other obligations (as further discussed below), and the monetization of trade accounts receivable. As of June 30, 2022, we had cash and cash equivalents of $378.5 million. Corporate Debt Our corporate debt at June 30, 2022, excluding film related financing and other obligations discussed further below, consisted of the following: • Senior Credit Facilities: ◦ Revolving Credit Facility. We have a $1.25 billion revolving credit facility (with no amounts outstanding at June 30, 2022) due April 2026 (the "Revolving Credit Facility"). We maintain significant availability under our Revolving Credit Facility, which is currently used to meet our short-term liquidity requirements, and could also be used for longer term liquidity requirements. ◦ Term Loan A. We have a term loan A facility due April 2026 (the "Term Loan A"), with $444.9 million outstanding at June 30, 2022. ◦ Term Loan B. We have a term loan B facility due March 2025 (the "Term Loan B", and, together with the Revolving Credit Facility and the Term Loan A, the "Senior Credit Facilities"), with $841.0 million outstanding at June 30, 2022. • Senior Notes: We have $1.0 billion outstanding of 5.500% senior notes due 2029 (the "5.500% Senior Notes") at June 30, 2022. In July 2022, we repurchased $18.7 million principal amount of the 5.500% Senior Notes for $14.6 million, together with accrued and unpaid interest. See Note 18 - Subsequent Events to our unaudited condensed consolidated financial statements. See Note 5 to our unaudited condensed consolidated financial statements for a discussion of our corporate debt. Film Related Financing and Other Obligations We utilize our film related financing and other obligations to fund our film and television productions or licenses. Our film related financing and other obligations at June 30, 2022 include the following: • Production Loans: Production loans represent individual loans for the production of film and television programs that we produce or license. The majority of the Company's production loans have contractual repayment dates either at or near the expected completion date, with the exception of certain loans containing repayment dates on a longer term basis. At June 30, 2022, there was $1,135.0 million outstanding of production loans. • Programming Notes: Programming notes represent individual loans for the license of film and television programs that we license. The Company's programming notes have contractual repayment dates in July 2022. At June 30, 2022, there was $56.2 million outstanding of programming notes. • Production Tax Credit Facility: We have a $235.0 million non-recourse senior secured revolving credit facility due January 2025 based on collateral consisting of certain of the Company’s tax credit receivables (the "Production Tax Credit Facility"). At June 30, 2022, there was $233.7 million outstanding of production and related loans. • IP Credit Facility: In July 2021, as amended on September 30, 2021, certain of our subsidiaries entered into a senior secured amortizing term credit facility due July 2026 (the "IP Credit Facility") based on the collateral consisting solely of certain of our rights in certain library titles, including the Spyglass and other recently acquired libraries. The maximum principal amount of the IP Credit Facility is $140.0 million, subject to the amount of collateral available, which is based on the valuation of cash flows from the libraries. At June 30, 2022, there was $114.0 million outstanding under the IP Credit Facility. 64 Table of Contents • Backlog Financing Facility and Other: ◦ Backlog Financing Facility. In March 2022, as amended in August 2022, certain subsidiaries of the Company entered into a committed secured revolving credit facility (the "Backlog Financing Facility") based on collateral consisting of certain of the Company's fixed fee or minimum guarantee contracts where cash will be received in the future. The maximum principal amount of the Backlog Financing Facility as of June 30, 2022 was $125.0 million, subject to the amount of eligible collateral contributed to the facility. In August 2022, the Company amended its Backlog Financing Facility and increased the maximum principal amount of the Backlog Financing Facility from $125.0 million to $175.0 million (see Note 18 - Subsequent Events to our unaudited condensed consolidated financial statements). The Backlog Financing Facility revolving period finishes on May 16, 2025, at which point cash collections from the underlying collateral is used to repay the facility. The facility maturity date is up to 2 years and 90 days after the revolving period ends, currently August 14, 2027. As of June 30, 2022, there was $125.0 million outstanding under the Backlog Financing Facility. ◦ Other. On June 28, 2022, the Company borrowed $118.6 million under a loan agreement which is secured by contracted receivables which are not yet recognized as revenue under certain licensing agreements (the "Distribution Loan Agreement"). The loan agreement matures on December 28, 2025. Outstanding loan balances must be repaid with any cash collections from the underlying collateral if and when received by the Company, and may be voluntarily repaid at any time without prepayment penalty fees. See Note 6 to our unaudited condensed consolidated financial statements for a discussion of our film related and other financing obligations. Accounts Receivable Monetization and Governmental Incentives Our accounts receivable monetization programs include individual agreements to monetize certain of our trade accounts receivable directly with third-party purchasers and a revolving agreement to monetize designated pools of