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 an 18,000-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). Proposed Spin-off of Studio Business In March 2023, we announced that we had confidentially submitted a draft registration statement on Form 10 with the SEC relating to the proposed spin-off of our Studio Business, consisting of our Television Production and Motion Picture segments (the "Form 10"). In July 2023, we publicly filed the Form 10 with the SEC. The proposed spin-off will be subject to the satisfaction of a number of conditions and our Board of Directors may decide not to proceed with the spin-off at any time. A failure to satisfy required conditions, or disruptions in market conditions, could delay the completion of the proposed spin-off for a significant period of time or prevent it from occurring at all. Additionally, the proposed spin-off is complex in nature, and unanticipated developments or changes, including disruptions in general market conditions, changes in law or challenges in executing the spin-off, may affect our ability to complete the spin-off on the terms or on the timeline we announced, or at all. These or other developments could cause us not to realize some or all of the expected benefits, or to realize them on a different timeline than expected. Media Networks Restructuring In fiscal 2023, we began a plan to restructure our LIONSGATE+ business, which included exiting the business in seven international territories (France, Germany, Italy, Spain, Benelux, the Nordics and Japan), and identifying additional cost-saving initiatives. This plan included a strategic review of content performance across Starz’s domestic and international platforms, resulting in certain programming being removed from those platforms and written down to fair value. As a result of these restructuring initiatives, we recorded content impairment charges related to the Media Networks segment in the three months ended June 30, 2023 of $28.0 million, which are included in restructuring and other in the unaudited condensed consolidated statement of operations (see Note 12 to our unaudited condensed consolidated financial statements). We have incurred impairment charges from the inception of the plan through June 30, 2023 amounting to $407.3 million. Under the current restructuring plan, the Company estimates it will incur additional charges ranging from approximately $5 million to $30 million related to certain contractual content commitments or programming content impairment charges, among other items, related to territories exited or to be exited. The net future cash outlay is estimated to range from approximately $60 million to $90 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content previously written down. As the Company continues to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments), including further strategic review of content performance and its strategy on a territory-by-territory basis, the Company may decide to expand its restructuring plan and exit additional territories or remove certain content off its platform in the future. In July 2023, in connection with a modification to shorten a long-term distribution contract, the Company decided to shut down the LIONSGATE+ service in Latin America. While the modified contract covers the cost of the content during the shutdown period, there may be additional charges for remaining contractual commitments when the service is completely shut down in Latin America, which is expected toward the end of calendar 2023. The Company may incur additional content impairment and other restructuring charges beyond the estimates above. 40 Table of Contents Industry Strikes On May 1, 2023, the collective bargaining agreement between the Writers Guild of America (“WGA”) and the Alliance of Motion Picture and Television Producers (“AMPTP”) expired, and on May 2, 2023, the WGA commenced an industry-wide strike. On July 12, 2023, the collective bargaining agreement between the Screen Actors Guild - American Federation of Television and Radio Artists (“SAG-AFTRA”) and the AMPTP expired, and on July 14, 2023, the SAG-AFTRA commenced an industry-wide strike. Subsequently, we have paused and may further pause certain theatrical and television productions as a result of the WGA and SAG-AFTRA strikes. Consequently, the timing of certain production payments will be delayed until productions can resume and may increase the variability in payments for investment in film and television programs and licensed program rights in future periods. In addition, the pausing and restarting of productions may result in incremental costs, delay the completion and release of some of our content (investment in films, television programs and licensed programs) and could cause an impairment of our investment in film, television programs or licensed program rights if the incremental costs are significant, or the Company is unable to efficiently complete the production of the film, television show or program or decides to abandon the production. The extent of these costs and delays will depend on the duration of the strikes and the ability to reschedule production in a timely and efficient manner. The incremental costs incurred through June 30, 2023 as a result of the WGA strike were not material. 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, 2023 and 2022. 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 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. 41 Table of Contents • 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") streaming platforms and distributors, on a direct-to-consumer basis through the Starz App, and through U.S. multichannel video programming distributors (“MVPDs”) including cable operators, satellite television providers and telecommunications companies (collectively, “Distributors”), (in the aggregate, the "Starz Domestic Platform"). • LIONSGATE+. LIONSGATE+ revenues are primarily derived from OTT distribution of the STARZ branded premium subscription video services outside of the U.S. The Starz Domestic Platform together with the LIONSGATE+ platforms are referred to as the "Starz Platforms". Expenses 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 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. Corporate general and administrative expenses include certain corporate executive expense (such as salaries and wages for the office of the Chief Executive Officer, Chief Financial Officer, General Counsel and other corporate officers), investor relations costs, costs of maintaining corporate facilities, and other unallocated common administrative support functions, including corporate accounting, finance and financial reporting, internal and external audit and tax costs, corporate and other legal support functions, and certain information technology and human resources expense. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 42 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. 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 25, 2023, as amended on July 20, 2023 (the "Form 10-K"). 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, which may depend on a number of factors, including, among others, the ratings or viewership the program achieves on the customers' platforms. 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.) and the estimated number of seasons of the series. Ultimates of revenue beyond the initial license fee are generally higher for programs that have been or are expected to be ordered for multiple 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. 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). 43 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. While not significant through June 30, 2023, certain license agreements and productions may include additional ancillary rights in addition to the rights for exploitation on the Starz Platforms. A portion of the cost of these licenses and the cost of produced content, is allocated between the programming rights for exploitation on the Starz Platforms and investment in film and television programs for exploitation outside of the Starz Platforms in ancillary markets (e.g., home video, digital platforms, television, etc.) based on the relative fair value of those markets. The estimates of fair value for the allocation between windows of exploitation on the Starz Platform and ancillary markets is based on historical experience of the values of similar titles licensed in subsequent windows and estimates of future revenues in ancillary markets. Management believes these are reasonably reliable estimates of these values, however, these estimates involve uncertainty and management judgment. The cost of licensed program rights for films and television programs (including original series) exhibited by the Media Networks segment are generally amortized on a title-by-title or episode-by-episode basis using an accelerated or straight-line method based on the expected and historical viewership patterns, or the current and anticipated number of exhibitions over the license period or estimated life for owned or produced programs. 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. 