Cineplex Entertainment Limited Partnership
Annual Report 2021

Plain-text annual report

2021 Table of Contents Chair of the Board of Directors' Letter to Shareholders .....................................................................................4 Chief Executive Officer's Letter to Shareholders ............................................................................................... 6 Management’s Discussion and Analysis.......................................................................................................... 9 Overview of Cineplex.................................................................................................................................. 11 Business Strategy......................................................................................................................................... 21 Cineplex’s Businesses.................................................................................................................................. 23 Overview of Operations............................................................................................................................... 29 Results of Operations................................................................................................................................... 33 Balance Sheets............................................................................................................................................. 53 Liquidity and Capital Resources.................................................................................................................. 55 Adjusted Free Cash Flow and Dividends..................................................................................................... 63 Share Activity .............................................................................................................................................. 64 Seasonality and Quarterly Results ............................................................................................................... 67 Related Party Transactions .......................................................................................................................... 69 Significant Accounting Judgments and Estimation Uncertainties ............................................................... 69 Accounting Policies ..................................................................................................................................... 71 Risks and Uncertainties ............................................................................................................................... 71 Controls and Procedures .............................................................................................................................. 82 Outlook ........................................................................................................................................................ 83 Non-GAAP and Other Financial Measures.................................................................................................. 84 Financial Statements and Notes................................................................................................................ 91 Management’s Report to Shareholders ......................................................................................................... 91 Independent Auditor’s Report....................................................................................................................... 92 Consolidated Balance Sheets ........................................................................................................................ 98 Consolidated Statements of Operations...................................................................................................... 100 Consolidated Statements of Comprehensive Loss...................................................................................... 101 Consolidated Statements of Changes in Equity .......................................................................................... 102 Consolidated Statements of Cash Flows..................................................................................................... 103 Notes to Consolidated Financial Statements............................................................................................... 104 Investor Information .................................................................................................................................... 167 Cineplex Inc. Letter to Shareholders Letter from the Chair of the Board Dear fellow shareholders, It is my pleasure to write you today as the Chair of the Board of Directors of Cineplex Inc. I am honoured to be leading this great group of Directors and to be part of an organization which I strongly support. This year Cineplex will host a hybrid in-person and virtual Annual General Meeting (“AGM”). Our meeting will be on Wednesday, May 25, 2022. Registered shareholders and duly appointed proxyholders can participate in- person or via live webcast, which will include voting on the motions put forward and the ability to ask questions, all in real-time. During the past two challenging years, the Board remained guided by our corporate strategy and values, took decisive action to ensure the ongoing viability of the Corporation, and upheld our commitment to our employees, guests, shareholders, and the communities in which we operate. Navigating the Prolonged Pandemic and Return to Normalcy We continue to find ourselves in unprecedented times. As I look back on 2021, I take great pride in Cineplex’s achievements and successful management of the impact of yet another year of the pandemic. Challenges posed by new variants during the past year resulted in continued volatility and the prolonged provincial closures and operating restrictions of our entertainment venues. However, our team’s agility, resilience, and focus on cost management and liquidity have positioned us well to capitalize on the resurgence of our business as restrictions continue to ease and we begin to see a return to normalcy. Cineworld Litigation The past year also entailed gratifying developments in Cineplex’s litigation against Cineworld. The Ontario Superior Court of Justice held that Cineworld breached the Arrangement Agreement and awarded Cineplex approximately $1.24 billion in damages. We are extremely pleased with this outcome and while Cineworld has filed its Notice of Intent to Appeal the judgement, we remain confident in the Superior Court’s decision. We have filed a Notice of Cross-Appeal and will defend the Superior Court’s decision. We will continue pursuing compensation for what was a wrongful repudiation of the Arrangement Agreement between Cineplex and Cineworld. The Board recognizes the significance of this matter and will take the necessary steps to optimize the value of this litigation. Continued Good Governance and Corporate Citizenship As your Board, we are committed to promoting excellent corporate governance. Throughout this past year, the Board worked closely with senior management to ensure the financial health of the Corporation and to drive strategic initiatives geared towards value creation for shareholders. Over the last year, Cineplex and the Board remained committed to our employees and community partners. While we have a long history of corporate responsibility and sustainability, these past two years have demonstrated the importance of a renewed focus on the health and safety of our employees, guests, and communities. We are proud of the numerous initiatives we have taken in this regard, including an industry- leading health and safety protocol (“VenueSafe”). Furthermore, Cineplex’s commitment to its community partners was made even more evident this year by our unwavering support for local communities across the CINEPLEX INC. 2021 ANNUAL REPORT LETTER TO SHAREHOLDERS 4 Cineplex Inc. Letter to Shareholders country during the pandemic. Even with our network of theatres and entertainment venues closed for the first half of the year, contributions were made from across Cineplex’s businesses to assist communities in times of need. In addition, Cineplex has integrated sustainability initiatives across its ecosystem and is taking steps through three inter-connected environmental issues: waste, energy consumption, and eco-friendly materials. Commitment to Inclusion and Diversity As we continue to prioritize inclusion and diversity within the Corporation, I am proud to report that Cineplex was an early adopter of the Catalyst Accord and is a member of the international Catalyst-affiliated “30% Club”. Today, forty-four percent of our Board is comprised of females and 44% is comprised of underrepresented groups. As at year end, 30% of executive management and 28% of senior management are women. In addition to the Corporation’s long-standing commitment to inclusion, in 2020, Mr. Jacob signed the Black North Initiative CEO Pledge, which includes a commitment to hire a minimum of one Black leader to fill an executive or Board member role in Canada by 2025. Also, in recognition of National Indigenous Peoples Day on June 21, 2021, we donated $1 from every movie ticket sold, as well as purchases across our ecosystem to imagineNATIVE – the world’s largest presenter of Indigenous screen content. In addition to these initiatives, we provide venues and platforms to promote content and lend a voice to these and other underrepresented communities. Path Forward: The Future is Bright As we resume operations across our circuit of theatres and entertainment venues at full capacity, Cineplex is moving to the next phase of its recovery. With the pent-up consumer demand for out-of-home entertainment and the abundance of film product available, we have renewed confidence for a bright future ahead. On behalf of the entire Board, I extend our thanks and appreciation to the management team and to all employees for their hard work, passion, and dedication during what has been another challenging year for Cineplex. I look forward to connecting with you at our AGM, but should you wish to contact me directly, please email me at boardchair@cineplex.com. Sincerely yours, Phyllis Yaffe Chair of the Board, Cineplex Inc. boardchair@cineplex.com CINEPLEX INC. 2021 ANNUAL REPORT LETTER TO SHAREHOLDERS 5 Cineplex Inc. Letter to Shareholders Letter from the CEO Dear fellow shareholders, Throughout 2021, our team worked diligently to mitigate the negative effects of COVID-19, support the Corporation’s long-term stability, protect the health and safety of our employees and guests, and advance growth initiatives. Unfortunately, governmental operating restrictions arising from new variants including mandated closures, provincial capacity restrictions, and prohibitions on concessions sales impacted our annual results significantly. Despite these challenges, I am pleased to report that Cineplex and the exhibition industry continue to make significant progress in recovering from the effects of the pandemic. In the latter part of the year, the industry witnessed record-breaking results from films such as Shang-Chi and the Legends of the Ten Rings and Spider-Man: No Way Home, which generated over $1 billion of global box office revenues within two weeks of its release and is the third-highest grossing movie in history at the domestic box office. The high demand for out-of-home entertainment that we experienced during operating periods was encouraging, and Cineplex is well positioned to capitalize on this demand now that operating restrictions are being lifted and we return to normalcy. Positive Momentum Across All Businesses During Operational Periods While our theatres and entertainment venues were closed for the first half of 2021, we saw encouraging results across all business lines once we were able to reopen from mid-July to early December of 2021. During our periods of operation, box office revenues were progressively approaching pre-pandemic levels with October 2021 reaching 80% of the same month in 2019. We also saw strong momentum in our Media businesses and our Amusement and Leisure businesses in the second half of the year. With the onset of the COVID-19 Omicron variant, provincially mandated operating restrictions and closures were reinstated across Canada in December 2021. Further operating restrictions, including restrictions on concession sales were extended to additional regions, including our largest market, Ontario. The timing of the restrictions was extremely unfortunate as the last two weeks of December account for a material portion of our business, typically delivering around 30% of our fourth quarter box office revenues. This prevented us from realizing the full benefits of the highly anticipated release Spider-Man: No Way Home. However, we know from our box office results prior to the most recent closures, as well as box office results from our peers in the United States and across the globe that guests are excited to be back in theatres when given the opportunity. Despite the numerous challenges we faced, all our business segments generated positive adjusted EBITDAaL1 for the last two quarters of 2021. In Q4 2021 we delivered our strongest quarter in two years, reporting our first quarter without a net cash burn1 since the beginning of the pandemic, generating positive net cash from operating activities of $27.5 million compared to negative $61.0 million in Q4 2020. For the year ended 2021, total revenues increased 57% to $656.8 million compared to $418.3 million in 2020. During this period, attendance grew from 13.1 million to 20.1 million, box office revenues per patron1 (“BPP”) increased from $10.17 to $11.77, and while Q4 2021 concession revenues per patron1 (“CPP”) was significantly impacted by restrictions on concession sales, we still set an-all time annual record CPP1 of $7.93. We 1 Adjusted measures are non-GAAP measures. For additional information, see the “Non-GAAP and Other Financial Measures” section of the MD&A. CINEPLEX INC. 2021 ANNUAL REPORT LETTER TO SHAREHOLDERS 6 Cineplex Inc. Letter to Shareholders significantly improved our net loss during the year to $248.7 million from $629.0 million in 2020 and improved adjusted EBITDAaL2 to a loss of $84.3 million from $182.8 million in 2020. Through a combination of attendance growth, positive contribution from our non-theatrical businesses, and strong working capital management, we generated positive net cash from operating activities of $61.0 million in 2021 compared to negative $106.3 million in 2020. Proactive Efforts to Reinstate Financial Stability Throughout 2021, we took proactive steps to restore financial stability and prepared for potential challenges arising from new COVID variants. We also continued our focus on minimizing cash burn and managing costs across all business lines and added liquidity, which included government subsidies where possible. Key liquidity events for the year include receiving $62.6 million in income taxes recoverable to date, the head office sale-leaseback proceeds of $57 million received in the first quarter, as well as the issuance of $250 million in the form of Second Lien Secured Notes in Q1. Moreover, with the onset of Omicron in December 2021, we immediately and proactively worked with our supportive lenders and obtained the continued suspension of financial covenant testing until the end of the second quarter of 2022. This continued support speaks volumes about our lenders’ confidence in our business plan and our expected recovery. Overall, our team has taken significant measures to manage the financial uncertainties created by COVID-19 and we believe we have positioned the corporation well to withstand any further pressures in the near-term. Advanced Growth Initiatives We have always provided our guests with an exceptional experience, but now more than ever we are taking steps to drive attendance and moviegoing frequency. During the third quarter, we launched our entertainment subscription program, CineClub, which provides members with benefits in our theatres, location-based entertainment venues, and at the Cineplex Store. So far, CineClub has received a positive response from our guests despite the impacts of operating restrictions late in the year. Also, in Q3, we launched our new brand platform – Where Escape Begins – to welcome guests back to theatres and remind them of what they’ve been missing for far too long. In addition, during the fourth quarter, we announced the launch of Scene+. This enhanced rewards program brings together two of Canada’s favourite loyalty programs, SCENE and Scotia Rewards. Scene+ members will still enjoy the much-loved features and rewards for movies, entertainment and dining, while also adding the option of earning and redeeming points for travel, shopping and banking. This strategic alignment creates huge opportunities for the future of the Scene+ program and enables our team to reach and entertain even more guests and movie-lovers than ever before. Last year, we opened three new VIP locations each in Montreal (Quebec), Burnaby (British Columbia), and Calgary (Alberta). We also opened one Playdium location in Dartmouth (Nova Scotia) and two new locations of The Rec Room in Burnaby (British Columbia) and Barrie (Ontario) in 2021. With these additions, we now have location-based entertainment venues open coast-to-coast and expect to realize benefits from these new locations as we move forward. Finally, we are also exploring alternative content offerings including the expansion of our distribution business (“Cineplex Pictures”) for select feature films in Canada. With this initiative, we see growth opportunities where we can leverage Cineplex’s numerous assets and database to promote and find audiences for film product which might not otherwise have played in Canada. This is in addition to our ongoing efforts to increase and diversify content through international titles and other alternative programming through “Cineplex Events”, where we are experiencing tremendous success. 