trade accounts receivable with various financial institutions. In addition, we utilize governmental incentives, programs and other structures from states and foreign countries (e.g., sales tax refunds, transferable tax credits, refundable tax credits, low interest loans, direct subsidies or cash rebates, calculated based on the amount of money spent in the particular jurisdiction in connection with the production) to fund our film and television productions and reduce financial risk. See Note 17 to our unaudited condensed consolidated financial statements for our accounts receivable monetization programs and our tax credit receivables. Uses of Cash Our principal uses of cash in operations include the funding of film and television productions, film and programming rights acquisitions, the distribution and marketing of films and television programs, and general and administrative expenses. We also use cash for debt service (i.e. principal and interest payments) requirements, equity method or other equity investments, quarterly cash dividends when declared, the purchase of common shares under our share repurchase program, capital expenditures, and acquisitions of or investment in businesses. Redeemable Noncontrolling Interests. In addition, the Company has a redeemable noncontrolling interest balance of $336.6 million as of June 30, 2022 related to its acquisition of a controlling interest in Pilgrim Media Group and 3 Arts Entertainment, which may require the use of cash in the event the holders of the noncontrolling interests require the Company to repurchase their interests (see Note 8 to our unaudited condensed consolidated financial statements). • 3 Arts Entertainment. The noncontrolling interest holders have a right to put the noncontrolling interest of 3 Arts Entertainment, at fair value, exercisable beginning May 29, 2023, for a 60 day period. Beginning 30 days after the expiration of the exercise period for the put rights held by the noncontrolling interest holders, the Company has a right to call the noncontrolling interest of 3 Arts Entertainment, at fair value, for a 60 day period. • Pilgrim Media Group. Pursuant to an amendment dated April 2, 2021, the put and call rights associated with the noncontrolling interest were extended and modified, such that the noncontrolling interest holder has a right to put and the Company has a right to call a portion of the noncontrolling interest, equal to 25% of Pilgrim Media Group, at fair value, exercisable for thirty (30) days beginning November 12, 2022. In addition, the noncontrolling interest holder has a right to put and the Company has a right to call the remaining amount of noncontrolling interest at fair value, subject to a cap, exercisable for thirty (30) days beginning November 12, 2024, as amended. 65 Table of Contents We may from time to time seek to retire or purchase or refinance our outstanding debt through cash purchases, and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, refinancings, or otherwise. Such repurchases or exchanges or refinancings, if any, will depend on prevailing market conditions, our liquidity requirements, our assessment of opportunities to lower interest expense, contractual restrictions and other factors, and such repurchases or exchanges could result in a charge from the early extinguishment of debt. The amounts involved may be material. Anticipated Cash Requirements. The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. We expect to continue to increase our investments in film and television programs and film and programming rights acquisitions. In addition, the launch of the Company's STARZPLAY international service has and will require capital investment as the service expands to other international territories. In the short-term, we currently expect that our cash requirements for productions will increase and that our cash requirements for marketing spends will be comparable in fiscal 2023 as compared to fiscal 2022, due to the expected increase in film and television programs, productions or acquisitions in fiscal 2023. However, we currently believe that cash flow from operations, cash on hand, revolving credit facility availability, the monetization of trade accounts receivable, tax-efficient financing, the availability of our Production Tax Credit Facility, IP Credit Facility and Backlog Financing Facility and other financing obligations, and available production or license financing will be adequate to meet known operational cash and debt service (i.e. principal and interest payments) requirements for the next twelve months and beyond, including the funding of future film and television production, film and programming rights acquisitions and theatrical and home entertainment release schedules, and future equity method or other investment funding requirements, and international expansion. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our credit worthiness. Our current financing strategy is to fund operations and to leverage investment in films and television programs in the short-term and long-term through our cash flow from operations, our revolving credit facility, production loans and programming notes, government incentive programs, film funds, the monetization of trade accounts receivable, our Production Tax Credit Facility, our IP Credit Facility, our Backlog Financing Facility, and other financing obligations. In addition, we continue to expand our STARZPLAY international service and may acquire businesses or assets, including individual films or libraries that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing. If additional financing beyond our existing cash flows from operations and credit facilities cannot fund such transactions, there is no assurance that such financing will be available on terms acceptable to us. Our ability to obtain any additional financing will depend on, among other things, our business plans, operating performance, the condition of the capital markets at the time we seek financing, and short and long-term debt ratings assigned by independent rating agencies. Additionally, circumstances related to the COVID-19 global pandemic, inflation and rising interest rates has caused disruption in the capital markets, which could make financing more difficult and/or expensive, and we may not be able to obtain such financing. We may also dispose of businesses or assets, including individual films or libraries, and use the net proceeds from such dispositions to fund operations or such acquisitions, or to repay debt. 66 Table of Contents Material Cash Requirements from Known Contractual and Other Obligations. Our material cash requirements from known contractual and other obligations primarily relate to our corporate debt and film related and other obligations. The following table sets forth our significant contractual and other obligations as of June 30, 2022 and the estimated timing of payment: Total Next 12 Months Beyond 12 Months (Amounts in millions) Future annual repayment of debt and other obligations recorded as of June 30, 2022 (on-balance sheet arrangements) Corporate debt (1) : Revolving credit facility $ — $ — $ — Term Loan A 444.9 22.2 422.7 Term Loan B 841.0 12.5 828.5 5.500% Senior Notes (1) 1,000.0 18.7 981.3 Film related and other obligations (2) 1,782.5 1,090.3 692.2 Operating lease obligations 200.8 41.9 158.9 4,269.2 1,185.6 3,083.6 Contractual commitments by expected repayment date (off-balance sheet arrangements) Film related obligations commitments (3) 920.9 416.3 504.6 Interest payments on corporate debt (4) 634.3 134.8 499.5 Other contractual obligations 386.8 120.3 266.5 1,942.0 671.4 1,270.6 Total future repayment of debt and other commitments under contractual obligations (5) $ 6,211.2 $ 1,857.0 $ 4,354.2 ___________________ (1) See Note 5 to our unaudited condensed consolidated financial statements for further information on our corporate debt. In July 2022, we repurchased $18.7 million principal amount of the 5.500% Senior Notes for $14.6 million, together with accrued and unpaid interest. See Note 18 - Subsequent Events to our unaudited condensed consolidated financial statements for further information. (2) Film related and other obligations include program rights and film obligations, and film related financing and other obligations (i.e., production loans, Production Tax Credit Facility, programming notes, Backlog Financing Facility and other, and IP Credit Facility), included on the consolidated balance sheets. See Note 6 to our unaudited condensed consolidated financial statements for further information. (3) Film related obligations commitments include distribution and marketing commitments, minimum guarantee commitments, program rights commitments, and production loan commitments not reflected on the consolidated balance sheets as they did not then meet the criteria for recognition. (4) Includes cash interest payments on our corporate debt, excluding the interest payments on the revolving credit facility as future amounts are not fixed or determinable due to fluctuating balances and interest rates. (5) Not included in the amounts above are $336.6 million of redeemable noncontrolling interest, as future amounts and timing are subject to a number of uncertainties such that we are unable to make sufficiently reliable estimations of future payments (see Note 8 to our unaudited condensed consolidated financial statements). We are obligated to pay programming fees for all qualifying films that are released theatrically in the U.S. by Sony’s Columbia Pictures, Screen Gems, Sony Pictures Classics and TriStar labels through 2021. We do not license films produced by Sony Pictures Animation. The programming fees to be paid by us to Sony are based on the quantity and domestic theatrical exhibition receipts of qualifying films. We also have an exclusive multiyear post pay-one output licensing agreement with Universal for live-action films theatrically released in the U.S. starting January 1, 2022. The Universal agreement provides us with rights to exhibit these films immediately following their pay-one windows. We are unable to estimate the amounts to be paid under the Universal agreement for films that have not yet been released in theaters, however, such amounts are expected to be significant. 67 Table of Contents In addition, as of June 30, 2022, we had gross unrecognized tax benefits of $70.2 million. We are unable to reasonably predict the ultimate amount or timing of settlement of our unrecognized tax benefits because, until formal resolutions are reached, reasonable estimates of the amount and timing of cash settlements with the respective taxing authorities are not practicable. However, we estimate the liability for unrecognized tax benefits will decrease in the next twelve months by $80.9 million as a result of projected audit settlements in certain jurisdictions. For additional details of contingencies, see Note 15 to our unaudited condensed consolidated financial statements. Covenants. The Senior Credit Facilities contain representations and warranties, events of default and affirmative and negative covenants that are customary for similar financings and which include, among other things and subject to certain significant exceptions, restrictions on the ability to declare or pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. In