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 and the 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. For television programs, the discounted cash flow analysis used in the impairment evaluation includes key inputs such as estimates of future anticipated revenue, as discussed above. 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 with the Company's networks and digital content offerings domestically (i.e., Starz Networks) and internationally by territory or groups of territories where content assets are shared across the various territories. Content removed from the service and abandoned is written down to its fair value, if any, determined using a discounted cash flow approach. In fiscal 2023, we began a plan to restructure our LIONSGATE+ business. This restructuring, which included exiting the business in seven international territories (France, Germany, Italy, Spain, Benelux, the Nordics and Japan), and identifying additional cost-saving initiatives, which included a strategic review of content performance across Starz’s domestic and international platforms, resulting in certain programming being removed from those platforms and written down to fair value. As a result of these restructuring initiatives, we recorded content impairment charges related to the Media Networks segment in the three months ended June 30, 2023 of $28.0 million, which are included in restructuring and other in the unaudited condensed consolidated statement of operations (see Note 2 and Note 12 to our unaudited condensed consolidated financial statements). We have incurred impairment charges from the inception of the plan through June 30, 2023 amounting to $407.3 million. 44 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 6 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, and international market places. Our Media Networks segment generates revenue primarily from the distribution of our STARZ 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). 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 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. 45 Goodwill and Indefinite-Lived Intangibles. At June 30, 2023, the carrying value of goodwill and indefinite-lived intangible assets was $1.29 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, 2023, were Motion Picture (goodwill of $394 million), Media Networks (goodwill of $493.9 million), 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 Assessments: In fiscal 2023, during the second quarter ended September 30, 2022, we updated our quantitative impairment assessment for all of our reporting units based on the most recent data and expected growth trends. 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 13.0%, 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 quantitative impairment assessment, the Company determined that the fair value of our reporting units exceeded the carrying values for all of our reporting units, except the Media Networks reporting unit which was previously disclosed as a reporting unit "at risk" of impairment. The analysis resulted in a goodwill impairment charge of $1.475 billion in the second quarter of fiscal 2023, related to our Media Networks reporting unit goodwill. Since the impairment charge reduced the carrying value of the Media Networks reporting unit to its fair value, at September 30, 2022 the fair value and carrying value of the Media Networks reporting unit were equal and thus it continues to be considered "at risk" of impairment. For our annual goodwill impairment test for fiscal 2023, we performed a qualitative goodwill impairment assessment for all our reporting units. Our qualitative assessment considered the increase in the market price of the Company’s common shares from September 30, 2022, the recent performance of the Company’s reporting units, and updated forecasts of performance and cash flows, as well as the continuing micro and macroeconomic environment, and industry considerations, and determined that since the quantitative assessment performed in the quarter ended September 30, 2022, there were no events or circumstances 46 that rise to a level that would more-likely-than-not reduce the fair value of those reporting units below their carrying values; therefore, a quantitative goodwill impairment analysis was not required. During the three months ended June 30, 2023, we evaluated events and circumstances in the quarter that would, more-likely-than-not, reduce the fair value of our reporting units below their carrying amount. Our evaluation considered the decrease in the market price of the Company's common shares since March 31, 2023, the recent performance of the Company's reporting units, and updated forecasts of performance and cash flows, as well as the current micro and macroeconomic environments in relation to the current and expected performance of our reporting units. Based on this evaluation, we determined that since the quantitative assessment performed in the quarter ended September 30, 2022 and our qualitative assessment performed for fiscal 2023, there were no events or circumstances that rise to a level that would more-likely-than-not reduce the fair value of those reporting units below their carrying values; therefore, a quantitative goodwill impairment analysis was not required. Management will continue to monitor all of its reporting units for further 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 global economy, consumer consumption levels of our content; 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, and past and future bank failures; volatility in the equity and debt markets which could result in higher weighted-average cost of capital; capital market transactions; the duration and potential impact of strikes of unions which we rely on, such as the current strike of members of the WGA and SAG-AFTRA, on our ability to produce, acquire and distribute our content; 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. If our assumptions are not realized, it is possible that additional impairment charges may need to be recorded in the future. Indefinite-Lived Intangibles Other Than Goodwill Impairment Assessment: For fiscal 2023, for our annual impairment assessment, 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 not more-likely-than-not that the fair value of our trade names was less 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 same factors as discussed above in its evaluation of potential goodwill impairment including the global macroeconomic environment, 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 quarter ended June 30, 2023, 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, 2023, the carrying value of our finite-lived intangible assets was approximately $1.02 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 $1.01 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. 47 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 2023, due to changes in the industry related to the migration from linear to OTT and direct-to-consumer consumption, 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. During the quarter ended June 30, 2023, 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, 2023, we had a valuation allowance of $455.7 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, 2023 Compared to Three Months Ended June 30, 2022 Consolidated Results of Operations The following table sets forth our consolidated results of operations for the three months ended June 30, 2023 and 2022: 48 Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Revenues Studio Business Motion Picture $ 406.5 $ 278.8 $ 127.7 45.8 % Television Production 218.5 432.3 (213.8) (49.5) % Total Studio Business 625.0 711.1 (86.1) (12.1) % Media Networks 381.1 381.2 (0.1) — % Intersegment eliminations (97.5) (198.4) 100.9 (50.9) % Total revenues 908.6 893.9 14.7 1.6 % Expenses: Direct operating 481.2 596.5 (115.3) (19.3) % Distribution and marketing 244.2 211.5 32.7 15.5 % General and administration 123.6 103.7 19.9 19.2 % Depreciation and amortization 44.4 42.4 2.0 4.7 % Restructuring and other 32.0 8.0 24.0 nm Total expenses 925.4 962.1 (36.7) (3.8) % Operating loss (16.8) (68.2) 51.4 (75.4) % Interest expense (62.0) (46.1) (15.9) 34.5 % Interest and other income 1.9 1.3 0.6 46.2 % Other expense (5.7) (5.0) (0.7) 14.0 % Gain (loss) on extinguishment of debt 21.2 (1.3) 22.5 nm Gain on investments — 1.8 (1.8) (100.0) % Equity interests income (loss) (0.3) 0.9 (1.2) (133.3) % Loss before income taxes (61.7) (116.6) 54.9 (47.1) % Income tax provision (9.8) (6.0) (3.8) 63.3 % Net loss (71.5) (122.6) 51.1 (41.7) % Less: Net loss attributable to noncontrolling interest 0.8 3.6 (2.8) (77.8) % Net loss attributable to Lions Gate Entertainment Corp. shareholders $ (70.7) $ (119.0) $ 48.3 (40.6) % _______________________ nm - Percentage not meaningful. 