2 Adjusted measures are non-GAAP measures. For additional information, see the “Non-GAAP and Other Financial Measures” section of the MD&A. CINEPLEX INC. 2021 ANNUAL REPORT LETTER TO SHAREHOLDERS 7 Cineplex Inc. Letter to Shareholders Cineworld Litigation The past year also entailed gratifying developments in Cineplex’s litigation against Cineworld. The Ontario Superior Court of Justice held that Cineworld breached the Arrangement Agreement and awarded Cineplex approximately $1.24 billion in damages. We are extremely pleased with this outcome and while Cineworld has filed its Notice of Intent to Appeal the judgement, we remain confident in the Superior Court’s decision. We have filed a Notice of Cross-Appeal and will defend the Superior Court’s decision. We will continue pursuing compensation for what was a wrongful repudiation of the Arrangement Agreement between Cineplex and Cineworld. Together with the help of our Board, we will take the necessary steps to optimize the value of this litigation. Path Forward – The Future is Bright Cineplex has an exciting year and future ahead. We remain confident in the strength of our businesses and our efforts to control costs and manage financial uncertainties. We are encouraged by this year’s strong film slate and the momentum that we are seeing in all our businesses. Our studio partners are gravitating towards an exclusive theatrical window and continue to acknowledge the important role theatrical exhibition plays in elevating content. Our theatres and entertainment venues are now open countrywide, and we expect the remaining restrictions to be lifted in the coming weeks. Above all, we are thrilled to be back doing what we do best, entertaining Canadians – something we’ve been proudly doing for 100 years! I am extremely proud of the Cineplex team and want to thank them for their agility, resourcefulness and willingness to make sacrifices as we worked together to accomplish all that we did. I also want to thank our Board of Directors for its ongoing support and sound advice during these unprecedented times. Finally, I want to thank our customers, partners, guests and investors for their ongoing support and belief in Cineplex. Sincerely, Ellis Jacob President and CEO, Cineplex Inc. CINEPLEX INC. 2021 ANNUAL REPORT LETTER TO SHAREHOLDERS 8 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— MANAGEMENT’S DISCUSSION AND ANALYSIS February 10, 2022 The following management’s discussion and analysis (“MD&A”) of Cineplex Inc. (“Cineplex”) financial condition and results of operations should be read together with the consolidated financial statements and related notes of Cineplex (see Section 1, Overview of Cineplex). These financial statements, presented in Canadian dollars, were prepared in accordance with Canadian generally accepted accounting principles (“GAAP”), defined as International Financial Reporting Standards (“IFRS”) as set out in the Handbook of the Canadian Institute of Chartered Professional Accountants. Unless otherwise specified, all information in this MD&A is as of December 31, 2021 and all amounts are in Canadian dollars. Cineplex Inc. Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS CONTENTS ————————————————————————————————————————————— Section Contents Non-GAAP and Other Financial Measures Cineplex reports on certain non-GAAP measures, non-GAAP ratios, supplementary financial measures and total segments measure that are used by management to evaluate the performance of Cineplex. In addition, non-GAAP measures are used in measuring compliance with debt covenants. Non-GAAP measures do not have standardized meaning under GAAP and may not be comparable to similar measures provided by other issuers. Cineplex includes these measures because management believes that they assist investors in assessing financial performance. The definition, calculation and reconciliation of non-GAAP measures are provided in Section 17, Non-GAAP and other financial measures. Overview of Cineplex Business strategy Cineplex’s businesses Overview of operations Results of operations Balance sheets Liquidity and capital resources Adjusted free cash flow and dividends Share activity Seasonality and quarterly results Related party transactions Significant accounting judgments and estimation uncertainties Accounting policies Risks and uncertainties Controls and procedures Outlook Non-GAAP and other financial measures Forward-Looking Statements Certain information included in this MD&A contains forward-looking statements within the meaning of applicable securities laws. These forward-looking statements include, among others, statements with respect to Cineplex’s objectives, goals and strategies to achieve those objectives and goals, as well as statements with respect to Cineplex’s beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words “may”, “will”, “could”, “should”, “would”, “suspect”, “outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”, “forecast”, “objective” and “continue” (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements. Forward-looking statements also include, statements pertaining to: Page 3 13 15 21 24 45 47 55 56 59 61 61 63 63 74 75 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 • • • Cineplex’s outlook, goals, expectations and projected results of operations, including factors and assumptions underlying Cineplex’s projections regarding the duration and impact of a novel strain of coronavirus (“COVID-19”) pandemic on Cineplex, the movie exhibition industry and the economy in general, as well as Cineplex’s response to the pandemic related to the closure or operational restrictions of its theatres and location-based entertainment (“LBE”) venues, employee reductions and other cost-cutting initiatives and increased expenses relating to safety measures taken at its facilities to protect the health and well-being of guests and employees; Cineplex’s expectations with respect to liquidity and capital expenditures, including its ability to meet its ongoing capital, operating and other obligations, and anticipated needs for, and sources of, funds; and Cineplex’s ability to execute cost-cutting and revenue enhancement initiatives in response to the COVID-19 pandemic. The COVID-19 pandemic has had an unprecedented impact on Cineplex, along with the rest of the movie exhibition industry and other industries in which Cineplex operates, including material decreases in revenues, results of operations and cash flows. The situation continues to evolve and the social and economic effects are widespread. As an entertainment and media company that operates spaces where guests gather in close proximity, Cineplex’s business has been significantly impacted by the actions taken to control the spread of COVID-19. These actions include, among other things, the introduction of vaccine passports or proof of vaccination mandates, social distancing measures and restrictions including those on capacity. The uncertainty of the timing of the reductions of many government-imposed restrictions may potentially have negative effects on Cineplex’s businesses. Restrictions imposed in many of the markets in which Cineplex operates are gradually being lifted as COVID-19 cases decline CINEPLEX INC. 2021 ANNUAL REPORT across the country, providing clearer visibility for the reopening of Cineplex’s business and the return to normalcy. MANAGEMENT'S DISCUSSION AND ANALYSIS Cineplex is actively monitoring the situation and is adapting its business strategies as the impact of the COVID-19 9 pandemic evolves. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS By their very nature, forward-looking statements involve inherent risks and uncertainties, including those described in Cineplex’s Annual Information Form (“AIF”), and in this MD&A. Those risks and uncertainties, both general and specific, give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Cineplex cautions readers not to place undue reliance on these statements, as a number of important factors, many of which are beyond Cineplex’s control, could cause actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the duration and impact of the COVID-19 pandemic on Cineplex, the movie exhibition industry and the economy in general, as well as Cineplex’s response to the COVID-19 pandemic as it relates to the closure of its theatres and LBE venues, employee reductions and other cost-cutting initiatives, and increased expenses relating to CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 1 2 Cineplex Inc. Management’s Discussion and Analysis Non-GAAP and Other Financial Measures ————————————————————————————————————————————— Cineplex reports on certain non-GAAP measures, non-GAAP ratios, supplementary financial measures and total segments measure that are used by management to evaluate the performance of Cineplex. In addition, non-GAAP measures are used in measuring compliance with debt covenants. Non-GAAP measures do not have standardized meaning under GAAP and may not be comparable to similar measures provided by other issuers. Cineplex includes these measures because management believes that they assist investors in assessing financial performance. The definition, calculation and reconciliation of non-GAAP measures are provided in Section 17, Non-GAAP and other financial measures. Forward-Looking Statements Certain information included in this MD&A contains forward-looking statements within the meaning of applicable securities laws. These forward-looking statements include, among others, statements with respect to Cineplex’s objectives, goals and strategies to achieve those objectives and goals, as well as statements with respect to Cineplex’s beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words “may”, “will”, “could”, “should”, “would”, “suspect”, “outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”, “forecast”, “objective” and “continue” (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements. Forward-looking statements also include, statements pertaining to: Cineplex’s outlook, goals, expectations and projected results of operations, including factors and assumptions underlying Cineplex’s projections regarding the duration and impact of a novel strain of coronavirus (“COVID-19”) pandemic on Cineplex, the movie exhibition industry and the economy in general, as well as Cineplex’s response to the pandemic related to the closure or operational restrictions of its theatres and location-based entertainment (“LBE”) venues, employee reductions and • • Cineplex Inc. Management's Discussion and Analysis other cost-cutting initiatives and increased expenses relating to safety measures taken at its facilities to protect the health and well-being of guests and employees; Cineplex’s expectations with respect to liquidity and capital expenditures, including its ability to meet its ongoing capital, operating and other obligations, and anticipated needs for, and sources of, funds; and Cineplex’s ability to execute cost-cutting and revenue enhancement initiatives in response to the COVID-19 pandemic. • The COVID-19 pandemic has had an unprecedented impact on Cineplex, along with the rest of the movie exhibition industry and other industries in which Cineplex operates, including material decreases in revenues, results of operations and cash flows. The situation continues to evolve and the social and economic effects are widespread. As an entertainment and media company that operates spaces where guests gather in close proximity, Cineplex’s business has been significantly impacted by the actions taken to control the spread of COVID-19. These actions include, among other things, the introduction of vaccine passports or proof of vaccination mandates, social distancing measures and restrictions including those on capacity. The uncertainty of the timing of the reductions of many government-imposed restrictions may potentially have negative effects on Cineplex’s businesses. Restrictions imposed in many of the markets in which Cineplex operates are gradually being lifted as COVID-19 cases decline across the country, providing clearer visibility for the reopening of Cineplex’s business and the return to normalcy. Cineplex is actively monitoring the situation and is adapting its business strategies as the impact of the COVID-19 pandemic evolves. By their very nature, forward-looking statements involve inherent risks and uncertainties, including those described in Cineplex’s Annual Information Form (“AIF”), and in this MD&A. Those risks and uncertainties, both general and specific, give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Cineplex cautions readers not to place undue reliance on these statements, as a number of important factors, many of which are beyond Cineplex’s control, could cause actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are Cineplex Inc. not limited to, the duration and impact of the COVID-19 pandemic on Cineplex, the movie exhibition industry and Management’s Discussion and Analysis the economy in general, as well as Cineplex’s response to the COVID-19 pandemic as it relates to the closure of its ————————————————————————————————————————————— theatres and LBE venues, employee reductions and other cost-cutting initiatives, and increased expenses relating to safety measures taken at its facilities to protect the health and well-being of customers and employees; Cineplex’s expectations with respect to liquidity and capital expenditures, including its ability to meet its ongoing capital, operating and other obligations, and anticipated needs for, and sources of, funds; Cineplex’s ability to execute cost- cutting and revenue enhancement initiatives in response to the COVID-19 pandemic; risks generally encountered in the relevant industry, competition, customer, legal, taxation and accounting matters; the outcome of the litigation surrounding the termination of the Cineworld transaction (described below); and diversion of management time on litigation related to the Cineworld transaction. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 2 The foregoing list of factors that may affect future results is not exhaustive. When reviewing Cineplex’s forward- looking statements, readers should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the “Risks and Uncertainties” section of this MD&A. Cineplex does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable Canadian securities law. Additionally, Cineplex undertakes no obligation to comment on analyses, expectations or statements made by third parties in respect of Cineplex, its financial or operating results or its securities. All forward-looking statements in this MD&A are made as of the date hereof and are qualified by these cautionary statements. Additional information, including Cineplex’s AIF, can be found on SEDAR at www.sedar.com. 1. OVERVIEW OF CINEPLEX Cineplex (TSX:CGX) is a top-tier Canadian brand that operates in the Film Entertainment and Content, Amusement and Leisure, and Media sectors. Cineplex offers a unique escape from the everyday to millions of guests through its circuit of over 170 movie theatres and location-based entertainment venues. In addition to being Canada’s largest and most innovative film exhibitor, the company operates Canada’s favourite destination for ‘Eats & Entertainment’ (The Rec Room) and complexes specially designed for teens and families (Playdium). It also operates successful businesses in digital commerce (CineplexStore.com), alternative programming (Cineplex Events), cinema media (Cineplex Media), digital place-based media (Cineplex Digital Media “CDM”) and amusement solutions (Player One Amusement Group “P1AG”). Providing even more value for its guests, Cineplex is a partner in Scene CINEPLEX INC. 2021 ANNUAL REPORT LP (“Scene+”), Canada’s largest entertainment and lifestyle loyalty program. MANAGEMENT'S DISCUSSION AND ANALYSIS 10 Cineplex’s theatre circuit is concentrated in major metropolitan and mid-sized markets. As of December 31, 2021, Cineplex owned, leased or had a joint venture interest in 1,652 screens in 160 theatres from coast to coast as well as 13 LBE venues in six provinces. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 3 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— safety measures taken at its facilities to protect the health and well-being of customers and employees; Cineplex’s expectations with respect to liquidity and capital expenditures, including its ability to meet its ongoing capital, operating and other obligations, and anticipated needs for, and sources of, funds; Cineplex’s ability to execute cost- cutting and revenue enhancement initiatives in response to the COVID-19 pandemic; risks generally encountered in the relevant industry, competition, customer, legal, taxation and accounting matters; the outcome of the litigation surrounding the termination of the Cineworld transaction (described below); and diversion of management time on litigation related to the Cineworld transaction. The foregoing list of factors that may affect future results is not exhaustive. When reviewing Cineplex’s forward- looking statements, readers should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the “Risks and Uncertainties” section of this MD&A. Cineplex does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable Canadian securities law. Additionally, Cineplex undertakes no obligation to comment on analyses, expectations or statements made by third parties in respect of Cineplex, its financial or operating results or its securities. All forward-looking statements in this MD&A Cineplex Inc. are made as of the date hereof and are qualified by these cautionary statements. Additional information, including Management's Discussion and Analysis Cineplex’s AIF, can be found on SEDAR at www.sedar.com. 1. OVERVIEW OF CINEPLEX Cineplex (TSX:CGX) is a top-tier Canadian brand that operates in the Film Entertainment and Content, Amusement and Leisure, and Media sectors. Cineplex offers a unique escape from the everyday to millions of guests through its circuit of over 170 movie theatres and location-based entertainment venues. In addition to being Canada’s largest and most innovative film exhibitor, the company operates Canada’s favourite destination for ‘Eats & Entertainment’ (The Rec Room) and complexes specially designed for teens and families (Playdium). It also operates successful businesses in digital commerce (CineplexStore.com), alternative programming (Cineplex Events), cinema media (Cineplex Media), digital place-based media (Cineplex Digital Media “CDM”) and amusement solutions (Player One Amusement Group “P1AG”). Providing even more value for its guests, Cineplex is a partner in Scene LP (“Scene+”), Canada’s largest entertainment and lifestyle loyalty program. Cineplex’s theatre circuit is concentrated in major metropolitan and mid-sized markets. As of December 31, 2021, Cineplex owned, leased or had a joint venture interest in 1,652 screens in 160 theatres from coast to coast as well as Cineplex Inc. 13 LBE venues in six provinces. Management’s Discussion and Analysis ————————————————————————————————————————————— Cineplex Theatre locations and screens at December 31, 2021 Locations Screens Screens UltraAVX 3D Digital IMAX Screens (i) VIP Auditoriums D-BOX Auditoriums Recliner Auditoriums Other Screens (ii) Province Ontario Quebec British Columbia Alberta Nova Scotia Saskatchewan Manitoba New Brunswick Newfoundland & Labrador Prince Edward Island 67 17 25 20 11 6 5 5 2 2 722 220 236 213 90 54 49 41 14 13 356 88 125 114 43 28 26 20 9 6 41 10 16 20 1 3 1 2 — — 94 13 3 3 2 1 1 1 — 1 — 25 48 9 20 16 — 3 3 — — — 99 48 7 16 16 2 3 2 2 1 1 108 11 17 43 83 — 16 — — — — 1 1 6 1 1 1 — — — 22 TOTALS 160 1,652 815 98 267 Percentage of screens CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 49 % 2 % 6 % 6 % 6 % 16 % 1 % 3 (i) All IMAX screens are 3D enabled. Total 3D screens including IMAX screens are 840 screens or 51% of the circuit. (ii) Other screens includes 4DX, Cineplex Clubhouse and ScreenX. Cineplex - Theatres, screens and premium offerings in the last eight quarters 2021 2020 Theatres Screens 3D Digital Screens UltraAVX Screens IMAX Screens VIP Auditoriums D-BOX Locations Recliner Screens Other Screens Cineplex - LBE - at December 31, 2021 Province Ontario Alberta Manitoba Newfoundland & Labrador British Columbia Nova Scotia TOTALS Q4 Q3 Q2 160 161 160 Q1 161 Q4 Q3 Q2 Q1 162 164 164 164 1,652 1,656 1,651 1,657 1,667 1,687 1,687 1,687 815 816 816 816 819 826 826 826 94 25 99 98 267 22 94 25 94 98 262 19 94 25 84 98 253 19 94 25 84 98 253 19 94 25 89 98 258 19 2021 94 25 84 99 221 19 94 25 84 99 221 19 2020 94 25 84 99 221 19 The Rec Room Playdium The Rec Room Playdium 4 3 1 1 1 — 10 2 2 3 CINEPLEX INC. 2021 ANNUAL REPORT — 3 — MANAGEMENT'S DISCUSSION AND ANALYSIS 11 — — 1 — — 1 3 1 — — 8 — — — 2 1.1 RECENT DEVELOPMENTS COVID-19 business impacts, risks and liquidity In early 2020, the outbreak of COVID-19 was confirmed in multiple countries throughout the world and on March 11, 2020, it was declared a global pandemic by the World Health Organization (“WHO”). In response, Cineplex immediately introduced enhanced cleaning protocols and reduced theatre capacities to promote social distancing. By mid-March 2020, each of Canada’s provinces and territories had declared a state of emergency resulting in, among other things, the mandated closure of non-essential businesses, restrictions on public gatherings and quarantining of CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 4 Cineplex Inc. Management’s Discussion and Analysis Theatre locations and screens at December 31, 2021 ————————————————————————————————————————————— Locations Screens Screens UltraAVX Screens (i) Auditoriums Auditoriums Auditoriums Screens (ii) 3D Digital IMAX VIP D-BOX Recliner Other Cineplex Province Ontario Quebec British Columbia Alberta Nova Scotia Saskatchewan Manitoba New Brunswick Newfoundland & Labrador Prince Edward Island 67 17 25 20 11 6 5 5 2 2 722 220 236 213 90 54 49 41 14 13 356 88 125 114 43 28 26 20 9 6 41 10 16 20 1 3 1 2 — — 13 3 3 2 1 1 1 — 1 — 48 9 20 16 — 3 3 — — — 48 7 16 16 2 3 2 2 1 1 108 11 17 43 83 — 16 — — — — 267 1 1 6 1 1 1 — — — 22 16 % 1 % TOTALS Cineplex Inc. Percentage of screens Management's Discussion and Analysis (i) All IMAX screens are 3D enabled. Total 3D screens including IMAX screens are 840 screens or 51% of the circuit. 