addition, a net first lien leverage maintenance covenant and an interest coverage ratio maintenance covenant apply to the Revolving Credit Facility and the Term Loan A and are tested quarterly. As of June 30, 2022, the Company was in compliance with all applicable covenants. The 5.500% Senior Notes contain certain restrictions and covenants that, subject to certain exceptions, limit the Company’s ability to incur additional indebtedness, pay dividends or repurchase the Company’s common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations. As of June 30, 2022, the Company was in compliance with all applicable covenants. Share Repurchase Plan. On February 2, 2016, our Board of Directors authorized to increase our previously announced share repurchase plan from $300 million to $468 million. To date, approximately $288.1 million of our common shares have been purchased under the plan, leaving approximately $179.9 million of authorized potential repurchases. The remaining $179.9 million of our common shares authorized under the plan may be purchased from time to time at our discretion, including quantity, timing and price thereof, and will be subject to market conditions. Such purchases will be structured as permitted by securities laws and other legal requirements. During the three months ended June 30, 2022, the Company did not repurchase any common shares. Dividends. The amount of dividends, if any, that we pay to our shareholders is determined by our Board of Directors, at its discretion, and is dependent on a number of factors, including our financial position, results of operations, cash flows, capital requirements and restrictions under our credit agreements, and shall be in compliance with applicable law. Capacity to Pay Dividends. At June 30, 2022, the capacity to pay dividends under the Senior Credit Facilities and the Senior Notes significantly exceeded the amount of the Company's accumulated deficit or net loss, and therefore the Company's net loss of $122.6 million and accumulated deficit of $504.7 million were deemed free of restrictions from paying dividends at June 30, 2022. 68 Table of Contents Discussion of Operating, Investing, Financing Cash Flows Cash, cash equivalents and restricted cash increased by $24.8 million for the three months ended June 30, 2022 and decreased by $261.3 million for the three months ended June 30, 2021, before foreign exchange effects on cash. Components of these changes are discussed below in more detail. Operating Activities. Cash flows used in operating activities for the three months ended June 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 2021 Net Change (Amounts in millions) Operating income (loss) $ (68.2) $ 20.3 $ (88.5) Depreciation and amortization 42.4 43.3 (0.9) Amortization of films and television programs and program rights 472.0 371.1 100.9 Non-cash share-based compensation 8.4 34.6 (26.2) Cash interest (38.9) (29.7) (9.2) Interest and other income and expense, net (3.7) 2.2 (5.9) Current income tax provision (5.8) (5.6) (0.2) Other amortization 23.1 25.5 (2.4) Cash flows from operations before changes in operating assets and liabilities 429.3 461.7 (32.4) Changes in operating assets and liabilities: Proceeds from the termination of interest rate swaps 188.7 — 188.7 Accounts receivable, net and other assets 5.4 (149.6) 155.0 Investment in films and television programs and program rights (608.4) (577.4) (31.0) Accounts payable and accrued liabilities (51.8) (60.1) 8.3 Other changes in operating assets and liabilities 36.6 (23.3) 59.9 Changes in operating assets and liabilities (429.5) (810.4) 380.9 Net Cash Flows Used In Operating Activities $ (0.2) $ (348.7) $ 348.5 Cash flows used in operating activities for the three months ended June 30, 2022 were $0.2 million compared to cash flows used in operating activities of $348.7 million for the three months ended June 30, 2021. The lower cash used in operating activities is due to lower cash used from changes in operating assets and liabilities as shown above, partially offset by lower cash flows from operations before changes in operating assets and liabilities. The lower use of cash from changes in operating assets and liabilities was driven by proceeds from the termination of interest rate swaps (see further discussion below for interest rate swap transactions in the current quarter), decreases in accounts receivable, net and other assets, increases in accounts payable and accrued liabilities and other changes in operating assets and liabilities, partially offset by increased cash used for investment in films and television programs and program rights. In addition, cash flows used in operating activities for the three months ended June 30, 2022 included a net benefit of approximately $13.9 million from the monetization of accounts receivables programs, as compared to a net use of cash of approximately $51.0 million for the three months ended June 30, 2021 (see Note 17 to our unaudited condensed consolidated financial statements). During the three months ended June 30, 2022, we terminated certain interest rate swaps (a portion of which were considered hybrid instruments with a financing component and an embedded at-market derivative that was a designated cash flow hedge), and received approximately $56.4 million. The $56.4 million received was classified in the unaudited condensed consolidated statement of cash flows as cash provided by operating activities of $188.7 million reflecting the amount received for the derivative portion of the termination of swaps, and a use of cash in financing activities of $134.5 million reflecting the pay down of the financing component of the Terminated Swaps (inclusive of payments made between April 1, 2022 and the termination date amounting to $3.2 million) (see Financing Activities below). See Note 16 to our unaudited condensed consolidated financial statements. 