49 Revenues. Consolidated revenues increased $14.7 million in the three months ended June 30, 2023 reflecting a decrease of $86.1 million from our Studio Business, offset by lower intersegment eliminations of $100.9 million. Intersegment eliminations relate to the licensing of product from our Studio Business (primarily our Television Production segment) to the Media Networks segment. Motion Picture revenue increased $127.7 million in the current quarter due to greater theatrical, digital media home entertainment, international and other revenue. Motion Picture revenue included $16.5 million of revenue from licensing Motion Picture segment product to the Media Networks segment, representing an increase of $13.0 million from the three months ended June 30, 2022. Television Production revenue decreased $213.8 million due to decreased domestic television revenue from lower third-party revenue and lower intersegment revenues from the licensing of Starz original series, decreased international revenue, and decreased digital media home entertainment revenue, partially offset by increased other revenue. Television Production revenue included $81.0 million of revenue from licensing Television Production segment product to our Media Networks segment, representing a decrease of $113.9 million from the three months ended June 30, 2022. The decrease in intersegment eliminations is primarily associated with lower Television Production revenues for licenses of original series to Starz Networks and LIONSGATE+, both in the Media Networks segment as discussed above. Media Networks revenue was comparable, and reflected increased revenue at LIONSGATE+ of $12.1 million, offset by a decrease of $12.2 million at Starz Networks. 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, 2023 and 2022: Three Months Ended June 30, 2023 2022 Change Amount % of Segment Revenues Amount % of Segment Revenues Amount Percent (Amounts in millions) Direct operating expenses Studio Business Motion Picture $ 186.7 45.9 % $ 150.2 53.9 % $ 36.5 24.3 % Television Production 174.9 80.0 393.2 91.0 (218.3) (55.5) % Total Studio Business 361.6 57.9 543.4 76.4 (181.8) (33.5) % Media Networks 206.4 54.2 247.2 64.8 (40.8) (16.5) % COVID-19 related charges (benefit) 0.2 nm (1.0) nm 1.2 nm Other 0.4 nm 0.2 nm 0.2 nm Intersegment eliminations (87.4) nm (193.3) nm 105.9 (54.8) % $ 481.2 53.0 % $ 596.5 66.7 % $ (115.3) (19.3) % _______________________ nm - Percentage not meaningful. Direct operating expenses decreased in the three months ended June 30, 2023 due to lower direct operating expenses for our Studio Business and the Media Networks segment, partially offset by lower intersegment eliminations. The decrease at the Studio Business reflects lower direct operating expenses of the Television Production segment due to lower revenues from Television Production, partially offset by higher direct operating expenses of the Motion Picture segment due to higher revenues. The decrease in Media Networks direct operating expense was driven by decreases at Starz Networks of $26.1 million and LIONSGATE+ of $14.7 million due to lower programming cost amortization, and lower foreign exchange losses at LIONSGATE+. The decrease in intersegment eliminations is due to decreased revenue from licenses of original series to Starz Networks and LIONSGATE+, as discussed above. See further discussion in the Segment Results of Operations section below. COVID-19 Related Charges (Benefit). We incurred certain incremental costs associated with the COVID-19 global pandemic. In the three months ended June 30, 2023, direct operating expense included charges of $0.2 million, net of immaterial insurance recoveries (three months ended June 30, 2022 - benefit of $1.0 million, net of insurance recoveries of 50 $1.0 million). Direct operating expenses related to the COVID-19 global pandemic have been declining and are expected to continue to decline if the severity of the COVID-19 global pandemic continues to lessen. We are in the process of seeking additional insurance recovery for some of the costs incurred. The ultimate amount of insurance recovery cannot be estimated at this time. Other. Other direct operating expense includes share-based compensation. Distribution and Marketing Expenses. Distribution and marketing expenses by segment were as follows for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Distribution and marketing expenses Studio Business: Motion Picture $ 121.2 $ 55.5 $ 65.7 118.4 % Television Production 8.0 8.4 (0.4) (4.8) % Total Studio Business 129.2 63.9 65.3 102.2 % Media Networks 117.0 147.5 (30.5) (20.7) % Other 0.2 0.1 0.1 100.0 % Intersegment eliminations (2.2) — (2.2) n/a $ 244.2 $ 211.5 $ 32.7 15.5 % U.S. theatrical P&A and Premium VOD expense included in Motion Picture distribution and marketing expense $ 84.4 $ 26.3 $ 58.1 220.9 % Distribution and marketing expenses increased in the three months ended June 30, 2023, due to higher Studio Business distribution and marketing expense, partially offset by lower Media Networks distribution and marketing expense. The increase at the Studio Business reflects greater Motion Picture theatrical P&A and Premium VOD expense associated with the theatrical slate releases in the current quarter, and higher expense for films to be released in subsequent quarters. The decrease in Media Networks distribution and marketing expense was due to a decrease at Starz Networks of $16.2 million due to lower spend for our Starz Originals' premieres in the current period, and a decrease at LIONSGATE+ of $14.3 million. See further discussion in the Segment Results of Operations section below. 51 General and Administrative Expenses. General and administrative expenses by segment were as follows for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, Change 2023 % of Revenues 2022 % of Revenues Amount Percent (Amounts in millions) General and administrative expenses Studio Business Motion Picture $ 29.4 $ 22.6 $ 6.8 30.1 % Television Production 12.7 11.1 1.6 14.4 % Total Studio Business 42.1 33.7 8.4 24.9 % Media Networks 25.8 23.5 2.3 9.8 % Corporate 30.4 23.0 7.4 32.2 % Share-based compensation expense 15.3 7.5 7.8 104.0 % Purchase accounting and related adjustments 10.0 16.0 (6.0) (37.5) % Total general and administrative expenses $ 123.6 13.6% $ 103.7 11.6% $ 19.9 19.2 % General and administrative expenses increased in the three months ended June 30, 2023, resulting from increased share-based compensation expense, corporate, Motion Picture, Television Production, and Media Networks general and administrative expenses, partially offset by lower purchase accounting and related adjustments. See further discussion in the Segment Results of Operations section below. Corporate general and administrative expenses increased $7.4 million, or 32.2%, primarily due to an increase in incentive based compensation. The increase in share-based compensation expense included in general and administrative expense in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022 is primarily due to an increase in incentive based compensation and lower fair values in the prior year's quarter 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, 2023 2022 (Amounts in millions) Share-based compensation expense by expense category General and administrative expense $ 15.3 $ 7.5 Restructuring and other (1) 0.5 0.6 Direct operating expense 0.4 0.2 Distribution and marketing expense 0.2 0.1 Total share-based compensation expense $ 16.4 $ 8.4 _______________________ (1) Represents share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements. Purchase accounting and related adjustments include the non-cash charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the non-cash charge for the amortization of the recoupable portion of the purchase price and the expense associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense. The noncontrolling equity interest in the distributable earnings of 3 Arts Entertainment are reflected as an expense rather than noncontrolling interest in the consolidated statement of operations due to the relationship to continued employment. Purchase accounting and related adjustments decreased $6.0 million, or 37.5%, primarily due to lower noncontrolling interest 52 discount amortization of $4.9 million (see further detail in the reconciliation of operating loss to total segment profit further below). Depreciation and Amortization Expense. Depreciation and amortization of $44.4 million for the three months ended June 30, 2023 increased $2.0 million from $42.4 million in the three months ended June 30, 2022. Restructuring and Other. Restructuring and other increased $24.0 million in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, and includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable. Restructuring and other costs were as follows for the three months ended June 30, 2023 and 2022 (see Note 12 to our unaudited condensed consolidated financial statements): 53 Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Restructuring and other: Content impairments (1) $ 28.0 $ — $ 28.0 n/a Severance (2) Cash 4.3 2.8 1.5 53.6 % Accelerated vesting on equity awards (see Note 10 to our unaudited condensed consolidated financial statements) 0.5 0.6 (0.1) n/a Total severance costs 4.8 3.4 1.4 41.2 % COVID-19 related charges — 0.1 (0.1) (100.0) % Transaction and other costs (benefits) (3) (0.8) 4.5 (5.3) nm $ 32.0 $ 8.0 $ 24.0 nm _______________________ nm - Percentage not meaningful (1) Media Networks Restructuring: In