69 Table of Contents Investing Activities. Cash flows provided by (used in) investing activities for the three months ended June 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 2021 (Amounts in millions) Proceeds from the sale of Pantaya $ — $ 123.6 Proceeds from the sale of other investments 2.3 — Investment in equity method investees and other (7.5) (2.0) Distributions from equity method investees — 0.5 Capital expenditures (9.6) (6.4) Net Cash Flows Provided By (Used In) Investing Activities $ (14.8) $ 115.7 Cash flows used in investing activities of $14.8 million for the three months ended June 30, 2022 compared to cash flows provided by investing activities of $115.7 million for the three months ended June 30, 2021, primarily due to the receipt of proceeds during the three months ended June 30, 2021 from the sale of Pantaya (see Note 2 to our unaudited condensed consolidated financial statements). Financing Activities. Cash flows provided by (used in) financing activities for the three months ended June 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 2021 (Amounts in millions) Debt - borrowings, net of debt issuance and redemption costs $ 518.5 $ 1,199.9 Debt - repurchases and repayments (715.2) (1,373.9) Net repayments and repurchases of debt (196.7) (174.0) Film related financing and other obligations - borrowings, net of debt issuance costs 522.9 309.2 Film related financing and other obligations - repayments (152.6) (146.0) Net proceeds from film related financing and other obligations 370.3 163.2 Other financing activities (133.8) (17.5) Net Cash Flows Provided By (Used In) Financing Activities $ 39.8 $ (28.3) Cash flows provided by financing activities of $39.8 million for the three months ended June 30, 2022 compared to cash flows used in financing activities of $28.3 million for the three months ended June 30, 2021. Cash flows provided by financing activities for the three months ended June 30, 2022 primarily reflects net film related financing and other obligations borrowings of $370.3 million, offset by net debt repayments of $196.7 million due to the April 2022 voluntarily prepayment of the entire outstanding principal amount of $193.6 million of the Term Loan A due March 22, 2023 and required repayments on the Term Loan B. In addition, other financing activities in the three months ended June 30, 2022 includes $134.5 million for interest rate swap settlement payments due to $134.5 million for the pay down of the financing component of our terminated interest rate swaps in the current quarter (inclusive of payments made between April 1, 2022 and the termination date amounting to $3.2 million) (see discussion above in Operating Activities , and Note 16 to our unaudited condensed consolidated financial statements). Other financing activities also includes tax withholding required on equity awards of $1.1 million. Cash flows used in financing activities of $28.3 million for the three months ended June 30, 2021 primarily reflects net debt repayments of $174.0 million, and net film related financing and other obligations borrowings of $163.2 million, as production activity increased in the three months ended June 30, 2021. In addition, other financing activities in the three months ended June 30, 2021 includes $6.9 million for interest rate swap settlement payments due to a financing component on a portion of our interest rate swaps (see Note 16 to our unaudited condensed consolidated financial statements). Net debt repayments and 70 Table of Contents repurchases of $174.0 million in the three months ended June 30, 2021 included the below transactions and associated debt issuance and redemption costs, along with required repayments on our term loans: • On April 1, 2021, we redeemed in full all $518.7 million outstanding principal amount of our 5.875% Senior Notes and all $545.6 million outstanding principal amount of our 6.375% Senior Notes, and paid a prepayment premium of $15.2 million and $17.4 million on the 5.875% Senior Notes and 6.375% Senior Notes, respectively, plus accrued and unpaid interest to the date of redemption. • On April 1, 2021, in connection with the redemption of the 5.875% Senior Notes and the 6.375% Senior Notes, we issued $1.0 billion aggregate principal amount of 5.500% Senior Notes. • On April 6, 2021, we amended our Credit Agreement to, among other things, extend the maturity of a portion of our revolving credit commitments, amounting to $1.25 billion, and a portion of our outstanding term A loans, amounting to $444.9 million to April 6, 2026. • During the three months ended June 30, 2022, the Company completed a series of repurchases of the Term Loan B and, in aggregate, paid $51.1 million to repurchase $51.5 million principal amount of the Term Loan B. Remaining Performance Obligations and Backlog Remaining performance obligations represent deferred revenue on the balance sheet plus fixed fee or minimum guarantee contracts where the revenue will be recognized and the cash received in the future (i.e., backlog). As disclosed in Note 9 to our unaudited condensed consolidated financial statements, remaining performance obligations were $1.9 billion at June 30, 2022 (March 31, 2022 - $1.8 billion). The backlog portion of remaining performance obligations (excluding deferred revenue) related to our Motion Picture and Television Production segments was $1.5 billion at June 30, 2022 (March 31, 2022 - $1.3 billion).