fiscal 2023, the Company began a plan to restructure its LIONSGATE+ business, which included exiting the business in seven international territories (France, Germany, Italy, Spain, Benelux, the Nordics and Japan), and identifying additional cost-saving initiatives. This plan included a strategic review of content performance across Starz's domestic and international platforms, resulting in certain programming being removed from those platforms and written down to fair value. As a result of these restructuring initiatives, the Company recorded content impairment charges related to the Media Networks segment in the three months ended June 30, 2023 of $28.0 million. The Company has incurred impairment charges from the inception of the plan through June 30, 2023 amounting to $407.3 million. Under the current restructuring plan, the Company estimates it will incur additional charges ranging from approximately $5 million to $30 million related to certain contractual content commitments or programming content impairment charges, among other items, related to territories exited or to be exited. The net future cash outlay is estimated to range from approximately $60 million to $90 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content previously written down. As the Company continues to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments), including further strategic review of content performance and its strategy on a territory-by-territory basis, the Company may decide to expand its restructuring plan and exit additional territories or remove certain content off its platform in the future. In July 2023, in connection with a modification to shorten a long-term distribution contract, the Company decided to shut down the LIONSGATE+ service in Latin America. While the modified contract covers the cost of the content during the shut down period, there may be additional charges for remaining contractual commitments when the service is completely shut down in Latin America, which is expected toward the end of calendar 2023. The Company may incur additional content impairment and other restructuring charges beyond the estimates above. (2) Severance costs were primarily related to restructuring activities and other cost-saving initiatives. (3) Transaction and other costs in the three months ended June 30, 2023 and 2022 reflect transaction, integration and legal costs associated with certain strategic transactions, and restructuring activities and also include costs and benefits associated with certain legal matters. In the three months ended June 30, 2023, transaction and other costs also includes a benefit of $3.8 million associated with an arrangement to migrate subscribers in some of the exited territories to a third-party in connection with the LIONSGATE+ international restructuring. Interest Expense. Interest expense of $62.0 million in the three months ended June 30, 2023 increased $15.9 million from the three months ended June 30, 2022 due to higher average interest rates and balances on the revolving credit facility, and higher average interest rates on the term loans. The following table sets forth the components of interest expense for the three months ended June 30, 2023 and 2022: 54 Three Months Ended June 30, 2023 2022 (Amounts in millions) Interest Expense Cash Based: Revolving credit facility $ 9.5 $ 2.8 Term loans 20.4 9.3 Senior Notes 10.2 13.8 Other (1) 15.1 13.0 55.2 38.9 Amortization of debt issuance costs and other non-cash interest (2) 6.8 7.2 Total interest expense $ 62.0 $ 46.1 ______________________ (1) Amounts include payments and receipts associated with the Company's interest rate swaps (see Note 15 to our unaudited condensed consolidated financial statements) and interest payments associated with certain film related obligations (Production Tax Credit Facility, IP Credit Facility, Backlog Facility and other, see Note 5 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 primarily 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 15 to our unaudited condensed consolidated financial statements). Interest and Other Income. Interest and other income of $1.9 million for the three months ended June 30, 2023 compared to interest and other income of $1.3 million for the three months ended June 30, 2022. Other Expense. Other expense of $5.7 million for the three months ended June 30, 2023 compared to other expense of $5.0 million for the three months ended June 30, 2022, and represented the loss recorded related to our monetization of accounts receivable programs (see Note 16 to our unaudited condensed consolidated financial statements). Gain (Loss) on Extinguishment of Debt. Gain on extinguishment of debt of $21.2 million for the three months ended June 30, 2023 represented a gain associated with the repurchase of $85.0 million principal amount of 5.500% Senior Notes at a discount. In the three months ended June 30, 2022, the loss on extinguishment of debt of $1.3 million 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. See Note 4 to our unaudited condensed consolidated financial statements. Gain on Investments. There was no gain on investments for the three months ended June 30, 2023, as compared to a gain on investments of $1.8 million for the three months ended June 30, 2022 related to equity securities sold. Equity Interests Income (Loss). Equity interests loss of $0.3 million in the three months ended June 30, 2023 compared to equity interests income of $0.9 million in the three months ended June 30, 2022. Income Tax Provision. We had an income tax provision of $9.8 million in the three months ended June 30, 2023, compared to an income tax provision of $6.0 million in the three months ended June 30, 2022. 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, 2023 and 2022 was also impacted by an interest accrual on uncertain tax benefits, and benefited from the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations. Net Loss Attributable to Lions Gate Entertainment Corp. Shareholders. Net loss attributable to our shareholders for the three months ended June 30, 2023 was $70.7 million, or basic and diluted net loss per common share of $0.31 on 230.2 million weighted average common shares outstanding. This compares to net loss attributable to our shareholders for the three months 55 ended June 30, 2022 of $119.0 million, or basic and diluted net loss per common share of $0.53 on 225.6 million weighted average common shares outstanding. Segment Results of Operations and Non-GAAP Measures The Company's primary measure of segment performance is segment profit. Segment profit is defined as segment revenues, less segment direct operating and segment distribution and marketing expense, less segment general and administration expenses. Total segment profit represents the sum of segment profit for our individual segments, net of eliminations for intersegment transactions. Segment profit and total segment profit excludes, when applicable, corporate general and administrative expense, restructuring and other costs, share-based compensation, certain programming and content charges as a result of changes in management and/or programming and content strategy, certain charges related to the COVID-19 global pandemic, charges resulting from Russia's invasion of Ukraine, and purchase accounting and related adjustments. Segment profit is a GAAP financial measure and is disclosed in Note 13 to our unaudited condensed consolidated financial statements. We also present below our total segment profit for all of our segments and the sum of our Motion Picture and Television Production segment profit as our "Studio Business" segment profit. Total segment profit and Studio Business segment profit, when presented outside of the segment information and reconciliations included in Note 16 to our unaudited condensed consolidated financial statements, is considered a non-GAAP financial measure, and should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with United States GAAP. We use this non-GAAP measure, among other measures, to evaluate the aggregate operating performance of our business. The Company believes the presentation of total segment profit and Studio Business segment profit is relevant and useful for investors because it allows investors to view total segment performance in a manner similar to the primary method used by the Company's management and enables them to understand the fundamental performance of the Company's businesses before non-operating items. Total segment profit and Studio Business segment profit is considered an important measure of the Company’s performance because it reflects the aggregate profit contribution from the Company's segments, both in total and for the Studio Business and represents a measure, consistent with our segment profit, that eliminates amounts that, in management’s opinion, do not necessarily reflect the fundamental performance of the Company’s businesses, are infrequent in occurrence, and in some cases are non-cash expenses. Not all companies calculate segment profit or total segment profit in the same manner, and segment profit and total segment profit as defined by the Company may not be comparable to similarly titled measures presented by other companies due to differences in the methods of calculation and excluded items. The following table reconciles the GAAP measure, operating loss, to the non-GAAP measure, total segment profit, for the three months ended June 30, 2023 and 2022. In addition, each of segment direct operating expense, distribution and marketing expense and general and administrative expense is reconciled to the respective line items presented in the GAAP-based statement of operations in the preceding section of the Management's Discussion and Analysis of Financial Condition and Results of Operations which discusses consolidated results of operations. Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Operating loss $ (16.8) $ (68.2) $ 51.4 (75.4) % Corporate general and administrative expenses 30.4 23.0 7.4 32.2 % Adjusted depreciation and amortization (1) 10.0 10.1 (0.1) (1.0) % Restructuring and other 32.0 8.0 24.0 nm COVID-19 related charges (benefit) (2) 0.2 (1.0) 1.2 (120.0) % Adjusted share-based compensation expense (3) 15.9 7.8 8.1 103.8 % Purchase accounting and related adjustments (4) 44.4 48.3 (3.9) (8.1) % Total segment profit $ 116.1 $ 28.0 $ 88.1 nm _______________________ nm - Percentage not meaningful. (1) Adjusted depreciation and amortization represents depreciation and amortization as presented on our consolidated statements of operations less the depreciation and amortization related to the non-cash fair value adjustments to property and equipment and intangible assets acquired in recent acquisitions which are included in the purchase accounting and related adjustments line item above, as shown in the table below: 56 Three Months Ended June 30, 2023 2022 (Amounts in millions) Depreciation and amortization $ 44.4 $ 42.4 Less: Amount included in purchase accounting and related adjustments (34.4) (32.3) Adjusted depreciation and amortization $ 10.0 $ 10.1 (2) COVID-19 related charges (benefit) represent the incremental costs included in direct operating expense and distribution and marketing expense resulting from circumstances associated with the COVID-19 global pandemic, net of insurance recoveries. (3) The following table reconciles total share-based compensation expense to adjusted share-based compensation expense: Three Months Ended June 30, 2023 2022 (Amounts in millions) Total share-based compensation expense $ 16.4 $ 8.4 Less: Amount included in restructuring and other (i) (0.5) (0.6) Adjusted share-based compensation $ 15.9 $ 7.8 (i) Represents share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements. (4) Purchase accounting and related adjustments primarily represent the amortization of non-cash fair value adjustments to certain assets acquired in recent acquisitions. The following sets forth the amounts included in each line item in the financial statements: Three Months Ended June 30, 2023 2022 (Amounts in millions) Purchase accounting and related adjustments: General and administrative expense (i) $ 10.0 $ 16.0 Depreciation and amortization 34.4 32.3 $ 44.4 $ 48.3 (i) These adjustments include the non-cash charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the non-cash charge for the amortization of the recoupable portion of the purchase price and the expense associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense, as presented in the table below. The noncontrolling equity interest in the distributable earnings of 3 Arts Entertainment are reflected as an expense rather than noncontrolling interest in the consolidated statement of operations due to the relationship to continued employment. Three Months Ended June 30, 2023 2022 (Amounts in millions) Amortization of recoupable portion of the purchase price $ 1.3 $ 1.9 Noncontrolling interest discount amortization — 4.9 Noncontrolling equity interest in distributable earnings 8.7 9.2 $ 10.0 $ 16.0 57 We refer to our Motion Picture and Television Production segments collectively as our Studio Business. The table below sets forth the revenues and segment profit of our collective Studio Business and Media Networks segment. Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Revenue Studio Business Motion Picture $ 406.5 $ 278.8 $ 127.7 45.8 % Television Production 218.5 432.3 (213.8) (49.5) % Total Studio Business $ 625.0 $ 711.1 $ (86.1) (12.1) % Media Networks 381.1 381.2 (0.1) — % Intersegment eliminations (97.5) (198.4) 100.9 (50.9) % $ 908.6 $ 893.9 $ 14.7 1.6 % Segment Profit (Loss) Studio Business Motion Picture $ 69.2 $ 50.5 $ 18.7 37.0 % Television Production 22.9 19.6 3.3 16.8 % Total Studio Business $ 92.1 $ 70.1 $ 22.0 31.4 % Media Networks 31.9 (37.0) 68.9 (186.2) % Intersegment eliminations (7.9) (5.1) (2.8) nm $ 116.1 $ 28.0 $ 88.1 314.6 % _______________________ nm - Percentage not meaningful. See the following discussion for further detail of our individual segments. The segment results of operations presented below do not include the elimination of intersegment transactions which are eliminated when presenting consolidated results. Motion Picture The table below sets forth Motion Picture gross contribution and segment profit for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Motion Picture Segment: Revenue $ 406.5 $ 278.8 $ 127.7 45.8 % Expenses: Direct operating expense 186.7 150.2 36.5 24.3 % Distribution & marketing expense 121.2 55.5 65.7 118.4 % Gross contribution 98.6 73.1 25.5 34.9 % General and administrative expenses 29.4 22.6 6.8 30.1 % Segment profit $ 69.2 $ 50.5 $ 18.7 37.0 % U.S. theatrical P&A and Premium VOD expense included in distribution and marketing expense $ 84.4 $ 26.3 $ 58.1 220.9 % Direct operating expense as a percentage of revenue 45.9 % 53.9 % Gross contribution as a percentage of revenue 24.3 % 26.2 % 58 Revenue. The table below sets forth Motion Picture revenue by media and product category for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, 2023 2022 Total Increase (Decrease) Lionsgate Original Releases (2) Other Film (3) Total Lionsgate Original Releases (2) Other Film (3) Total (Amounts in millions) Motion Picture Revenue Theatrical $ 65.2 $ 0.7 $ 65.9 $ 10.3 $ 0.6 $ 10.9 $ 55.0 Home Entertainment Digital Media 131.3 42.8 174.1 85.8 46.4 132.2 41.9 Packaged Media 20.8 5.1 25.9 13.6 8.5 22.1 3.8 Total Home Entertainment 152.1 47.9 200.0 99.4 54.9 154.3 45.7 Television 42.3 6.2 48.5 34.9 10.4 45.3 3.2 International 74.1 6.9 81.0 55.1 10.6 65.7 15.3 Other 9.7 1.4 11.1 1.5 1.1 2.6 8.5 $ 343.4 $ 63.1 $ 406.5 $ 201.2 $ 77.6 $ 278.8 $ 127.7 ____________________ (1) 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.). (2) 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 increased $55.0 million in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due to an increase of $54.9 million from Lionsgate Original Releases driven by the performance of John Wick: Chapter 4 in the current quarter (which was released on March 24, 2023), and to a lesser extent, a greater number of theatrical slate releases generating revenue in the quarter. Home entertainment revenue increased $45.7 million, or 29.6%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, due to higher digital media revenue of $41.9 million driven by Lionsgate Original Releases due to higher revenue from our theatrical slate titles, and in particular, the revenues generated from John Wick: Chapter 4 in the current quarter. Television revenue was comparable in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. International revenue increased $15.3 million, or 23.3%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022 due to an increase from Lionsgate Original Releases of $19.0 million due to higher revenue generated from our fiscal 2023 theatrical slate titles in the current quarter as compared to the fiscal 2022 theatrical slate titles in the prior year's quarter, partially offset by decreased revenue from direct-to-platform releases. 59 Direct Operating Expense. The increase in direct operating expenses is due to higher motion picture revenue in the current quarter. The decrease 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 the lower amortization rate of the fiscal 2023 theatrical slate releases generating revenue in the current quarter and lower expense related to multi-platform and 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). In addition, the current quarter included a decrease in development write-offs of $8.9 million on Lionsgate Original Releases, and lower expense of $6.4 million related to foreign exchange gains in the current quarter which compared to foreign exchange losses in the prior year's quarter. Investment in film write-downs included in Motion Picture segment direct operating expense in the three months ended June 30, 2023 were $0.2 million, as compared to $0.5 million in the three months ended June 30, 2022. Distribution and Marketing Expense. The increase in distribution and marketing expense in the three months ended June 30, 2023 is due to higher theatrical P&A and Premium VOD expense due to higher expense associated with the theatrical slate releases in the current quarter, and higher expense for films to be released in subsequent quarters. In the three months ended June 30, 2023 approximately $20.9 million of P&A and Premium VOD expense was incurred in advance for films to be released in subsequent quarters, compared to approximately $5.3 million in the three months ended June 30, 2022 in the Motion Picture segment. Gross Contribution. Gross contribution of the Motion Picture segment for the three months ended June 30, 2023 increased as compared to the three months ended June 30, 2022 due to higher Motion Picture revenue, and lower direct operating expense as a percentage of Motion Picture revenue, partially offset by higher distribution and marketing expense. General and Administrative Expense. General and administrative expenses of the Motion Picture segment in the three months ended June 30, 2023 increased $6.8 million, or 30.1%, primarily due to an increase 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, 2023 and 2022: Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Television Production Segment: Revenue $ 218.5 $ 432.3 $ (213.8) (49.5) % Expenses: Direct operating expense 174.9 393.2 (218.3) (55.5) % Distribution & marketing expense 8.0 8.4 (0.4) (4.8) % Gross contribution 35.6 30.7 4.9 16.0 % General and administrative expenses 12.7 11.1 1.6 14.4 % Segment profit $ 22.9 $ 19.6 $ 3.3 16.8 % Direct operating expense as a percentage of revenue 80.0 % 91.0 % Gross contribution as a percentage of revenue 16.3 % 7.1 % 60 Revenue. The table below sets forth Television Production revenue and changes in revenue by media for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, Increase (Decrease) 2023 2022 Amount Percent Television Production (Amounts in millions) Television $ 150.0 $ 301.3 $ (151.3) (50.2) % International 31.9 79.3 (47.4) (59.8) % Home Entertainment Digital 11.8 31.3 (19.5) (62.3) % Packaged Media 0.4 0.9 (0.5) (55.6) % Total Home Entertainment 12.2 32.2 (20.0) (62.1) % Other 24.4 19.5 4.9 25.1 % $ 218.5 $ 432.3 $ (213.8) (49.5) % The primary component of Television Production revenue is domestic television revenue. Domestic television revenue decreased in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, due to significant third-party revenue in the prior year's quarter from The First Lady Season 1, and a decrease of $68.4 million from intersegment revenues from the licensing of Starz original series to Starz Networks (revenue in the prior year's quarter from Power Book III: Raising Kanan Season 3 , The Serpent Queen Season 1 , P-Valley Season 2 , Party Down Season 3 and Power Book II: Ghost Season 3 compared to revenue in the current quarter from Power Book III: Raising Kanan Season 3 and Power Book II: Ghost Season 4 ). International revenue in the three months ended June 30, 2023 decreased $47.4 million, or 59.8% as compared to the three months ended June 30, 2022 due to a decrease of $31.5 million from intersegment revenues from the licensing of Starz original series to LIONSGATE+, and revenue in the prior year's quarter from The First Lady Season 1 and Home Economics Season 2. Home entertainment revenue in the three months ended June 30, 2023 decreased $20.0 million, or 62.1% as compared to the three months ended June 30, 2022 due to a decrease of $13.6 million from digital media intersegment revenues from the licensing of Starz original series to Starz Networks and digital media revenue in the prior year's quarter for The First Lady Season 1. Other revenue in the three months ended June 30, 2023 increased $4.9 million, or 25.1% from the three months ended June 30, 2022, and primarily includes revenue of 3 Arts Entertainment which is generated from commissions and executive producer fees earned related to talent management. Direct Operating Expense. Direct operating expense of the Television Production segment in the three months ended June 30, 2023 decreased $218.3 million, or 55.5% due to the decrease in Television Production revenues. Direct operating expenses as a percentage of television production revenue decreased as compared to the prior year's quarter, primarily due to the mix of titles generating revenue in the current quarter as compared to the prior year's quarter, and in particular, the prior year's quarter included a greater number of deliveries of newer shows in which direct operating expense is typically higher as a percentage of revenue. In addition, the current quarter included lower write-downs to fair value of investment in film and television programs (none in the current quarter as compared to $1.2 million in the prior year's quarter). Gross Contribution. Gross contribution of the Television Production segment for the three months ended June 30, 2023 increased as compared to the three months ended June 30, 2022, as the lower television production revenue was more than offset by 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 $1.6 million, or 14.4% primarily due to an increase in incentive based compensation. Media Networks The table below sets forth Media Networks gross contribution and segment profit for the three months ended June 30, 2023 and 2022: 61 Three Months Ended June 30, Change 2023 2022 Amount Percent (Amounts in millions) Media Networks Segment: Revenue $ 381.1 $ 381.2 $ (0.1) — % Expenses: Direct operating expense 206.4 247.2 (40.8) (16.5) % Distribution & marketing expense 117.0 147.5 (30.5) (20.7) % Gross contribution 57.7 (13.5) 71.2 nm General and administrative expenses 25.8 23.5 2.3 9.8 % Segment profit $ 31.9 $ (37.0) $ 68.9 (186.2) % Direct operating expense as a percentage of revenue 54.2 % 64.8 % Gross contribution as a percentage of revenue 15.1 % (3.5) % The following table sets forth the Media Networks segment profit by product line: Three Months Ended Three Months Ended June 30, 2023 June 30, 2022 Starz Networks LIONSGATE+ Total Media Networks Starz Networks LIONSGATE+ Total Media Networks (Amounts in millions) Media Networks Segment: Revenue $ 337.4 $ 43.7 $ 381.1 $ 349.6 $ 31.6 $ 381.2 Expenses: Direct operating expense 174.8 31.6 206.4 200.9 46.3 247.2 Distribution & marketing expense 103.7 13.3 117.0 119.9 27.6 147.5 Gross contribution 58.9 (1.2) 57.7 28.8 (42.3) (13.5) General and administrative expenses 21.2 4.6 25.8 16.6 6.9 23.5 Segment profit $ 37.7 $ (5.8) $ 31.9 $ 12.2 $ (49.2) $ (37.0) 62 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, as of the dates presented, subscriptions to our Media Networks and STARZPLAY Arabia services. June 30, June 30, 2023 2022 (Amounts in millions) Starz Domestic Linear Subscribers 7.7 9.2 OTT Subscribers 11.8 12.2 Total 19.5 21.4 LIONSGATE+ Linear Subscribers 1.8 1.8 OTT Subscribers (1) 5.3 12.2 Total 7.1 14.0 Total Starz Linear Subscribers 9.5 11.0 OTT Subscribers (1) 17.1 24.4 Total Starz 26.6 35.4 STARZPLAY Arabia (2) 2.8 1.9 Total Domestic and International Subscribers (2) 29.4 37.3 Subscribers by Platform: Linear Subscribers 9.5 11.0 OTT Subscribers (1)(3) 19.9 26.3 Total Global Subscribers 29.4 37.3 ___________________ (1) June 30, 2022 includes OTT subscribers totaling 8.0 million for the international territories exited. (2) Represents subscribers of STARZPLAY Arabia, a non-consolidated equity method investee. (3) OTT subscribers includes subscribers of STARZPLAY Arabia, as presented above. Revenue. Media Networks revenue was comparable and reflected increased revenue at LIONSGATE+ of $12.1 million, mostly offset by a decrease of $12.2 million at Starz Networks. The increase in revenue at LIONSGATE+ was due to revenue from the distribution of Starz Originals and licensed content to third-party distributors outside of the Starz Platforms in ancillary markets of approximately $14.0 million, an increase in revenue from the continuing LIONSGATE+ territories of approximately $7.5 million, all of which was offset by a decrease in revenue from the LIONSGATE+ exited territories of approximately $9.4 million. Starz Networks' revenue decreased $12.2 million primarily as a result of declines in revenue of $21.1 million from traditional linear services, which were offset by higher OTT revenue of $7.8 million resulting from increased subscriptions. 63 During the three months ended June 30, 2023 and 2022, the following original series premiered on STARZ: Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Title Premiere Date Title Premiere Date First Quarter: First Quarter: Blindspotting Season 2 April 14, 2023 Gaslit April 24, 2022 Run the World Season 2 May 26, 2023 P-Valley Season 2 June 3, 2022 Outlander Season 7A June 16, 2023 Becoming Elizabeth Season 1 June 12, 2022 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 LIONSGATE+ international service, in its remaining territories, has and will continue to result in an increase in expenses as the service continues to expand. The decrease in Media Networks direct operating expenses is due to decreases at Starz Networks of $26.1 million and LIONSGATE+ of $14.7 million in the three months ended June 30, 2023. The decrease in Starz Networks direct operating expense was primarily due to lower programming cost amortization related to our Starz Originals of $6.4 million primarily related to lower cost original series premieres, lower programming cost amortization of $8.1 million related to library content, and lower programming amortization of $6.0 million related to theatrical releases under our programming output agreements. Direct operating expenses at LIONSGATE+ decreased as a result of lower programming cost amortization of approximately $17.3 million in connection with the exited territories and lower expense of approximately $6.9 million related to foreign exchange gains in the current quarter which compared to foreign exchange losses in the prior year's quarter, partially offset by higher amortization of investment in films and television programs of $10.5 million associated with the distribution of Starz Originals and licensed content to third-party distributors outside of the Starz Platforms in ancillary markets. The decrease in Media Networks distribution and marketing expense is due to a decrease of $16.2 million at Starz Networks primarily due to lower spend for our Starz Originals' premieres in the current period, and a decrease of $14.3 million at LIONSGATE+ primarily due to a decrease in direct response advertising in connection with the exited territories. Gross Contribution. The increase in gross contribution compared to the three months ended June 30, 2022 was due to an increase in gross contribution at Starz Networks of $30.1 million, and lower negative gross contribution at LIONSGATE+ of $41.1 million, driven by lower direct operating expense and distribution and marketing expense, and higher LIONSGATE+ revenue, partially offset by lower Starz Networks revenue, as described above. The negative gross contribution related to the exited territories was approximately $17.6 million for the three months ended June 30, 2022. General and Administrative Expense. General and administrative expenses in the three months ended June 30, 2023 increased from the prior year's quarter, due to increases of $4.6 million at Starz Networks, partially offset by a decrease of $2.3 million at LIONSGATE+. 64 LIQUIDITY AND CAPITAL RESOURCES Sources of Cash Our liquidity and capital requirements in the three months ended June 30, 2023 were provided principally through cash generated from operations, corporate debt, our film related obligations (as further discussed below), and the monetization of trade accounts receivable. As of June 30, 2023, we had cash and cash equivalents of $322.7 million. Corporate Debt Our corporate debt at June 30, 2023, excluding film related 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, 2023) 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 $422.6 million outstanding at June 30, 2023. The outstanding amounts under the Revolving Credit Facility and Term Loan A may become due on December 23, 2024 (i.e. 91 days prior to March 24, 2025) prior to its maturity on April 6, 2026 in the event that the aggregate principal amount of outstanding Term Loan B in excess of $250 million has not been repaid, refinanced or extended to have a maturity date on or after July 6, 2026. The Company expects to refinance and extend the maturity date of the Term Loan B prior to December 23, 2024 such that the maturity of the revolving credit facility and Term Loan A are not accelerated. ◦ 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 $828.5 million outstanding at June 30, 2023. • Senior Notes: We have $715.0 million outstanding of 5.500% senior notes due 2029 (the "5.500% Senior Notes") at June 30, 2023. See Note 4 to our unaudited condensed consolidated financial statements for a discussion of our corporate debt. Film Related Obligations We utilize our film related obligations to fund our film and television productions or licenses. Our film related obligations at June 30, 2023 include the following: • Production Loans: Production loans represent individual and multi-title 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 or release dates, with the exception of certain loans containing repayment dates on a longer term basis. At June 30, 2023, there was $1,374.4 million outstanding of production loans. • Programming Notes: Programming notes represent individual loans for the licensing of film and television programs that we license, related to our Media Networks business. The Company's programming notes have contractual repayment dates in August 2023. At June 30, 2023, there was $62.2 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 solely of certain of the Company’s tax credit receivables (the "Production Tax Credit Facility"). Cash collections from the underlying collateral (tax credit receivables) are used to repay the Production Tax Credit Facility. At June 30, 2023, there was $235.0 million outstanding under the Production Tax Credit Facility. 65 • IP Credit Facility: In July 2021, as amended in September 2022, certain of our subsidiaries entered into a senior secured amortizing term credit facility due July 2027 (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 $161.9 million, subject to the amount of collateral available, which is based on the valuation of cash flows from the libraries. At June 30, 2023, there was $133.1 million outstanding under the IP Credit Facility. • Backlog Facility and Other: ◦ Backlog Facility. In March 2022, as amended in August 2022, certain subsidiaries of the Company entered into a committed secured revolving credit facility (the "Backlog Facility") based on collateral consisting solely 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 Facility is $175.0 million, subject to the amount of eligible collateral contributed to the facility. The Backlog 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 two years and 90 days after the revolving period ends, currently August 14, 2027. As of June 30, 2023, there was $175.0 million outstanding under the Backlog Facility. ◦ Other. In September 2022, the Company borrowed $43.4 million under a loan agreement which is secured by contracted receivables which are not yet recognized as revenue under certain licensing agreements, which matures on March 28, 2026 (the "September 2022 Distribution Loan"). In December 2022, the Company borrowed $16.2 million under a loan agreement which matures on November 1, 2025 (the "December 2022 Distribution Loan"). In June 2023, the Company borrowed an aggregate of $158.1 million under a loan agreement (the "June 2023 Distribution Loan", and together with the September 2022 Distribution Loan and December 2022 Distribution Loan, the "Distribution Loans"), of which $110.0 million matures on June 30, 2026, and $48.1 million matures on August 6, 2025. Outstanding loan balances under the Distribution Loans 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. As of June 30, 2023, $206.1 million remains outstanding under the Distribution Loans. See Note 5 to our unaudited condensed consolidated financial statements for a discussion of our film related 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 16 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 $347.2 million as of June 30, 2023 related to its acquisition of a controlling interest, consisting of a limited liability company interest, in each of 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 7 to our unaudited condensed consolidated financial statements). 66 • 3 Arts Entertainment. Pursuant to an amendment dated July 31, 2023, the put rights associated with the 3 Arts Entertainment noncontrolling interest were extended, such that the noncontrolling interest holders have a right to put the noncontrolling interest of 3 Arts Entertainment, at fair value, exercisable beginning August 15, 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. The Company has a remaining redeemable noncontrolling interest representing 12.5% of Pilgrim Media Group. The noncontrolling interest holder has a right to put and the Company has a right to call the noncontrolling interest at fair value, subject to a cap, exercisable for thirty (30) days beginning November 12, 2024, as amended. 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 LIONSGATE+ international service, in its remaining territories, has and will require capital investment as the service continues to expand. Under the current Media Networks business restructuring plan previously discussed under "Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition - Overview", we estimate we will incur additional charges ranging from approximately $5 million to $30 million related to certain contractual content commitments or programming content impairment charges, among other items related to territories exited or to be exited. The net future cash outlay is estimated to range from approximately $60 million to $90 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content previously written down. As we continue to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments), including further strategic review of content performance and its strategy on a territory-by-territory basis, we may decide to expand our restructuring plan and exit additional territories or remove certain content off its platform in the future. In July 2023, in connection with a modification to shorten a long-term distribution contract, we decided to shut down the LIONSGATE+ service in Latin America. While the modified contract covers the cost of the content during the shut down period, there may be additional charges for remaining contractual commitments when the service is completely shut down in Latin America, which is expected toward the end of calendar 2023. We may incur additional content impairment and other restructuring charges beyond the estimates above. In the short-term, we currently expect that our cash requirements for productions will be comparable and that our cash requirements for marketing spend will increase in fiscal 2024 as compared to 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 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 12 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 in our remaining international territories. 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, the monetization of trade accounts receivable, our Production Tax Credit Facility, our IP Credit Facility, our Backlog Facility, and other obligations. In addition, we continue to invest in our LIONSGATE+ international service, in its remaining territories, 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 67 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 inflation and rising interest rates and bank failures 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. 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 obligations. The following table sets forth our significant contractual and other obligations as of June 30, 2023 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, 2023 (on-balance sheet arrangements) Corporate debt (1) : Revolving credit facility $ — $ — $ — Term Loan A 422.6 31.1 391.5 Term Loan B 828.5 12.5 816.0 5.500% Senior Notes 715.0 — 715.0 Film related obligations (2) 2,185.8 1,314.0 871.8 Content related payables (3) 255.6 203.1 52.5 Operating lease obligations 193.9 43.4 150.5 4,601.4 1,604.1 2,997.3 Contractual commitments by expected repayment date (off-balance sheet arrangements) Film related obligations commitments (4) 813.6 479.6 334.0 Interest payments (5) 509.6 189.2 320.4 Other contractual obligations 503.8 142.4 361.4 1,827.0 811.2 1,015.8 Total future repayment of debt and other commitments under contractual obligations (6) $ 6,428.4 $ 2,415.3 $ 4,013.1 ___________________ (1) See Note 4 to our unaudited condensed consolidated financial statements for further information on our corporate debt. (2) See Note 5 to our unaudited condensed consolidated financial statements for further information on our film related obligations (3) Content related payables include minimum guarantees and accrued licensed program rights obligations included on our consolidated balance sheet, which represent amounts payable for film or television rights that we have acquired or licensed. (4) 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. (5) Includes cash interest payments on our corporate debt and film related obligations, based on the applicable SOFR and LIBOR interest rates at June 30, 2023, net of payments and receipts from the Company's interest rate swaps, and excluding the interest payments on the revolving credit facility as future amounts are not fixed or determinable due to fluctuating balances and interest rates. (6) Not included in the amounts above are $347.2 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 7 to our unaudited condensed consolidated financial statements. We 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. 68 For additional details of contingencies, see Note 14 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, 2023, 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, 2023, 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, 2023, 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, 2023, 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 $71.5 million and accumulated deficit of $2,516.3 million were deemed free of restrictions from paying dividends at June 30, 2023. Discussion of Operating, Investing, Financing Cash Flows Cash, cash equivalents and restricted cash increased by $79.9 million for the three months ended June 30, 2023 and increased by $24.8 million for the three months ended June 30, 2022, before foreign exchange effects on cash. Components of these changes are discussed below in more detail. Operating Activities. Cash flows provided by (used in) operating activities for the three months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, 2023 2022 Net Change (Amounts in millions) Net Cash Flows Provided By (Used In) Operating Activities $ 29.2 $ (0.2) $ 29.4 Cash flows provided by operating activities for the three months ended June 30, 2023 were $29.2 million compared to cash flows used in operating activities of $0.2 million for the three months ended June 30, 2022. The increase in cash provided by operating activities is due to lower cash used from changes in operating assets and liabilities of $83.5 million, 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 lower cash used for investment in film and television programs and program rights, greater decreases in accounts receivable, net, and lower decreases in accounts payable and accrued liabilities, partially offset by proceeds in the prior year's quarter from the termination of interest rate swaps (see further discussion below for interest rate swap transactions in the prior year's quarter). In addition, cash flows used in operating activities for the three months ended June 30, 2023 included a net use of cash of approximately $30.9 million from the monetization of accounts receivables programs, as compared to a net benefit of approximately $13.9 million for the three months ended June 30, 2022 (see Note 16 to our unaudited condensed consolidated financial statements). 69 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 presented in the "proceeds from the termination of interest rate swaps" line item on the unaudited condensed consolidated statement of cash flows), 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 15 to our unaudited condensed consolidated financial statements. Investing Activities. Cash flows used in investing activities for the three months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, 2023 2022 (Amounts in millions) Proceeds from the sale of equity method and other investments $ — $ 2.3 Investment in equity method investees and other — (7.5) Increase in loans receivable (0.9) — Capital expenditures (8.9) (9.6) Net Cash Flows Used In Investing Activities $ (9.8) $ (14.8) Cash flows used in investing activities of $9.8 million for the three months ended June 30, 2023 compared to cash flows used in investing activities of $14.8 million for the three months ended June 30, 2022, primarily due to lower cash used for investment in equity method investees and other. Financing Activities. Cash flows provided by financing activities for the three months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, 2023 2022 (Amounts in millions) Debt - borrowings, net of debt issuance and redemption costs $ 490.0 $ 518.5 Debt - repurchases and repayments (560.1) (715.2) Net repayments and repurchases of debt (70.1) (196.7) Film related obligations - borrowings 569.9 522.9 Film related obligations - repayments (423.7) (152.6) Net proceeds from film related obligations 146.2 370.3 Other financing activities (15.6) (133.8) Net Cash Flows Provided By Financing Activities $ 60.5 $ 39.8 Cash flows provided by financing activities of $60.5 million for the three months ended June 30, 2023 compared to cash flows provided by financing activities of $39.8 million for the three months ended June 30, 2022. Cash flows provided by financing activities for the three months ended June 30, 2023 primarily reflects net film related obligations borrowings of $146.2 million due to net borrowings under production loans and the Production Tax Credit Facility of $3.6 million and net borrowings under the Backlog Facility, IP Credit Facility and Distribution Loans of $142.6 million, offset by net debt repayments and repurchases of $70.1 million. Net debt repayments and repurchases of $70.1 million in the three months ended June 30, 2023 included the below transaction, along with required repayments on our term loans: • During the three months ended June 30, 2023, we repurchased $85.0 million principal amount of the 5.500% Senior Notes for $61.4 million. 70 Cash flows provided by financing activities of $39.8 million for the three months ended June 30, 2022 primarily reflects net film related and other obligations borrowings of $370.3 million, offset by net debt repayments of $196.7 million due to the April 2022 voluntary 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 a financing component on a portion of our interest rate swaps (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 15 to our unaudited condensed consolidated financial statements). Other financing activities also includes tax withholding required on equity awards of $1.1 million. 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 8 to our unaudited condensed consolidated financial statements, remaining performance obligations were $1.9 billion at June 30, 2023 (March 31, 2023 - $1.9 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, 2023 (March 31, 2023 - $1.5 billion).