1,652 49 % 160 815 2 % 6 % 6 % 6 % 25 94 99 98 (ii) Other screens includes 4DX, Cineplex Clubhouse and ScreenX. Cineplex - Theatres, screens and premium offerings in the last eight quarters 2021 2020 Theatres Screens 3D Digital Screens UltraAVX Screens IMAX Screens VIP Auditoriums D-BOX Locations Recliner Screens Other Screens Cineplex - LBE - at December 31, 2021 Province Ontario Alberta Manitoba Newfoundland & Labrador British Columbia Nova Scotia TOTALS Q4 Q3 Q2 160 161 160 Q1 161 Q4 Q3 Q2 Q1 162 164 164 164 1,652 1,656 1,651 1,657 1,667 1,687 1,687 1,687 815 816 816 816 819 826 826 826 94 25 99 98 267 22 94 25 94 98 262 19 94 25 84 98 253 19 94 25 84 98 253 19 94 25 89 98 258 19 2021 94 25 84 99 221 19 94 25 84 99 221 19 2020 94 25 84 99 221 19 The Rec Room Playdium The Rec Room Playdium 4 3 1 1 1 — 10 2 — — — — 1 3 3 3 1 1 — — 8 2 — — — — — 2 1.1 RECENT DEVELOPMENTS COVID-19 business impacts, risks and liquidity In early 2020, the outbreak of COVID-19 was confirmed in multiple countries throughout the world and on March 11, 2020, it was declared a global pandemic by the World Health Organization (“WHO”). In response, Cineplex Cineplex Inc. immediately introduced enhanced cleaning protocols and reduced theatre capacities to promote social distancing. By Management’s Discussion and Analysis mid-March 2020, each of Canada’s provinces and territories had declared a state of emergency resulting in, among ————————————————————————————————————————————— other things, the mandated closure of non-essential businesses, restrictions on public gatherings and quarantining of people who may have been exposed to the virus. On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE venues across Canada, as well as substantially all route locations operated by P1AG. On August 21, 2020, Cineplex reopened its entire circuit of theatres and LBE venues, however, theatre operations and LBE venues were continuously impacted by additional government mandated restrictions and closures over the next several quarters. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 4 As of July 17, 2021, Cineplex had reopened its entire circuit of theatres subject to capacity restrictions in some cases, after months of extended closure periods. The reopening included Cineplex’s then 161 theatre locations, encompassing 1,656 screens across Canada including 18 VIP Cinemas locations. As restrictions were temporarily eased in markets in which Cineplex operated, Cineplex also reopened its LBE venues across Canada as well as route locations operated by P1AG. All theatres, LBE venues and P1AG route locations continue to operate with enhanced safety and cleaning measures to ensure the safety of Cineplex’s employees and customers. Effective December 18, 2021, due to the rise of the Omicron variant, capacity restrictions were reinstated in Ontario, Cineplex’s largest market, limiting indoor capacity to 50% along with prohibiting the consumption of concessions in theatres. Theatres in Quebec were also mandated to temporarily close effective December 20, 2021. The reinstated restrictions significantly impacted Cineplex’s ability to benefit from the strong slate of films released during the busiest weeks of the fourth quarter of 2021 including Spider-Man: No Way Home and Sing 2. Subsequent to December 31, 2021, social gathering restrictions were further modified or reinstituted in several key markets in which Cineplex operates, resulting in theatre closures and prohibiting indoor dining in Ontario. Cineplex was also required to temporarily close or reduce capacity in other provinces. Effective January 29, 2022, January 31, 2022 and February 7, 2022 theatres in New Brunswick, Ontario and Quebec were permitted to reopen at reduced capacity levels, respectively. Cineplex is continuously monitoring operating restrictions and adjusts operating capacities in CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS accordance with government directives. 12 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 5 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— people who may have been exposed to the virus. On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE venues across Canada, as well as substantially all route locations operated by P1AG. On August 21, 2020, Cineplex reopened its entire circuit of theatres and LBE venues, however, theatre operations and LBE venues were continuously impacted by additional government mandated restrictions and closures over the next several quarters. As of July 17, 2021, Cineplex had reopened its entire circuit of theatres subject to capacity restrictions in some cases, after months of extended closure periods. The reopening included Cineplex’s then 161 theatre locations, encompassing 1,656 screens across Canada including 18 VIP Cinemas locations. As restrictions were temporarily Cineplex Inc. eased in markets in which Cineplex operated, Cineplex also reopened its LBE venues across Canada as well as route locations operated by P1AG. All theatres, LBE venues and P1AG route locations continue to operate with enhanced Management's Discussion and Analysis safety and cleaning measures to ensure the safety of Cineplex’s employees and customers. Effective December 18, 2021, due to the rise of the Omicron variant, capacity restrictions were reinstated in Ontario, Cineplex’s largest market, limiting indoor capacity to 50% along with prohibiting the consumption of concessions in theatres. Theatres in Quebec were also mandated to temporarily close effective December 20, 2021. The reinstated restrictions significantly impacted Cineplex’s ability to benefit from the strong slate of films released during the busiest weeks of the fourth quarter of 2021 including Spider-Man: No Way Home and Sing 2. Subsequent to December 31, 2021, social gathering restrictions were further modified or reinstituted in several key markets in which Cineplex operates, resulting in theatre closures and prohibiting indoor dining in Ontario. Cineplex was also required to temporarily close or reduce capacity in other provinces. Effective January 29, 2022, January 31, 2022 and February 7, 2022 theatres in New Brunswick, Ontario and Quebec were permitted to reopen at reduced capacity Cineplex Inc. levels, respectively. Cineplex is continuously monitoring operating restrictions and adjusts operating capacities in Management’s Discussion and Analysis accordance with government directives. ————————————————————————————————————————————— In Canada, most provinces have adopted a phased approach to reopening businesses subsequent to each closure. The plan includes mandatory proof of vaccination for people attending certain social and recreational settings and events which includes indoor dining, performance venues, cinemas, sports venues, gyms, arcades, amusement parks, recreation centres and sports and physical activities. The following table reflects the current status to the date of this MD&A. The reopening plans are subject to frequent change. Province British Columbia Cinemas open at 50% capacity per auditorium. Proof of vaccination required effective September 13, 2021. Theatres Alberta Cinemas open to a maximum of 500 per auditorium. Saskatchewan Cinemas open at 100% capacity. Proof of vaccination required effective October 1, 2021. Manitoba Ontario Quebec New Brunswick Nova Scotia Cinemas open at 50% capacity. Proof of vaccination required effective September 3, 2021. Cinemas open at 50% capacity per auditorium. Permitted to operate at 100% capacity effective February 21, 2022. Proof of vaccination required effective September 22, 2021. Cinemas open at 50% capacity up to 500 per auditorium. Permitted to operate at 100% capacity effective February 28, 2022. Proof of vaccination required effective September 1, 2021. Cinemas open at 50% capacity with physical distancing measures in place. Proof of vaccination required effective September 22, 2021. Cinemas open at 25% capacity up to 50 per auditorium with physical distancing measures. Proof of vaccination required effective October 4, 2021. Restaurants Restaurants open at 50% capacity with a maximum of 6 guests per table. Proof of vaccination required effective September 13, 2021. Restaurants open with capacity limits that vary to a maximum of 500 persons per building depending on building size. Restaurants open at 100% capacity. Proof of vaccination required effective October 1, 2021. Restaurants open at 50% capacity. Proof of vaccination required effective September 3, 2021. Restaurants open at 50% capacity. Permitted to operate at 100% capacity effective February 21, 2022. Proof of vaccination required effective September 22, 2021. Restaurants open at 50% capacity with a maximum of 4 guests per table. Proof of vaccination required effective September 1, 2021. Restaurants open at 50% capacity. Proof of vaccination required effective September 22, 2021. Restaurants open at 50% capacity with physical distancing measures with a maximum of 10 guests per table. Proof of vaccination required effective October 4, 2021. Prince Edward Island CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS Cinemas open at 50 per building. Permitted to operate at 50% capacity effective February 17, 2022. Proof of vaccination required effective October 5, 2021. Cinemas open at the lower of 25% capacity or 50 per auditorium. Permitted to operate at 50% capacity per auditorium effective February 14, 2022. Proof of vaccination required effective October 22, 2021. Newfoundland Restaurants open at 50% capacity. Proof of vaccination required effective October 5, 2021. Restaurants open at 50% capacity with a maximum of 10 guests per table. Proof of vaccination required effective October 22, 2021. To mitigate the negative impact of COVID-19 and support its long-term stability, Cineplex has undertaken a variety of measures including: Liquidity measures: • • • • • • June 2020: entered into the First Credit Agreement Amendment with The Bank of Nova Scotia as administrative agent to Cineplex’s seventh amended and restated credit agreement (as amended, the “Credit Facilities”) providing certain financial covenant relief in light of the COVID-19 pandemic and its impact on CINEPLEX INC. 2021 ANNUAL REPORT Cineplex’s business (Section 7.4, Long-term debt); MANAGEMENT'S DISCUSSION AND ANALYSIS 13 July 2020: issued convertible unsecured subordinated debentures (the “Debentures”) for net proceeds of $303.3 million, (Section 7.4, Long-term debt); November 2020: entered into the Second Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt); $60.0 million with respect to the reorganization; December 2020: entered into an agreement to enhance and expand the SCENE loyalty program receiving January 2021: completed the sale and leaseback transaction of Cineplex’s head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57.0 million; January 2021: filed tax returns for the 2020 taxation year claiming a $62.6 million recovery of income taxes paid in prior periods (all of which has been received as of December 31, 2021); CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 5 6 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— In Canada, most provinces have adopted a phased approach to reopening businesses subsequent to each closure. The plan includes mandatory proof of vaccination for people attending certain social and recreational settings and events which includes indoor dining, performance venues, cinemas, sports venues, gyms, arcades, amusement parks, recreation centres and sports and physical activities. The following table reflects the current status to the date of this MD&A. The reopening plans are subject to frequent change. Province British Columbia Cinemas open at 50% capacity per auditorium. Proof of vaccination required effective September 13, 2021. Theatres Alberta Cinemas open to a maximum of 500 per auditorium. Saskatchewan Cinemas open at 100% capacity. Proof of vaccination required effective October 1, 2021. Manitoba Cinemas open at 50% capacity. Proof of vaccination required effective September 3, 2021. Ontario Cinemas open at 50% capacity per auditorium. Permitted to operate at 100% capacity effective February 21, 2022. Proof of vaccination required effective September 22, 2021. Quebec Cinemas open at 50% capacity up to 500 per auditorium. Permitted to Restaurants open at 50% capacity with a operate at 100% capacity effective February 28, 2022. Proof of vaccination required effective September 1, 2021. New Brunswick place. Cinemas open at 50% capacity with physical distancing measures in Proof of vaccination required effective September 22, 2021. September 22, 2021. Nova Scotia Cinemas open at 25% capacity up to 50 per auditorium with physical distancing measures. Proof of vaccination required effective October 4, 2021. guests per table. Restaurants Restaurants open at 50% capacity with a maximum of 6 guests per table. Proof of vaccination required effective September 13, 2021. Restaurants open with capacity limits that vary to a maximum of 500 persons per building depending on building size. Restaurants open at 100% capacity. Proof of vaccination required effective October 1, 2021. Restaurants open at 50% capacity. Proof of vaccination required effective September 3, 2021. Restaurants open at 50% capacity. Permitted to operate at 100% capacity effective February 21, 2022. Proof of vaccination required effective September 22, 2021. maximum of 4 guests per table. Proof of vaccination required effective September 1, 2021. Restaurants open at 50% capacity. Proof of vaccination required effective Restaurants open at 50% capacity with physical distancing measures with a maximum of 10 Proof of vaccination required effective October 4, 2021. Restaurants open at 50% capacity. Proof of vaccination required effective October 5, 2021. Restaurants open at 50% capacity with a maximum of 10 guests per table. Proof of vaccination required effective October 22, 2021. Cinemas open at 50 per building. Permitted to operate at 50% capacity effective February 17, 2022. Proof of vaccination required effective October 5, 2021. Cinemas open at the lower of 25% capacity or 50 per auditorium. Permitted to operate at 50% capacity per auditorium effective February 14, 2022. Proof of vaccination required effective October 22, 2021. Cineplex Inc. Newfoundland Management's Discussion and Analysis Prince Edward Island To mitigate the negative impact of COVID-19 and support its long-term stability, Cineplex has undertaken a variety of measures including: Liquidity measures: • • • • June 2020: entered into the First Credit Agreement Amendment with The Bank of Nova Scotia as administrative agent to Cineplex’s seventh amended and restated credit agreement (as amended, the “Credit Facilities”) providing certain financial covenant relief in light of the COVID-19 pandemic and its impact on Cineplex’s business (Section 7.4, Long-term debt); July 2020: issued convertible unsecured subordinated debentures (the “Debentures”) for net proceeds of $303.3 million, (Section 7.4, Long-term debt); November 2020: entered into the Second Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt); December 2020: entered into an agreement to enhance and expand the SCENE loyalty program receiving $60.0 million with respect to the reorganization; January 2021: completed the sale and leaseback transaction of Cineplex’s head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57.0 million; January 2021: filed tax returns for the 2020 taxation year claiming a $62.6 million recovery of income taxes paid in prior periods (all of which has been received as of December 31, 2021); February 2021: entered into the Third Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt); February 2021: issued 7.50% senior secured second lien notes due February 26, 2026 (the “Notes Payable”) for net proceeds of $243.3 million (Section 7.4, Long-term debt); and December 2021: entered into the Fourth Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt). Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS • • • • • 6 Cost reduction and subsidy measures: • • • • • • • • • • • • • temporary layoffs of all part-time and full-time hourly employees as well as a number of full-time employees who chose a temporary layoff rather than a salary reduction during the second quarter of 2020 and additional temporary layoffs of part-time employees beginning in December 2021 further expanding in the first quarter of 2022; reduced full-time employee salaries by agreement with such employees during the second and third quarters of 2020; suspended or deferred current capital spending, reviewing all capital projects to consider either deferral or cancellation; reduced non-essential discretionary operational expenditures (such as spending on marketing, travel and entertainment); implemented a more stringent review and approval process for all outgoing procurement and payment requests; continued negotiations with landlords for cash payments in exchange for the sale of contractual rights or negotiating rent relief, including abatements, reductions and deferral; worked with major suppliers and other business partners to modify the timing and quantum of certain contractual payments; reviewed and applied for government subsidy programs where available, including municipal and provincial property tax and energy rebates or subsidies; applied for the ongoing Canada Emergency Wage Subsidy (“CEWS”), which was launched by the Government of Canada, providing a variable subsidy for employee wages incurred from March 2020 to October 23, 2021; applied for the ongoing Canada Emergency Rent Subsidy (“CERS”), which was launched by the Government of Canada as a result of government mandated lockdowns, providing a variable subsidy for rent and other occupancy-related costs incurred from September 27, 2020 through October 23, 2021; applied for Canada’s Tourism and Hospitality Recovery Program (“THRP”) which provides wage and rent subsidies for businesses that have faced revenue losses, with a subsidy rate of up to 75%; continued evaluation of Cineplex’s eligibility under other relief programs; and continued the suspension of dividends. The COVID-19 pandemic continues to have a material negative effect on all aspects of Cineplex’s businesses resulting in material decreases in revenues, results of operations and cash flows. As a result of the reopening of its CINEPLEX INC. 2021 ANNUAL REPORT theatres, Cineplex was able to significantly reduce its average monthly net cash burn to an approximately net neutral MANAGEMENT'S DISCUSSION AND ANALYSIS 14 position during the fourth quarter of 2021 (defined as net cash provided by (used in) operating activities adjusted for changes in operating assets and liabilities, less repayments of lease obligations - principal and net capital expenditures, plus net cash received from CDCP) compared to the prior six quarters, however, Cineplex continues to be materially impacted by capacity and other restrictions in major markets in which it operates. As some of Cineplex’s largest expenses, such as film cost and cost of food services, are fully variable, during the closure of its theatres and LBE venues Cineplex focused on reducing its largest fixed and semi-fixed expenses, including those attributed to theatre payroll and theatre occupancy. With higher revenues from the reopening of theatres that commenced during the third quarter, variable wage and rent subsidy rates which were designed to reduce with revenue growth, have declined and Cineplex recognized no additional subsidy receipts with respect to the CEWS and CERS programs beyond October with both programs coming to an end on October 23, 2021. However, in December of 2021, capacity restrictions or closure requirements were reinstituted in several key markets in which Cineplex operates, including Ontario, New Brunswick, Nova Scotia, Quebec, British Columbia and Prince Edward Island, materially impacting its ability to benefit from highly anticipated film releases. Cineplex was able to mitigate these losses through the recognition of wage and rent subsidies of $9.4 million and $1.1 million, respectively, from Canada’s THRP. With respect to theatre occupancy expenses, Cineplex has continued to work CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 7 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— February 2021: entered into the Third Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt); February 2021: issued 7.50% senior secured second lien notes due February 26, 2026 (the “Notes Payable”) for net proceeds of $243.3 million (Section 7.4, Long-term debt); and December 2021: entered into the Fourth Credit Agreement Amendment providing further financial covenant relief (Section 7.4, Long-term debt). Cost reduction and subsidy measures: temporary layoffs of all part-time and full-time hourly employees as well as a number of full-time employees who chose a temporary layoff rather than a salary reduction during the second quarter of 2020 and additional temporary layoffs of part-time employees beginning in December 2021 further expanding in the first quarter of 2022; quarters of 2020; cancellation; entertainment); requests; contractual payments; reduced full-time employee salaries by agreement with such employees during the second and third suspended or deferred current capital spending, reviewing all capital projects to consider either deferral or reduced non-essential discretionary operational expenditures (such as spending on marketing, travel and implemented a more stringent review and approval process for all outgoing procurement and payment continued negotiations with landlords for cash payments in exchange for the sale of contractual rights or negotiating rent relief, including abatements, reductions and deferral; worked with major suppliers and other business partners to modify the timing and quantum of certain reviewed and applied for government subsidy programs where available, including municipal and provincial property tax and energy rebates or subsidies; applied for the ongoing Canada Emergency Wage Subsidy (“CEWS”), which was launched by the Government of Canada, providing a variable subsidy for employee wages incurred from March 2020 to October 23, 2021; applied for the ongoing Canada Emergency Rent Subsidy (“CERS”), which was launched by the • • • • • • • • • • • • • • Government of Canada as a result of government mandated lockdowns, providing a variable subsidy for rent and other occupancy-related costs incurred from September 27, 2020 through October 23, 2021; applied for Canada’s Tourism and Hospitality Recovery Program (“THRP”) which provides wage and rent subsidies for businesses that have faced revenue losses, with a subsidy rate of up to 75%; continued evaluation of Cineplex’s eligibility under other relief programs; and continued the suspension of dividends. Cineplex Inc. Management's Discussion and Analysis • • The COVID-19 pandemic continues to have a material negative effect on all aspects of Cineplex’s businesses resulting in material decreases in revenues, results of operations and cash flows. As a result of the reopening of its theatres, Cineplex was able to significantly reduce its average monthly net cash burn to an approximately net neutral position during the fourth quarter of 2021 (defined as net cash provided by (used in) operating activities adjusted for changes in operating assets and liabilities, less repayments of lease obligations - principal and net capital expenditures, plus net cash received from CDCP) compared to the prior six quarters, however, Cineplex continues to be materially impacted by capacity and other restrictions in major markets in which it operates. As some of Cineplex’s largest expenses, such as film cost and cost of food services, are fully variable, during the closure of its theatres and LBE venues Cineplex focused on reducing its largest fixed and semi-fixed expenses, including those attributed to theatre payroll and theatre occupancy. With higher revenues from the reopening of theatres that commenced during the third quarter, variable wage and rent subsidy rates which were designed to reduce with revenue growth, have declined and Cineplex recognized no additional subsidy receipts with respect to the CEWS and CERS programs beyond October with both programs coming to an end on October 23, 2021. However, in December of 2021, capacity restrictions or closure requirements were reinstituted in several key markets in which Cineplex operates, including Ontario, New Brunswick, Nova Scotia, Quebec, British Columbia Cineplex Inc. and Prince Edward Island, materially impacting its ability to benefit from highly anticipated film releases. Cineplex was able to mitigate these losses through the recognition of wage and rent subsidies of $9.4 million and $1.1 million, Management’s Discussion and Analysis respectively, from Canada’s THRP. With respect to theatre occupancy expenses, Cineplex has continued to work ————————————————————————————————————————————— with its landlord partners subsequent to the government-imposed lockdowns to obtain relief measures, resulting in significantly reduced cash rent being paid in 2020 and 2021. Including the sale of certain restrictive lease rights to landlords undertaken in the third quarter of 2020, Cineplex was able to materially reduce net cash lease outflows on an annual basis by $72.5 million in 2020. As a result of ongoing discussions with landlords, Cineplex was able to reduce net cash lease outflows by $6.6 million during the fourth quarter of 2021 ($36.1 million year to date including the sale of certain lease rights for $6.4 million in 2021). The negotiated lease obligation savings represent forgiveness of lease payments. Cineplex remains focused on identifying opportunities to extract value under its existing lease agreements. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 7 Since the closure of its theatres and LBE venues in March 2020, Cineplex diligently prepared for their safe reopening, carefully re-examining all of its buildings and processes and implementing an industry-leading program with end-to-end health and safety protocols. In June 2021, Cineplex introduced its VenueSafe program, which encompasses all of Cineplex’s health and safety protocols, in accordance with Canada’s public health guidelines. With the VenueSafe seal of approval, Cineplex believes that guests can feel confident in the company’s commitment to provide a safe and comfortable environment to be entertained once again in both our theatres and other entertainment venues. While the specific protocols will evolve over time with the emergence from the pandemic, VenueSafe will remain consistent across all of Cineplex’s venues as health and safety remain a top priority and top of mind for our guests. Some of the measures include: • • • • improved ventilation systems to improve the delivery of clean air; reserved seating in all auditoriums across Canada; specially designed games-floor and dining-space configurations in LBE venues; reduced capacity based on province-specific guidelines; enhanced cleaning practices throughout the facilities, with particular focus on high-contact surfaces, restrooms and seats; safety signage throughout theatres and LBE venues; ensuring employees have the personal protective equipment they need and as required by law; and • • • making hand sanitizer readily available for guests and employees throughout the buildings. Canada’s vaccination rate has made tremendous progress during the year with a high percentage of the eligible population receiving at least one dose of a COVID-19 vaccine and an increasing number having received two or three doses. With increasing concerns over more transmissible variants, including the highly transmissible new Omicron variant, the Canadian government has accelerated the rollout of COVID-19 vaccine booster doses providing extra protection against COVID-19 and its variants. In order to control the spread of COVID-19, the majority of provinces across Canada require proof of vaccination as part of the reopening plans in select settings including those that operate indoors with close proximity of patrons. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 15 The capacity and other restrictions materially impacted Cineplex’s ability to benefit from highly anticipated film releases released during the holiday season. Despite mandatory capacity restrictions that continue to be enforced where and as applicable, Cineplex recognized a significant increase in revenues during the fourth quarter, the highest since the pandemic was declared in early 2020. Cineplex will continue to monitor capacity restrictions and will adjust operating levels in accordance with government directives. Cineplex is optimistic that all of its businesses will recover over time, believing that consumer demand for the theatrical experience, combined with a backlog of CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 8 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— with its landlord partners subsequent to the government-imposed lockdowns to obtain relief measures, resulting in significantly reduced cash rent being paid in 2020 and 2021. Including the sale of certain restrictive lease rights to landlords undertaken in the third quarter of 2020, Cineplex was able to materially reduce net cash lease outflows on an annual basis by $72.5 million in 2020. As a result of ongoing discussions with landlords, Cineplex was able to reduce net cash lease outflows by $6.6 million during the fourth quarter of 2021 ($36.1 million year to date including the sale of certain lease rights for $6.4 million in 2021). The negotiated lease obligation savings represent forgiveness of lease payments. Cineplex remains focused on identifying opportunities to extract value under its existing lease agreements. Since the closure of its theatres and LBE venues in March 2020, Cineplex diligently prepared for their safe reopening, carefully re-examining all of its buildings and processes and implementing an industry-leading program with end-to-end health and safety protocols. In June 2021, Cineplex introduced its VenueSafe program, which encompasses all of Cineplex’s health and safety protocols, in accordance with Canada’s public health guidelines. With the VenueSafe seal of approval, Cineplex believes that guests can feel confident in the company’s commitment to provide a safe and comfortable environment to be entertained once again in both our theatres and other entertainment venues. While the specific protocols will evolve over time with the emergence from the pandemic, VenueSafe will remain consistent across all of Cineplex’s venues as health and safety remain a top priority and top of mind for our guests. Some of the measures include: improved ventilation systems to improve the delivery of clean air; reserved seating in all auditoriums across Canada; specially designed games-floor and dining-space configurations in LBE venues; reduced capacity based on province-specific guidelines; • • • • enhanced cleaning practices throughout the facilities, with particular focus on high-contact surfaces, restrooms and seats; safety signage throughout theatres and LBE venues; ensuring employees have the personal protective equipment they need and as required by law; and • • • making hand sanitizer readily available for guests and employees throughout the buildings. Cineplex Inc. Management's Discussion and Analysis Canada’s vaccination rate has made tremendous progress during the year with a high percentage of the eligible population receiving at least one dose of a COVID-19 vaccine and an increasing number having received two or three doses. With increasing concerns over more transmissible variants, including the highly transmissible new Omicron variant, the Canadian government has accelerated the rollout of COVID-19 vaccine booster doses providing extra protection against COVID-19 and its variants. In order to control the spread of COVID-19, the majority of provinces across Canada require proof of vaccination as part of the reopening plans in select settings including those that operate indoors with close proximity of patrons. The capacity and other restrictions materially impacted Cineplex’s ability to benefit from highly anticipated film releases released during the holiday season. Despite mandatory capacity restrictions that continue to be enforced where and as applicable, Cineplex recognized a significant increase in revenues during the fourth quarter, the highest Cineplex Inc. since the pandemic was declared in early 2020. Cineplex will continue to monitor capacity restrictions and will adjust operating levels in accordance with government directives. Cineplex is optimistic that all of its businesses will Management’s Discussion and Analysis recover over time, believing that consumer demand for the theatrical experience, combined with a backlog of ————————————————————————————————————————————— anticipated releases of strong film content will help drive visitation, as was evidenced by strong post-reopening box office and food services revenues recognized during the second half of 2021. The release late in the second quarter of 2021 of the highly anticipated F9: The Fast Saga generated strong attendance in North America and globally, grossing $173.0 million and $726.2 million, respectively, as reported to date. The film generated $70.0 million during the opening weekend, more than doubling the opening box office earnings of Godzilla vs. Kong which previously held the opening box office record since the pandemic started in March 2020. The release of Shang-Chi and the Legend of the Ten Rings set the all-time box-office record for a Labour Day release generating $94.0 million during its opening weekend, and total gross box office revenues in North America and globally of $224.5 million and $432.0 million, respectively, as reported to date. The release of Marvel’s highly anticipated Spider-Man: No Way Home in December 2021 generated the second biggest North American opening weekend of all time and the biggest December opening weekend of all-time grossing $260.1 million and earning $735.9 million in North America and $1.7 billion globally since its release, as reported. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 8 Management continues to pursue all viable options to maintain adequate liquidity to fund operations for the currently anticipated duration of the pandemic. This includes but is not limited to asset sales such as Cineplex’s head office buildings in Toronto which was completed during the first quarter, the issuance of Notes Payable (Section 7.4, Long-term debt) and amendments to its existing Credit Facilities (Section 7.4, Long-term debt). As at December 31, 2021, Cineplex had a cash balance of $26.9 million and $270.7 million available under its Revolving Facility subject to the liquidity covenants set forth in the Credit Facilities as amended (Section 7.4, Long- term debt). Combined with the continued focus on reducing costs and capital expenditures, management believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic in the regions in which Cineplex operates. Cineworld Transaction On December 15, 2019, Cineplex entered into an arrangement agreement (the “Arrangement Agreement”) with Cineworld Group, plc (“Cineworld”), pursuant to which an indirect wholly-owned subsidiary of Cineworld agreed to acquire all of the issued and outstanding common shares of Cineplex (“Shares”) for $34.00 per share in cash (the “Cineworld Transaction”). The Cineworld Transaction was to be implemented by way of a statutory plan of arrangement under the Business Corporation Act (Ontario). On June 12, 2020, Cineworld delivered a notice (the “Termination Notice”) to Cineplex purporting to terminate the Arrangement Agreement. In the Termination Notice, Cineworld alleged that Cineplex took certain actions that constituted breaches of Cineplex’s covenants under the Arrangement Agreement including failing to operate its business in the ordinary course. In addition, Cineworld alleged that a material adverse effect had occurred with respect to Cineplex. Cineworld’s repudiation of the Arrangement Agreement was acknowledged by Cineplex and the Cineworld Transaction did not proceed. Cineplex vigorously denied Cineworld’s allegations. On July 3, 2020, Cineplex announced that it had commenced an action in the Ontario Superior Court of Justice (the “Court”) against Cineworld and 1232743 B.C. Ltd. seeking damages arising from what Cineplex claimed was a wrongful repudiation of the Arrangement Agreement. The claim sought damages, including the approximately $2.18 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS billion that Cineworld would have paid upon the closing of the Cineworld Transaction for Cineplex’s securities, 16 reduced by the value of the Cineplex securities retained by its security holders, as well as compensation for other losses including the loss to Cineplex of expected synergies, the failure of Cineworld to repay or refinance Cineplex’s approximately $664 million in debt, and transaction expenses. Cineplex also advanced alternative claims for damages for the loss of benefits to its security holders, and to require Cineworld to disgorge the benefits it improperly received by wrongfully repudiating the Cineworld Transaction. On July 6, 2020, Cineworld announced that it would defend Cineplex’s claim, and on September 2, 2020, filed its Statement of Defence and Counterclaim in which it denied Cineplex’s claims and advanced a counterclaim seeking reimbursement of £32 million for costs incurred with respect to the transaction and an unspecified amount for punitive damages. Cineplex responded to Cineworld’s defence and counterclaim on September 15, 2020, denying all claims levied by Cineworld. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 9 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— anticipated releases of strong film content will help drive visitation, as was evidenced by strong post-reopening box office and food services revenues recognized during the second half of 2021. The release late in the second quarter of 2021 of the highly anticipated F9: The Fast Saga generated strong attendance in North America and globally, grossing $173.0 million and $726.2 million, respectively, as reported to date. The film generated $70.0 million during the opening weekend, more than doubling the opening box office earnings of Godzilla vs. Kong which previously held the opening box office record since the pandemic started in March 2020. The release of Shang-Chi and the Legend of the Ten Rings set the all-time box-office record for a Labour Day release generating $94.0 million during its opening weekend, and total gross box office revenues in North America and globally of $224.5 million and $432.0 million, respectively, as reported to date. The release of Marvel’s highly anticipated Spider-Man: No Way Home in December 2021 generated the second biggest North American opening weekend of all time and the biggest December opening weekend of all-time grossing $260.1 million and earning $735.9 million in North America and $1.7 billion globally since its release, as reported. Management continues to pursue all viable options to maintain adequate liquidity to fund operations for the currently anticipated duration of the pandemic. This includes but is not limited to asset sales such as Cineplex’s head office buildings in Toronto which was completed during the first quarter, the issuance of Notes Payable (Section 7.4, Long-term debt) and amendments to its existing Credit Facilities (Section 7.4, Long-term debt). As at December 31, 2021, Cineplex had a cash balance of $26.9 million and $270.7 million available under its Revolving Facility subject to the liquidity covenants set forth in the Credit Facilities as amended (Section 7.4, Long- term debt). Combined with the continued focus on reducing costs and capital expenditures, management believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic in the regions in which Cineplex operates. Cineworld Transaction On December 15, 2019, Cineplex entered into an arrangement agreement (the “Arrangement Agreement”) with Cineworld Group, plc (“Cineworld”), pursuant to which an indirect wholly-owned subsidiary of Cineworld agreed to acquire all of the issued and outstanding common shares of Cineplex (“Shares”) for $34.00 per share in cash (the Cineplex Inc. “Cineworld Transaction”). The Cineworld Transaction was to be implemented by way of a statutory plan of Management's Discussion and Analysis arrangement under the Business Corporation Act (Ontario). On June 12, 2020, Cineworld delivered a notice (the “Termination Notice”) to Cineplex purporting to terminate the Arrangement Agreement. In the Termination Notice, Cineworld alleged that Cineplex took certain actions that constituted breaches of Cineplex’s covenants under the Arrangement Agreement including failing to operate its business in the ordinary course. In addition, Cineworld alleged that a material adverse effect had occurred with respect to Cineplex. Cineworld’s repudiation of the Arrangement Agreement was acknowledged by Cineplex and the Cineworld Transaction did not proceed. Cineplex vigorously denied Cineworld’s allegations. On July 3, 2020, Cineplex announced that it had commenced an action in the Ontario Superior Court of Justice (the “Court”) against Cineworld and 1232743 B.C. Ltd. seeking damages arising from what Cineplex claimed was a wrongful repudiation of the Arrangement Agreement. The claim sought damages, including the approximately $2.18 billion that Cineworld would have paid upon the closing of the Cineworld Transaction for Cineplex’s securities, reduced by the value of the Cineplex securities retained by its security holders, as well as compensation for other losses including the loss to Cineplex of expected synergies, the failure of Cineworld to repay or refinance Cineplex’s approximately $664 million in debt, and transaction expenses. Cineplex also advanced alternative claims for damages for the loss of benefits to its security holders, and to require Cineworld to disgorge the benefits it improperly received by wrongfully repudiating the Cineworld Transaction. On July 6, 2020, Cineworld announced that it would defend Cineplex’s claim, and on September 2, 2020, filed its Statement of Defence and Counterclaim in which it denied Cineplex’s claims and advanced a counterclaim seeking Cineplex Inc. reimbursement of £32 million for costs incurred with respect to the transaction and an unspecified amount for punitive damages. Cineplex responded to Cineworld’s defence and counterclaim on September 15, 2020, denying all Management’s Discussion and Analysis claims levied by Cineworld. ————————————————————————————————————————————— A trial of the action commenced before the Court on September 13, 2021 and continued until November 4, 2021. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 9 On December 14, 2021, the Court released its decision in the action (the “Decision”). The Court held that Cineplex did not breach any of its covenants in the Arrangement Agreement, and that Cineworld had no basis for terminating the Arrangement Agreement. The Court held that Cineworld breached the Arrangement Agreement and repudiated the transaction to acquire Cineplex, which actions precluded Cineplex from seeking specific performance and entitled Cineplex to monetary damages. The Court awarded damages for breach of contract to Cineplex in the amount of $1.24 billion on account of lost synergies, and $5.5 million for transaction costs, exclusive of pre- judgment interest. The Court also held that Cineplex’s shareholders did not have any rights under the Arrangement Agreement to enforce the agreement or sue Cineworld for any breach. The Court also denied Cineworld’s counterclaim against Cineplex. On January 12, 2022, Cineworld filed a Notice of Appeal with the Court of Appeal for Ontario and on January 27, 2022, Cineplex filed its Notice of Cross Appeal. Due to uncertainties inherent in appeals, it is not possible for Cineplex to predict the timing or final outcome of the appeal of the Decision announced by Cineworld. Further, even if Cineworld’s appeal is not successful, Cineworld may not have the ability to pay the full amount of any damages or costs awarded by the Court. Therefore no amount has been accrued as a receivable. 1.2 FINANCIAL HIGHLIGHTS Financial highlights Fourth Quarter Full Year (in thousands of dollars, except theatre attendance in thousands of patrons and per Share and per patron amounts) 2021 2020 Change (i) 2021 2020 Change (i) Total revenues (ii) Theatre attendance $ 299,951 $ 52,452 471.9 % $ 656,669 $ 418,263 10,245 786 NM 20,080 13,065 Net loss from continuing operations (iii) $ (21,778) $ (230,403) -90.5 % $ (248,722) $ (624,001) Net loss from discontinued operations $ — $ — — $ — $ (4,952) 57.0 % 53.7 % -60.1 % -100.0 % Net loss (iii) Net loss as a percentage of sales $ (21,778) $ (230,403) (7.3) % (439.3) % Cash provided by (used in) operating activities $ 27,480 $ (61,041) Box office revenues per patron (“BPP”) (iv) Concession revenues per patron (“CPP”) (iv) $ $ 12.29 7.49 $ $ 9.23 9.06 (37.9) % -90.5 % $ (248,722) -60.5 % $ (628,953) CINEPLEX INC. 2021 ANNUAL REPORT 111.3 % 432.0 % MANAGEMENT'S DISCUSSION AND ANALYSIS NM 17 15.7 % 13.4 % 33.2 % $ -17.3 % $ NM $ 61,004 10.17 6.99 11.77 7.93 $ (106,314) (149.2) % $ $ Adjusted EBITDA (v) Adjusted EBITDAaL (iii) (v) Adjusted EBITDAaL margin (iii) (vi) Adjusted free cash flow (v) $ 58,328 $ (32,097) NM $ 59,927 $ (55,866) $ 20,198 $ (65,948) NM $ (84,295) $ (182,815) 6.7 % (125.7) % 132.4 % (12.8) % (43.7) % (1,032) $ (30,530) -96.6 % $ (151,517) $ (161,870) Adjusted free cash flow per Share (vi) (0.016) $ (0.482) -96.7 % $ (2.392) $ (2.556) Earnings per Share (“EPS”) from continuing operations - basic and diluted (iii) EPS from discontinued operations - basic and diluted EPS - basic and diluted (iii) (0.34) — (0.34) $ $ $ (3.64) — (3.64) -90.7 % $ (3.93) — % $ — -90.7 % $ (3.93) $ $ $ (9.85) (0.08) (9.93) (i) Throughout this MD&A, changes in percentage amounts are calculated as 2021 value less 2020 value. $ $ $ $ $ NM -53.9 % 30.9 % -6.4 % -6.4 % -60.1 % -100.0 % -60.4 % (ii) All amounts are from continuing operations. (iii) 2021 includes expenses related to the Cineworld Transaction and associated litigation in the amount of $2.3 million (2020 - $1.3 million) for the fourth quarter and $11.4 million (2020 - $4.1 million) for the full year. (iv) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. (v) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. (vi) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 10 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— A trial of the action commenced before the Court on September 13, 2021 and continued until November 4, 2021. On December 14, 2021, the Court released its decision in the action (the “Decision”). The Court held that Cineplex did not breach any of its covenants in the Arrangement Agreement, and that Cineworld had no basis for terminating the Arrangement Agreement. The Court held that Cineworld breached the Arrangement Agreement and repudiated the transaction to acquire Cineplex, which actions precluded Cineplex from seeking specific performance and entitled Cineplex to monetary damages. The Court awarded damages for breach of contract to Cineplex in the amount of $1.24 billion on account of lost synergies, and $5.5 million for transaction costs, exclusive of pre- judgment interest. The Court also held that Cineplex’s shareholders did not have any rights under the Arrangement Agreement to enforce the agreement or sue Cineworld for any breach. The Court also denied Cineworld’s counterclaim against Cineplex. On January 12, 2022, Cineworld filed a Notice of Appeal with the Court of Appeal for Ontario and on January 27, 2022, Cineplex filed its Notice of Cross Appeal. Due to uncertainties inherent in appeals, it is not possible for Cineplex to predict the timing or final outcome of the appeal of the Decision announced by Cineworld. Further, even if Cineworld’s appeal is not successful, Cineworld Cineplex Inc. may not have the ability to pay the full amount of any damages or costs awarded by the Court. Therefore no amount has been accrued as a receivable. Management's Discussion and Analysis 1.2 FINANCIAL HIGHLIGHTS Financial highlights Fourth Quarter Full Year (in thousands of dollars, except theatre attendance in thousands of patrons and per Share and per patron amounts) 2021 2020 Change (i) 2021 2020 Change (i) Total revenues (ii) Theatre attendance $ 299,951 $ 52,452 471.9 % $ 656,669 $ 418,263 10,245 786 NM 20,080 13,065 Net loss from continuing operations (iii) $ (21,778) $ (230,403) -90.5 % $ (248,722) $ (624,001) Net loss from discontinued operations $ — $ — — $ — $ (4,952) Net loss (iii) $ (21,778) $ (230,403) -90.5 % $ (248,722) $ (628,953) Net loss as a percentage of sales (7.3) % (439.3) % 432.0 % (37.9) % (149.2) % Cash provided by (used in) operating activities $ 27,480 $ (61,041) NM $ 61,004 $ (106,314) Box office revenues per patron (“BPP”) (iv) Concession revenues per patron (“CPP”) (iv) $ $ 12.29 7.49 $ $ 9.23 9.06 33.2 % $ 11.77 -17.3 % $ 7.93 $ $ 10.17 6.99 Adjusted EBITDA (v) Adjusted EBITDAaL (iii) (v) Adjusted EBITDAaL margin (iii) (vi) Adjusted free cash flow (v) Adjusted free cash flow per Share (vi) Earnings per Share (“EPS”) from continuing operations - basic and diluted (iii) EPS from discontinued operations - basic and diluted EPS - basic and diluted (iii) $ 58,328 $ (32,097) NM $ 59,927 $ (55,866) $ 20,198 $ (65,948) NM $ (84,295) $ (182,815) 6.7 % (125.7) % 132.4 % (12.8) % (43.7) % (1,032) $ (30,530) -96.6 % $ (151,517) $ (161,870) (0.016) $ (0.482) -96.7 % $ (2.392) $ (2.556) (0.34) — (0.34) $ $ $ (3.64) — (3.64) -90.7 % $ (3.93) — % $ — -90.7 % $ (3.93) $ $ $ (9.85) (0.08) (9.93) $ $ $ $ $ 57.0 % 53.7 % -60.1 % -100.0 % -60.5 % 111.3 % NM 15.7 % 13.4 % NM -53.9 % 30.9 % -6.4 % -6.4 % -60.1 % -100.0 % -60.4 % (i) Throughout this MD&A, changes in percentage amounts are calculated as 2021 value less 2020 value. (ii) All amounts are from continuing operations. (iii) 2021 includes expenses related to the Cineworld Transaction and associated litigation in the amount of $2.3 million (2020 - $1.3 million) for the fourth quarter and $11.4 million (2020 - $4.1 million) for the full year. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS (iv) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. (v) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. Cineplex Inc. (vi) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. Management’s Discussion and Analysis ————————————————————————————————————————————— Total revenues for the fourth quarter of 2021 increased 471.9%, or $247.5 million to $300.0 million as compared to the prior year period. In the prior year, the majority of Cineplex’s businesses were closed or operating under strict capacity restrictions as a result of significant increases in daily COVID-19 case counts. During the fourth quarter of 2021, Cineplex’s entire circuit of theatres and LBE venues were open, subject to capacity and operating restrictions in select provinces, resulting in significant increases in revenue when compared to the prior year period. The release of highly anticipated films including Spider-Man: No Way Home, Dune, No Time To Die and Venom: Let There Be Carnage contributed to the significant theatre attendance increase of 9.5 million to 10.2 million as compared to 0.8 million in the prior year period which had limited first run films. Cineplex reported box office revenues of $125.9 million in the fourth quarter and an all-time quarterly record BPP of $12.29, food service revenues of $87.2 million and a fourth quarter CPP of $7.49 which was negatively impacted by restrictions on food service sales in Cineplex’s theatres. Food service revenues consist of theatre food service revenue of $76.7 million, home delivery revenues of $3.0 million and LBE food service revenues of $7.5 million. Media revenues of $32.8 million were mainly from cinema media and network management and services. Amusement revenues of $45.1 million generated in the fourth quarter were primarily from P1AG route operations including family entertainment centres (“FEC”) locations and theatres that reopened in the United States and Canada. Cineplex reported an increase in adjusted EBITDAaL of $86.1 million to $20.2 million compared to the prior year period loss of $65.9 million and adjusted free cash flow per Share was a loss of $(0.016) as compared to a loss in the prior year period of $(0.482). Cineplex’s net loss from continuing operations decreased from a reported loss of $230.4 million in the prior year period to a loss of $21.8 million in the current period with a net loss per share from continuing operations decreasing from $(3.64) in the prior year period to $(0.34) in the current period. 10 Reflecting the positive reopening of Cineplex’s businesses, total revenues for the year ended December 31, 2021 increased by $238.4 million to $656.7 million, or 57.0% from $418.3 million recognized in the prior year period. Adjusted EBITDAaL for the year was a loss of $84.3 million as compared to a loss of $182.8 million recognized in the prior year. For the annual period, Cineplex was able to reduce its net loss from continuing operations reported in CINEPLEX INC. 2021 ANNUAL REPORT the current year from $624.0 million reported in the prior year to $248.7 million reported in the current year period. MANAGEMENT'S DISCUSSION AND ANALYSIS 18 The following describes certain key business initiatives undertaken and results achieved during 2021 in each of 1.3 KEY DEVELOPMENTS IN 2021 Cineplex’s core business areas: FILM ENTERTAINMENT AND CONTENT Theatre Exhibition • • • • • • • Reported annual box office revenues of $236.3 million, a 77.9% increase from 2020 as a result of increased theatre attendance due to theatre reopenings compared to theatre closures that remained in effect for a majority of the prior year period. BPP was $11.77, an all-time annual record, an increase of $1.60 or 15.7% when compared to the prior year due to new releases and premium offerings in the current period as compared to the prior period which focused on discounted pricing for older and more classic film product. Opened Quebec’s second VIP Cinemas at Cineplex Forum and VIP in downtown Montreal on June 18, 2021. British Columbia on July 7, 2021. District Calgary on November 17, 2021. Opened Western Canada’s first standalone VIP Cinemas at Cineplex VIP Cinemas Brentwood in Burnaby, Opened Cineplex’s 25th VIP Cinemas, Cineplex VIP Cinemas University District located in the University Opened three new ScreenX auditoriums: Scotiabank Theatre Winnipeg in Manitoba, Cinéma Cineplex Odeon Brossard et VIP in Quebec and Cineplex Cinemas Ancaster in Ontario Launched CineClub, Canada’s first of its kind movie subscription program providing members with benefits accessible across Cineplex’s businesses nationwide including Cineplex theatres, the Cineplex Store and LBE venues. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 11 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Total revenues for the fourth quarter of 2021 increased 471.9%, or $247.5 million to $300.0 million as compared to the prior year period. In the prior year, the majority of Cineplex’s businesses were closed or operating under strict capacity restrictions as a result of significant increases in daily COVID-19 case counts. During the fourth quarter of 2021, Cineplex’s entire circuit of theatres and LBE venues were open, subject to capacity and operating restrictions in select provinces, resulting in significant increases in revenue when compared to the prior year period. The release of highly anticipated films including Spider-Man: No Way Home, Dune, No Time To Die and Venom: Let There Be Carnage contributed to the significant theatre attendance increase of 9.5 million to 10.2 million as compared to 0.8 million in the prior year period which had limited first run films. Cineplex reported box office revenues of $125.9 million in the fourth quarter and an all-time quarterly record BPP of $12.29, food service revenues of $87.2 million and a fourth quarter CPP of $7.49 which was negatively impacted by restrictions on food service sales in Cineplex’s theatres. Food service revenues consist of theatre food service revenue of $76.7 million, home delivery revenues of $3.0 million and LBE food service revenues of $7.5 million. Media revenues of $32.8 million were mainly from cinema media and network management and services. Amusement revenues of $45.1 million generated in the fourth quarter were primarily from P1AG route operations including family entertainment centres (“FEC”) locations and theatres that reopened in the United States and Canada. Cineplex reported an increase in adjusted EBITDAaL of $86.1 million to $20.2 million compared to the prior year period loss of $65.9 million and adjusted free cash flow per Share was a loss of $(0.016) as compared to a loss in the prior year period of $(0.482). Cineplex’s Cineplex Inc. net loss from continuing operations decreased from a reported loss of $230.4 million in the prior year period to a loss of $21.8 million in the current period with a net loss per share from continuing operations decreasing from Management's Discussion and Analysis $(3.64) in the prior year period to $(0.34) in the current period. Reflecting the positive reopening of Cineplex’s businesses, total revenues for the year ended December 31, 2021 increased by $238.4 million to $656.7 million, or 57.0% from $418.3 million recognized in the prior year period. Adjusted EBITDAaL for the year was a loss of $84.3 million as compared to a loss of $182.8 million recognized in the prior year. For the annual period, Cineplex was able to reduce its net loss from continuing operations reported in the current year from $624.0 million reported in the prior year to $248.7 million reported in the current year period. 1.3 KEY DEVELOPMENTS IN 2021 The following describes certain key business initiatives undertaken and results achieved during 2021 in each of Cineplex’s core business areas: FILM ENTERTAINMENT AND CONTENT Theatre Exhibition • • • • • • Reported annual box office revenues of $236.3 million, a 77.9% increase from 2020 as a result of increased theatre attendance due to theatre reopenings compared to theatre closures that remained in effect for a majority of the prior year period. BPP was $11.77, an all-time annual record, an increase of $1.60 or 15.7% when compared to the prior year due to new releases and premium offerings in the current period as compared to the prior period which focused on discounted pricing for older and more classic film product. Opened Quebec’s second VIP Cinemas at Cineplex Forum and VIP in downtown Montreal on June 18, 2021. Opened Western Canada’s first standalone VIP Cinemas at Cineplex VIP Cinemas Brentwood in Burnaby, British Columbia on July 7, 2021. Opened Cineplex’s 25th VIP Cinemas, Cineplex VIP Cinemas University District located in the University District Calgary on November 17, 2021. Opened three new ScreenX auditoriums: Scotiabank Theatre Winnipeg in Manitoba, Cinéma Cineplex Odeon Brossard et VIP in Quebec and Cineplex Cinemas Ancaster in Ontario Launched CineClub, Canada’s first of its kind movie subscription program providing members with benefits accessible across Cineplex’s businesses nationwide including Cineplex theatres, the Cineplex Store and LBE venues. Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— • Theatre Food Service • • CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS Reported annual theatre food service revenues of $159.2 million, a 74.2% increase compared to the prior year period primarily due to a significant increase in theatre attendance as a result of the reopening of theatres coupled with a record CPP. CPP was $7.93, an all-time annual record, an increase of $0.94 or 13.4% when compared to the prior year, due to product mix, modest price increases and film product that appealed to first-run viewers who tend to have a higher concession spend. Continued focus on theatre food delivery service over the prior year reporting annual revenues of $13.1 million, an increase of 59.7% or $4.9 million. • 11 Alternative Programming • • Alternative Programming (Cineplex Events) included the stage event The Great Big Boo, the documentary about the author CS Lewis, the anime features Sword Art Online and Gintara, as well as the successful re- release of past films including the reissue of The Matrix, Halloween (1999) and Rad the 35th Anniversary. Cineplex released the feature film Lamb on October 8, 2021 and The Tragedy of Macbeth on December 25, 2021. Digital Commerce • • Total registered users for Cineplex Store increased by 18% as compared to the prior year period, reaching over 2.2 million registered users. Cineplex Store continues to benefit from Premium Video On Demand (“PVOD”) and Premium Electronic Sell Through (“PEST”) releases. MEDIA • Cinema Media • • • • • • Total media revenues remained flat at $65.3 million for the year ended December 31, 2021. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 19 Reported annual Cinema media revenues of $33.0 million, an increase of $9.4 million or 39.8% over the prior year, due to increases in show-time and pre-show advertising as a result of reopened theatres and new film releases. Digital Place-Based Media that optimizes digital signage. AMUSEMENT AND LEISURE Amusement Solutions Location-based Entertainment Reported annual revenues of $32.4 million, a decrease of $9.4 million or 22.5%, compared to 2020. The decrease is attributable to a lower number of deployments combined with the impact of certain contract expirations while focusing on higher margin projects. Cineplex Digital Media rolled out the Flex SmartEngine, a data-driven machine learning software platform Reported annual revenues of $134.5 million an increase of $56.6 million or 72.6% as compared to the prior year. The increase is due to the reopening of P1AG route locations in Canada and the United States. Reported total annual revenues of $44.8 million including food service revenues of $14.7 million, amusement revenues of $29.2 million and other revenues of $0.8 million, an increase of $19.2 million or 75.3% as compared to 2020. The increase was due to the reopening of LBE businesses compared to closures that remained in effect for a majority of the prior year period. Opened Playdium in Dartmouth, Nova Scotia on February 26, 2021, British Columbia’s first location of The Rec Room in Burnaby on July 5, 2021, and The Rec Room in Barrie, Ontario, on July 26, 2021. With these openings, Cineplex has 10 locations of The Rec Room and three locations of Playdium across Canada. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 12 Cineplex Inc. Management’s Discussion and Analysis Theatre Food Service ————————————————————————————————————————————— Reported annual theatre food service revenues of $159.2 million, a 74.2% increase compared to the prior year period primarily due to a significant increase in theatre attendance as a result of the reopening of theatres coupled with a record CPP. CPP was $7.93, an all-time annual record, an increase of $0.94 or 13.4% when compared to the prior year, due to product mix, modest price increases and film product that appealed to first-run viewers who tend to have a higher concession spend. million, an increase of 59.7% or $4.9 million. Continued focus on theatre food delivery service over the prior year reporting annual revenues of $13.1 Alternative Programming Alternative Programming (Cineplex Events) included the stage event The Great Big Boo, the documentary about the author CS Lewis, the anime features Sword Art Online and Gintara, as well as the successful re- release of past films including the reissue of The Matrix, Halloween (1999) and Rad the 35th Anniversary. Cineplex released the feature film Lamb on October 8, 2021 and The Tragedy of Macbeth on December 25, • • • • • 2021. Digital Commerce • Total registered users for Cineplex Store increased by 18% as compared to the prior year period, reaching Cineplex Inc. over 2.2 million registered users. Cineplex Store continues to benefit from Premium Video On Demand (“PVOD”) and Premium Electronic Management's Discussion and Analysis Sell Through (“PEST”) releases. • MEDIA • Total media revenues remained flat at $65.3 million for the year ended December 31, 2021. Cinema Media • Reported annual Cinema media revenues of $33.0 million, an increase of $9.4 million or 39.8% over the prior year, due to increases in show-time and pre-show advertising as a result of reopened theatres and new film releases. Digital Place-Based Media • • Reported annual revenues of $32.4 million, a decrease of $9.4 million or 22.5%, compared to 2020. The decrease is attributable to a lower number of deployments combined with the impact of certain contract expirations while focusing on higher margin projects. Cineplex Digital Media rolled out the Flex SmartEngine, a data-driven machine learning software platform that optimizes digital signage. AMUSEMENT AND LEISURE Amusement Solutions • Reported annual revenues of $134.5 million an increase of $56.6 million or 72.6% as compared to the prior year. The increase is due to the reopening of P1AG route locations in Canada and the United States. Location-based Entertainment • • Reported total annual revenues of $44.8 million including food service revenues of $14.7 million, amusement revenues of $29.2 million and other revenues of $0.8 million, an increase of $19.2 million or 75.3% as compared to 2020. The increase was due to the reopening of LBE businesses compared to closures that remained in effect for a majority of the prior year period. Opened Playdium in Dartmouth, Nova Scotia on February 26, 2021, British Columbia’s first location of The Rec Room in Burnaby on July 5, 2021, and The Rec Room in Barrie, Ontario, on July 26, 2021. With these openings, Cineplex has 10 locations of The Rec Room and three locations of Playdium across Canada. Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— LOYALTY • Scene+ launched on December 13, 2021, merging the SCENE loyalty and Scotia Rewards programs. • Membership in the Scene+ loyalty program remained flat during the year ended December 31, 2021. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 12 CORPORATE • • • • • • Cineplex completed a sale and leaseback transaction for its head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57.0 million. Fifty percent of the net proceeds were used to permanently reduce the amount outstanding under Cineplex’s Credit Facilities. On February 8, 2021, Cineplex and Cineplex Entertainment Limited Partnership entered into the Third Credit Agreement Amendment with The Bank of Nova Scotia providing Cineplex with certain financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s business (Section 7.4, Long-term debt). On February 26, 2021, Cineplex completed the $250.0 million Notes Payable offering. Cineplex used the net proceeds raised in part to permanently repay $100.0 million of its Credit Facilities. The Notes Payable bear interest at a rate of 7.50% per annum and mature on February 26, 2026 (Section 7.4, Long-term debt) Cineplex negotiated the sale of certain restrictive lease rights for total proceeds of $6.4 million. On December 14, 2021 the Ontario Superior Court of Justice ruled in favour of Cineplex, finding that Cineworld repudiated the transaction to acquire Cineplex. The court awarded damages for breach of contract to Cineplex in the amount of $1.24 billion and reimbursement of transaction costs of $5.5 million. On December 30, 2021, Cineplex and Cineplex Entertainment Limited Partnership entered into the Fourth Credit Agreement Amendment with The Bank of Nova Scotia, which among other things, extended the suspension of financial covenant testing until the second quarter of 2022 and liquidity covenant requirements until June 30, 2022 (Section 7.4, Long-term debt). 2. CINEPLEX’S BUSINESS AND STRATEGY Cineplex’s mission statement is “Passionately delivering exceptional experiences.” All of its efforts are focused towards this mission and it is Cineplex’s goal to consistently provide guests and customers with exceptional CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS experiences. 20 Cineplex’s operations are primarily conducted in four main areas: film entertainment and content, media, amusement and leisure, and location-based entertainment, all supported by the Scene+ loyalty program. Cineplex’s key strategic areas of focus include the following: • • • • • Continue to enhance and expand Cineplex’s presence as an entertainment destination for Canadians in- theatre, at-home and on-the-go; business both inside and outside theatres; Capitalize on core media strengths and infrastructure to provide continued growth of Cineplex’s media Develop and scale amusement and leisure concepts by extending existing capabilities and infrastructure; Drive value within businesses by leveraging opportunities to optimize value, realize synergies, implement customer-centric technology and leverage big data across the Cineplex ecosystems; and Pursue opportunities that capitalize on Cineplex’s core strengths. Cineplex uses the Scene+ loyalty program and database as a strategic asset to link these areas of focus and drive customer acquisition and spending across all lines of business. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 13 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Diversified Entertainment and Media Company Key elements of this strategy include going beyond movies to reach customers in new ways and maximizing revenue per patron. Cineplex has implemented in-theatre initiatives to improve the overall entertainment experience, including increased premium offerings, enhanced in-theatre services, alternative pricing strategies, continued development of the Scene+ loyalty program and initiatives in theatre food service such as optimizing and adding product offerings and improving service execution. The ultimate goal of these in-theatre customer service initiatives is to maximize revenue per patron and increase the frequency of movie-going at Cineplex’s theatres. While box office revenues (which include alternative programming) typically account for the largest portion of Cineplex’s revenues, Cineplex has diversified its revenue streams through expanded theatre food service offerings, cinema media, digital place-based media, amusement and leisure, the Cineplex Store, promotions and other revenue streams which have increased as a share of total revenues. As a result of the impact of the COVID-19 pandemic on Cineplex’s business, Cineplex’s attention has shifted to respond to the impacts of the COVID-19 pandemic by implementing a variety of measures to reduce costs and has placed an increased focus on the safe reopening of its business (see Section 1.1, COVID-19 business impacts, risks and liquidity). The following charts present the annual results: Net income (loss) (millions) 2017 2018 2019 2020 2021 $(624.0) $(248.7) $70.3 $77.0 $28.9 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 14 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Scene+ launched on December 13, 2021, merging the SCENE loyalty and Scotia Rewards programs. • Membership in the Scene+ loyalty program remained flat during the year ended December 31, 2021. LOYALTY CORPORATE Cineplex completed a sale and leaseback transaction for its head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57.0 million. Fifty percent of the net proceeds were used to permanently reduce the amount outstanding under Cineplex’s Credit Facilities. On February 8, 2021, Cineplex and Cineplex Entertainment Limited Partnership entered into the Third Credit Agreement Amendment with The Bank of Nova Scotia providing Cineplex with certain financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s business (Section 7.4, Long-term debt). On February 26, 2021, Cineplex completed the $250.0 million Notes Payable offering. Cineplex used the net proceeds raised in part to permanently repay $100.0 million of its Credit Facilities. The Notes Payable bear interest at a rate of 7.50% per annum and mature on February 26, 2026 (Section 7.4, Long-term debt) Cineplex negotiated the sale of certain restrictive lease rights for total proceeds of $6.4 million. • • • • • • On December 14, 2021 the Ontario Superior Court of Justice ruled in favour of Cineplex, finding that Cineworld repudiated the transaction to acquire Cineplex. The court awarded damages for breach of contract to Cineplex in the amount of $1.24 billion and reimbursement of transaction costs of $5.5 million. On December 30, 2021, Cineplex and Cineplex Entertainment Limited Partnership entered into the Fourth Credit Agreement Amendment with The Bank of Nova Scotia, which among other things, extended the suspension of financial covenant testing until the second quarter of 2022 and liquidity covenant requirements until June 30, 2022 (Section 7.4, Long-term debt). Cineplex Inc. Management's Discussion and Analysis • 2. CINEPLEX’S BUSINESS AND STRATEGY Cineplex’s mission statement is “Passionately delivering exceptional experiences.” All of its efforts are focused towards this mission and it is Cineplex’s goal to consistently provide guests and customers with exceptional experiences. Cineplex’s operations are primarily conducted in four main areas: film entertainment and content, media, amusement and leisure, and location-based entertainment, all supported by the Scene+ loyalty program. Cineplex’s key strategic areas of focus include the following: • • • • • Continue to enhance and expand Cineplex’s presence as an entertainment destination for Canadians in- theatre, at-home and on-the-go; Capitalize on core media strengths and infrastructure to provide continued growth of Cineplex’s media business both inside and outside theatres; Develop and scale amusement and leisure concepts by extending existing capabilities and infrastructure; Drive value within businesses by leveraging opportunities to optimize value, realize synergies, implement customer-centric technology and leverage big data across the Cineplex ecosystems; and Pursue opportunities that capitalize on Cineplex’s core strengths. Cineplex uses the Scene+ loyalty program and database as a strategic asset to link these areas of focus and drive customer acquisition and spending across all lines of business. Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Diversified Entertainment and Media Company CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 13 Key elements of this strategy include going beyond movies to reach customers in new ways and maximizing revenue per patron. Cineplex has implemented in-theatre initiatives to improve the overall entertainment experience, including increased premium offerings, enhanced in-theatre services, alternative pricing strategies, continued development of the Scene+ loyalty program and initiatives in theatre food service such as optimizing and adding product offerings and improving service execution. The ultimate goal of these in-theatre customer service initiatives is to maximize revenue per patron and increase the frequency of movie-going at Cineplex’s theatres. CINEPLEX INC. 2021 ANNUAL REPORT While box office revenues (which include alternative programming) typically account for the largest portion of MANAGEMENT'S DISCUSSION AND ANALYSIS 21 Cineplex’s revenues, Cineplex has diversified its revenue streams through expanded theatre food service offerings, cinema media, digital place-based media, amusement and leisure, the Cineplex Store, promotions and other revenue streams which have increased as a share of total revenues. As a result of the impact of the COVID-19 pandemic on Cineplex’s business, Cineplex’s attention has shifted to respond to the impacts of the COVID-19 pandemic by implementing a variety of measures to reduce costs and has placed an increased focus on the safe reopening of its business (see Section 1.1, COVID-19 business impacts, risks and liquidity). The following charts present the annual results: Net income (loss) (millions) 2017 2018 2019 2020 2021 $(624.0) $(248.7) $70.3 $77.0 $28.9 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 14 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Diversified Entertainment and Media Company Cineplex Inc. Management's Discussion and Analysis Key elements of this strategy include going beyond movies to reach customers in new ways and maximizing revenue per patron. Cineplex has implemented in-theatre initiatives to improve the overall entertainment experience, including increased premium offerings, enhanced in-theatre services, alternative pricing strategies, continued development of the Scene+ loyalty program and initiatives in theatre food service such as optimizing and adding product offerings and improving service execution. The ultimate goal of these in-theatre customer service initiatives is to maximize revenue per patron and increase the frequency of movie-going at Cineplex’s theatres. While box office revenues (which include alternative programming) typically account for the largest portion of Cineplex’s revenues, Cineplex has diversified its revenue streams through expanded theatre food service offerings, cinema media, digital place-based media, amusement and leisure, the Cineplex Store, promotions and other revenue streams which have increased as a share of total revenues. As a result of the impact of the COVID-19 pandemic on Cineplex’s business, Cineplex’s attention has shifted to respond to the impacts of the COVID-19 pandemic by implementing a variety of measures to reduce costs and has placed an increased focus on the safe reopening of its business (see Section 1.1, COVID-19 business impacts, risks and liquidity). The following charts present the annual results: Net income (loss) (millions) 2017 2018 2019 2020 2021 $(624.0) $(248.7) $70.3 $77.0 $28.9 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— 14 Net income (loss) as a % of sales 2017 2018 2019 2020 2021 (149.2)% (37.9)% 4.5% 4.8% 1.7% Adjusted EBITDAaL (millions) (i) 2017 2018 2019 2020 2021 $(182.8) $(84.3) $224.7 $247.3 $230.5 Adjusted EBITDAaL Margin (i) 2017 2018 2019 2020 2021 (43.7)% (12.8)% 14.5% 15.3% 13.8% CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 22 (i) 2021 includes expenses related to the Cineworld Transaction and associated litigation in the amount of $11.4 million (2020 $4.1 million). 3. CINEPLEX’S BUSINESSES During 2021, all aspects of Cineplex’s business were materially negatively impacted by COVID-19. Despite this impact, the following reflects management’s belief that its business will return to profitability as operating restrictions are eventually fully lifted across all of Cineplex’s businesses and guests return to Cineplex’s theatres and venues. Cineplex’s operations are primarily conducted in four main areas: film entertainment and content, media, amusement and leisure and location-based entertainment, all supported by the Scene+ loyalty program. FILM ENTERTAINMENT AND CONTENT Theatre Exhibition Theatre exhibition is the core business of Cineplex. Box office revenues are highly dependent on the marketability, quality and appeal of the film product released by the major motion picture studios. The motion picture industry consists of three principal activities: production, distribution and exhibition. Production involves the development, financing and creation of feature-length motion pictures. Distribution involves the promotion and exploitation of motion pictures in a variety of different channels. Theatrical exhibition is a key channel for new motion picture releases and is the core business function of Cineplex. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 15 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Net income (loss) as a % of sales 2017 2018 2019 2020 2021 (149.2)% (37.9)% 4.5% 4.8% 1.7% Cineplex Inc. Management's Discussion and Analysis Adjusted EBITDAaL (millions) (i) 2017 2018 2019 2020 2021 $(182.8) $(84.3) $224.7 $247.3 $230.5 Adjusted EBITDAaL Margin (i) 2017 2018 2019 2020 2021 (43.7)% (12.8)% 14.5% 15.3% 13.8% (i) 2021 includes expenses related to the Cineworld Transaction and associated litigation in the amount of $11.4 million (2020 $4.1 million). 3. CINEPLEX’S BUSINESSES During 2021, all aspects of Cineplex’s business were materially negatively impacted by COVID-19. Despite this impact, the following reflects management’s belief that its business will return to profitability as operating restrictions are eventually fully lifted across all of Cineplex’s businesses and guests return to Cineplex’s theatres and venues. Cineplex’s operations are primarily conducted in four main areas: film entertainment and content, media, amusement and leisure and location-based entertainment, all supported by the Scene+ loyalty program. FILM ENTERTAINMENT AND CONTENT Theatre Exhibition Theatre exhibition is the core business of Cineplex. Box office revenues are highly dependent on the marketability, quality and appeal of the film product released by the major motion picture studios. The motion picture industry consists of three principal activities: production, distribution and exhibition. Production involves the development, financing and creation of feature-length motion pictures. Distribution involves the promotion and exploitation of motion pictures in a variety of different channels. Theatrical exhibition is a key channel for new motion picture releases and is the core business function of Cineplex. Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Canadian Industry Box Office (in millions) $992.5 $1,031.3 $1,022.0 $235.0 $345.0 CINEPLEX INC. 2021 ANNUAL REPORT 2021 MANAGEMENT’S DISCUSSION & ANALYSIS 2017 2018 2019 2020 Source: Movie Theatre Association of Canada ("MTAC") 15 Cineplex believes that the following market trends are important factors in the growth of the film exhibition industry in Canada: • • Importance of theatrical success in establishing movie brands and subsequent movies. Theatrical exhibition is the initial and most important channel for new motion picture releases. A successful theatrical release which “brands” a film is often the determining factor in its popularity and value in “downstream” distribution channels, such as transactional video-on-demand (“TVoD”), Blu-ray, pay-per-view, subscription video-on-demand (“SVoD”) as well as network television. While studios have experimented with different release strategies through secondary channels such as streaming, initial theatrical releases continue to be the most vital channel for film success as evidenced by the successful box office releases of CINEPLEX INC. 2021 ANNUAL REPORT Spider-Man: No Way Home and Shang-Chi and the Legend of the Ten Rings. MANAGEMENT'S DISCUSSION AND ANALYSIS 23 Continued supply of successful films. Studios are increasingly producing film franchises, such as Star Wars, Fast & Furious and Jurassic Park. Additionally, new franchises continue to be developed, such as the films in the Marvel and DC universes. When the first film in a franchise is successful, subsequent films in the franchise benefit from existing public awareness and anticipation. The result is that such features typically attract large audiences and generate strong box office revenues. The success of a broader range of film genres also benefits film exhibitors. In 2022, the studios are currently planning to release a strong slate of films, including Morbius, Uncharted, The Batman, Sonic the Hedgehog 2, Fantastic Beasts: The Secrets of Dumbledore, Doctor Strange in the Multiverse of Madness, Legally Blonde 3, Top Gun:Maverick, John Wick: Chapter 4, Jurassic World: Dominon, Lightyear, Minions: The Rise of Gru, Thor:Love and Thunder, Black Adam, Puss in Boots: The Last Wish, Spider-Man: Across The Spider-Verse - Part One, The Flash, Black Panther: Wakanda Forever, Avatar 2 and Aquaman and the Lost Kingdom. In spite of changing release models, Cineplex remains confident that studios will continue to release a significant number of films with an exclusive theatrical window. • Convenient and affordable form of out-of-home entertainment. Cineplex’s BPP was $11.77 and $10.17 in 2021 and 2020, respectively. Excluding the impact of Cineplex’s premium-priced product, BPP was $10.25 and $9.18 in 2021 and 2020, respectively. The movie-going experience continues to provide value and compares favourably to alternative forms of out-of-home entertainment in Canada such as professional sporting events or live theatre, and with Cineplex, Scene+ members enjoy the ability to earn points towards Cineplex products as well as discounts and special offers. CineClub members also have benefits accessible across Cineplex’s businesses nationwide including Cineplex theatres, the Cineplex Store and LBE venues. • Providing a variety of premium and enhanced guest theatre experiences. Premium priced theatre offerings include 3D, 4DX, UltraAVX, VIP, IMAX, D-BOX, ScreenX and Cineplex Clubhouse. BPP for premium- priced product was $15.37 in 2021, and accounted for 38.7% of total box office revenues in 2021. Recent enhancements to the current circuit include the addition of three VIP Cinemas and three new ScreenX auditoriums. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 16 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Canadian Industry Box Office (in millions) $992.5 $1,031.3 $1,022.0 $235.0 $345.0 2017 2018 2019 2020 2021 Source: Movie Theatre Association of Canada ("MTAC") Cineplex Inc. Cineplex believes that the following market trends are important factors in the growth of the film exhibition industry Management's Discussion and Analysis in Canada: • • • Importance of theatrical success in establishing movie brands and subsequent movies. Theatrical exhibition is the initial and most important channel for new motion picture releases. A successful theatrical release which “brands” a film is often the determining factor in its popularity and value in “downstream” distribution channels, such as transactional video-on-demand (“TVoD”), Blu-ray, pay-per-view, subscription video-on-demand (“SVoD”) as well as network television. While studios have experimented with different release strategies through secondary channels such as streaming, initial theatrical releases continue to be the most vital channel for film success as evidenced by the successful box office releases of Spider-Man: No Way Home and Shang-Chi and the Legend of the Ten Rings. Continued supply of successful films. Studios are increasingly producing film franchises, such as Star Wars, Fast & Furious and Jurassic Park. Additionally, new franchises continue to be developed, such as the films in the Marvel and DC universes. When the first film in a franchise is successful, subsequent films in the franchise benefit from existing public awareness and anticipation. The result is that such features typically attract large audiences and generate strong box office revenues. The success of a broader range of film genres also benefits film exhibitors. In 2022, the studios are currently planning to release a strong slate of films, including Morbius, Uncharted, The Batman, Sonic the Hedgehog 2, Fantastic Beasts: The Secrets of Dumbledore, Doctor Strange in the Multiverse of Madness, Legally Blonde 3, Top Gun:Maverick, John Wick: Chapter 4, Jurassic World: Dominon, Lightyear, Minions: The Rise of Gru, Thor:Love and Thunder, Black Adam, Puss in Boots: The Last Wish, Spider-Man: Across The Spider-Verse - Part One, The Flash, Black Panther: Wakanda Forever, Avatar 2 and Aquaman and the Lost Kingdom. In spite of changing release models, Cineplex remains confident that studios will continue to release a significant number of films with an exclusive theatrical window. Convenient and affordable form of out-of-home entertainment. Cineplex’s BPP was $11.77 and $10.17 in 2021 and 2020, respectively. Excluding the impact of Cineplex’s premium-priced product, BPP was $10.25 and $9.18 in 2021 and 2020, respectively. The movie-going experience continues to provide value and compares favourably to alternative forms of out-of-home entertainment in Canada such as professional sporting events or live theatre, and with Cineplex, Scene+ members enjoy the ability to earn points towards Cineplex products as well as discounts and special offers. CineClub members also have benefits accessible across Cineplex’s businesses nationwide including Cineplex theatres, the Cineplex Store and LBE venues. • Providing a variety of premium and enhanced guest theatre experiences. Premium priced theatre offerings include 3D, 4DX, UltraAVX, VIP, IMAX, D-BOX, ScreenX and Cineplex Clubhouse. BPP for premium- priced product was $15.37 in 2021, and accounted for 38.7% of total box office revenues in 2021. Recent enhancements to the current circuit include the addition of three VIP Cinemas and three new ScreenX Cineplex Inc. auditoriums. Management’s Discussion and Analysis ————————————————————————————————————————————— Box Office Revenues (millions) $715.6 $724.2 $705.5 Box Office Revenue per Patron CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS $10.17 $10.46 $10.63 $10.17 $11.77 16 $132.8 $236.3 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Alternative Programming it to leading market position enables Cineplex’s effectively manage film, food service and other theatre- level costs, thereby maximizing operating efficiencies. Cineplex seeks to continue to achieve incremental operating savings by, among other things, implementing improved supplier best practices and negotiating CINEPLEX INC. 2021 ANNUAL REPORT contracts. In addition, Cineplex continues to evaluate its MANAGEMENT'S DISCUSSION AND ANALYSIS existing theatre portfolio on an ongoing basis. 24 Theatre Attendance (millions) 70.4 69.3 66.4 13.1 20.1 2017 2018 2019 2020 2021 The development of premium experiences through design, structure and digital technology makes Cineplex theatres ideal locations for meetings and corporate events. Organizations, particularly corporations with offices across the country, can use Cineplex’s theatres and digital technology for annual meetings, product launches and employee or customer events, producing revenue streams independent of film exhibition. Theatre Food Service Cineplex’s theatre food service business offers guests a range of food choices to enhance their theatre experience while generating strong profit margins for the company. Cineplex’s theatres feature its internally developed brands: Outtakes and Melt. Certain Cineplex theatres also feature popular fast food retail branded outlets (“RBO’s”) including Starbucks and Pizza Pizza, among others. Cineplex continually focuses on process improvements designed to increase the speed of service at the concession counter in addition to optimizing the RBO’s available at Cineplex’s theatres. Each of the wide range of menu items available at Outtakes locations, expanded liquor service available in theatres, partnerships with Uber Eats and Skip The Dishes as well as the expanded menu and the licensed lounge service available at VIP Cinemas are designed to reach a wider market and to increase both purchase incidence and transaction value. Digital menu boards installed across the circuit offer flexibility in menu offerings to guests which contribute to an improved guest experience while also creating additional revenue opportunities. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 17 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Theatre Food Service Revenues (millions) $422.3 $440.7 $446.6 $99.6 $172.3 Concession Revenue per Patron $6.00 $6.36 $6.73 $6.99 $7.93 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Alternative programming includes Cineplex’s international film programming as well as content offered under its Event Cinema brand offerings, including The Metropolitan Opera, sporting events, concerts and dedicated event screens. International film programming includes Bollywood content as well as Cantonese, Hindi, Punjabi, Mandarin, Korean and Filipino language films, amongst others, in select theatres across the country based on local demographics. This programming attracts a more diverse audience, expanding Cineplex’s demographic reach and enhancing revenues. The success of Cineplex’s alternative programming events has led to offerings including the National Theatre from London, the In the Gallery series and screening select television content on the big screen. Cineplex offers the Classic Film Series and Family Favourites programming at non-peak hours to enhance theatre utilization rates. As additional content becomes available, Cineplex will continue to expand its alternative programming offerings. Cineplex distributed a limited number of films including the feature film Lamb on October 8, 2021 and The Tragedy of Macbeth on December 25, 2021. Digital Commerce Cineplex’s digital products consist of cineplex.com, the Cineplex mobile app and the Cineplex Store. Cineplex has developed cineplex.com into one of the leading entertainment sites in Canada, a destination of choice for Canadians seeking movie entertainment information on the internet. The website offers streaming video, movie information, showtimes and the ability to buy tickets online, entertainment news and box office reports as well as advertising and digital commerce opportunities. To complement cineplex.com, the Cineplex mobile app is available as a free download for a wide variety of devices, providing guests with the ability to find showtimes, buy tickets as well as find information relating to the latest movie choices and movie-related entertainment content in addition to providing mobile food and beverage ordering in VIP auditoriums. These features and others enable Cineplex to engage and interact with its guests online and on-the-go, allowing Cineplex to offer engaging, targeted and sponsored content to visitors and advertisers, resulting in opportunities to generate additional revenues. The Cineplex Store rents and sells over 11,600 movies in digital form (TVoD including PVOD and PEST movies). Cineplex continues to improve the user experience including releasing new Cineplex Store user interfaces and experiences across the website and multiple connected televisions and device apps. Cineplex’s strong brand association with movies and well-established partnerships with movie studios combined with Cineplex’s website, app and the Cineplex Store provide Cineplex with the ability to expand its touchpoints to consumers across multiple channels. As emerging technologies continue to change the ways in which content is consumed, Cineplex will continue to leverage its digital commerce properties to provide guests with in home and on-the-go options for content delivery. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 18 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Box Office Revenues (millions) $715.6 $724.2 $705.5 $132.8 $236.3 Box Office Revenue per Patron $10.17 $10.46 $10.63 $10.17 $11.77 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Cineplex Inc. Management's Discussion and Analysis it to leading market position enables Cineplex’s effectively manage film, food service and other theatre- level costs, thereby maximizing operating efficiencies. Cineplex seeks to continue to achieve incremental operating savings by, among other things, implementing best practices and negotiating improved supplier contracts. In addition, Cineplex continues to evaluate its existing theatre portfolio on an ongoing basis. Theatre Attendance (millions) 70.4 69.3 66.4 13.1 20.1 2017 2018 2019 2020 2021 The development of premium experiences through design, structure and digital technology makes Cineplex theatres ideal locations for meetings and corporate events. Organizations, particularly corporations with offices across the country, can use Cineplex’s theatres and digital technology for annual meetings, product launches and employee or customer events, producing revenue streams independent of film exhibition. Theatre Food Service Cineplex’s theatre food service business offers guests a range of food choices to enhance their theatre experience while generating strong profit margins for the company. Cineplex’s theatres feature its internally developed brands: Outtakes and Melt. Certain Cineplex theatres also feature popular fast food retail branded outlets (“RBO’s”) including Starbucks and Pizza Pizza, among others. Cineplex continually focuses on process improvements designed to increase the speed of service at the concession counter in addition to optimizing the RBO’s available at Cineplex’s theatres. Each of the wide range of menu items available at Outtakes locations, expanded liquor service available in theatres, partnerships with Uber Eats and Skip The Dishes as well as the expanded menu and the licensed lounge service available at VIP Cinemas are designed to reach a wider market and to increase both purchase incidence and transaction value. Digital menu boards installed Cineplex Inc. across the circuit offer flexibility in menu offerings to guests which contribute to an improved guest experience Management’s Discussion and Analysis while also creating additional revenue opportunities. ————————————————————————————————————————————— Theatre Food Service Revenues (millions) $446.6 $440.7 $422.3 $99.6 $172.3 Concession Revenue per Patron $6.00 $6.36 $6.73 $6.99 $7.93 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS Alternative Programming 17 Alternative programming includes Cineplex’s international film programming as well as content offered under its Event Cinema brand offerings, including The Metropolitan Opera, sporting events, concerts and dedicated event screens. International film programming includes Bollywood content as well as Cantonese, Hindi, Punjabi, Mandarin, Korean and Filipino language films, amongst others, in select theatres across the country based on local demographics. This programming attracts a more diverse audience, expanding Cineplex’s demographic reach and enhancing revenues. The success of Cineplex’s alternative programming events has led to offerings including the National Theatre from London, the In the Gallery series and screening select television content on the big screen. Cineplex offers the Classic Film Series and Family Favourites programming at non-peak hours to enhance theatre utilization rates. As CINEPLEX INC. 2021 ANNUAL REPORT additional content becomes available, Cineplex will continue to expand its alternative programming offerings. MANAGEMENT'S DISCUSSION AND ANALYSIS 25 Cineplex distributed a limited number of films including the feature film Lamb on October 8, 2021 and The Tragedy of Macbeth on December 25, 2021. Digital Commerce Cineplex’s digital products consist of cineplex.com, the Cineplex mobile app and the Cineplex Store. Cineplex has developed cineplex.com into one of the leading entertainment sites in Canada, a destination of choice for Canadians seeking movie entertainment information on the internet. The website offers streaming video, movie information, showtimes and the ability to buy tickets online, entertainment news and box office reports as well as advertising and digital commerce opportunities. To complement cineplex.com, the Cineplex mobile app is available as a free download for a wide variety of devices, providing guests with the ability to find showtimes, buy tickets as well as find information relating to the latest movie choices and movie-related entertainment content in addition to providing mobile food and beverage ordering in VIP auditoriums. These features and others enable Cineplex to engage and interact with its guests online and on-the-go, allowing Cineplex to offer engaging, targeted and sponsored content to visitors and advertisers, resulting in opportunities to generate additional revenues. The Cineplex Store rents and sells over 11,600 movies in digital form (TVoD including PVOD and PEST movies). Cineplex continues to improve the user experience including releasing new Cineplex Store user interfaces and experiences across the website and multiple connected televisions and device apps. Cineplex’s strong brand association with movies and well-established partnerships with movie studios combined with Cineplex’s website, app and the Cineplex Store provide Cineplex with the ability to expand its touchpoints to consumers across multiple channels. As emerging technologies continue to change the ways in which content is consumed, Cineplex will continue to leverage its digital commerce properties to provide guests with in home and on-the-go options for content delivery. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 18 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Theatre Food Service Revenues (millions) $422.3 $440.7 $446.6 $99.6 $172.3 Concession Revenue per Patron $6.00 $6.36 $6.73 $6.99 $7.93 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Cineplex Inc. Management's Discussion and Analysis Alternative Programming Alternative programming includes Cineplex’s international film programming as well as content offered under its Event Cinema brand offerings, including The Metropolitan Opera, sporting events, concerts and dedicated event screens. International film programming includes Bollywood content as well as Cantonese, Hindi, Punjabi, Mandarin, Korean and Filipino language films, amongst others, in select theatres across the country based on local demographics. This programming attracts a more diverse audience, expanding Cineplex’s demographic reach and enhancing revenues. The success of Cineplex’s alternative programming events has led to offerings including the National Theatre from London, the In the Gallery series and screening select television content on the big screen. Cineplex offers the Classic Film Series and Family Favourites programming at non-peak hours to enhance theatre utilization rates. As additional content becomes available, Cineplex will continue to expand its alternative programming offerings. Cineplex distributed a limited number of films including the feature film Lamb on October 8, 2021 and The Tragedy of Macbeth on December 25, 2021. Digital Commerce Cineplex’s digital products consist of cineplex.com, the Cineplex mobile app and the Cineplex Store. Cineplex has developed cineplex.com into one of the leading entertainment sites in Canada, a destination of choice for Canadians seeking movie entertainment information on the internet. The website offers streaming video, movie information, showtimes and the ability to buy tickets online, entertainment news and box office reports as well as advertising and digital commerce opportunities. To complement cineplex.com, the Cineplex mobile app is available as a free download for a wide variety of devices, providing guests with the ability to find showtimes, buy tickets as well as find information relating to the latest movie choices and movie-related entertainment content in addition to providing mobile food and beverage ordering in VIP auditoriums. These features and others enable Cineplex to engage and interact with its guests online and on-the-go, allowing Cineplex to offer engaging, targeted and sponsored content to visitors and advertisers, resulting in opportunities to generate additional revenues. The Cineplex Store rents and sells over 11,600 movies in digital form (TVoD including PVOD and PEST movies). Cineplex continues to improve the user experience including releasing new Cineplex Store user interfaces and experiences across the website and multiple connected televisions and device apps. Cineplex’s strong brand association with movies and well-established partnerships with movie studios combined with Cineplex’s website, app and the Cineplex Store provide Cineplex with the ability to expand its touchpoints to consumers across multiple channels. As emerging technologies continue to change the ways in which content is consumed, Cineplex will continue to leverage its digital commerce properties to provide guests with in home and on-the-go options for content delivery. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 18 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 26 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— MEDIA Cineplex’s media businesses cover two major categories: cinema media, which incorporates advertising mediums related to theatre exhibition, and digital place-based media which provides digital signage solutions. Media Revenues (millions) (i) $196.8 $162.8 $65.4 $65.3 $167.1 2017 2018 2019 2020 2021 (i) Media revenues for prior year periods have been restated to present revenue amounts from continuing operations. Cinema Media Cinema media incorporates advertising mediums related to theatre exhibition, both within Cineplex’s own circuit of theatres as well as in competitors’ theatres through revenue sharing arrangements. Cineplex’s media advertising arrangements are impacted by theatre attendance levels which drive impressions and ultimately impact media revenue generated by Cineplex. Cineplex’s core cinema media offerings include: • • • Show-time advertising, which runs just prior to the movie trailers in the darkened auditorium with limited distractions. Pre-show advertising, featured on the big screen as guests settle in to enjoy their movie night, in the period prior to Show-time. Digital lobby advertising and digital poster cases located in high traffic areas featuring big, bold digital signage. • Website and mobile advertising sales through cineplex.com and the Cineplex mobile app. Cineplex’s theatres also provide opportunities for advertisers’ special media placements (including floor and door coverings, window clings, standees, banners, samplings, activations and lobby domination setups). In addition to these individual offerings, Cineplex offers integrated solutions that can cross over some or all of the above-mentioned platforms. Advertisers can utilize these forms of media individually or take advantage of an integrated advertising program spanning multiple platforms. In partnership with its digital commerce platforms, Cineplex offers online media packages that include page dominations, page skins, pre-roll and post-roll advertising; all with geo-targeting capabilities. Cineplex’s cinema media business is well positioned for continued growth and is the ideal channel for advertisers wanting to reach all demographics, especially the highly sought-after 17 to 25-year-old Canadian market. Cineplex also generates revenues from the sale of sponsorship and advertising at LBE venues. Digital Place-Based Media Cineplex’s digital place-based media designs, installs, maintains and operates digital signage networks in four verticals including digital out of home (“DOOH”) (in public spaces such as shopping malls and office towers), quick service restaurants, financial institutions and retailers. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 27 19 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Cineplex Digital Media is focused on providing its clients smart solutions including the rollout of Flex SmartEngine, a data-driven machine learning software platform that optimizes digital signage to deliver the right content, to the right audience at the right time. Cineplex believes it can generate increased profitability with this new platform. Cineplex Digital Media’s advertising sales team combined with the project management, system design, network operations, and creative services teams within its digital place-based media business have Cineplex well positioned to expand its media reach throughout its current infrastructure as well as in numerous place-based advertising locations across the country. Cineplex believes that the strength of its digital place-based media assets make it a leader in the indoor digital signage industry and provide a platform for significant growth throughout North America and Europe. AMUSEMENT AND LEISURE Amusement and leisure includes two primary areas of operations: • • Amusement solutions, comprised of P1AG which is one of the largest distributors and operators of amusement, gaming and vending equipment in North America; Location-based entertainment, which includes social entertainment destinations featuring gaming, entertainment and dining, including The Rec Room, and Playdium. Amusement Solutions Cineplex’s amusement solutions business generates revenues from the following activities in both Canada and the United States: • • • Route operations: P1AG collects a revenue share on games revenues earned by P1AG-owned amusement and vending equipment placed into third party locations such as family entertainment centres, arcades, theatres, restaurants, bars and other locations. Third party equipment sales. Operating family entertainment centres. In addition to expanding Cineplex’s amusement and gaming presence outside of its theatres, the growth of P1AG has allowed Cineplex to vertically integrate its gaming operations. Cineplex’s in-theatre gaming business features Cineplex’s 40 XSCAPE Entertainment Centres as well as arcade games in select Cineplex theatres and LBE venues, with all of the games supplied and serviced by P1AG. Location-based Entertainment Cineplex operates LBE establishments under the brand names The Rec Room and Playdium, as well as other family entertainment centres. The Rec Room is a social entertainment destination targeting millennials featuring a wide range of entertainment options including, simulation, redemption, video, recreational gaming, attractions, and a live entertainment venue for watching a wide range of entertainment programming. These entertainment options are complemented with an upscale casual dining environment, featuring an open kitchen and contemporary menu, as well as a larger bar with a wide range of digital monitors and a large screen for watching sporting and other major events. The Rec Room earns revenues from food and beverage service, from amusement, gaming and leisure attraction play, and from ticket sales for events held within the destination. Cineplex opened British Columbia’s first location of The Rec Room in Burnaby on July 5, 2021, as well as The Rec Room in Barrie, Ontario, on July 26, 2021. With these openings, Cineplex has ten locations of The Rec Room. Playdium targets families and teens in mid-sized communities across Canada. Cineplex opened a new location in Dartmouth, Nova Scotia on February 26, 2021. With this opening, Cineplex has three locations of Playdium. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 28 20 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— LOYALTY Cineplex and Scotiabank are partners in the Scene+ loyalty program, providing Cineplex with significant data and a more comprehensive understanding of the demographics and behaviors of its audience. During the fourth quarter of 2021, Cineplex and Scotiabank launched Scene+ to bring together the full benefits of SCENE with Scotia Rewards, Scotiabank’s flexible customer loyalty program. Scene+ is a customer loyalty program designed to offer members discounts and the opportunity to earn and redeem points. Scene+ members can earn and redeem points for purchases at Cineplex’s theatres, at its location-based entertainment establishments, online at the Cineplex Store as well as at locations operated by select program partners and as part of the Cineplex Tuesdays program. Scene+ members also can earn and redeem points at a wide variety of popular retailers, and redeem points as statement credits on certain Scotiabank products, as well as book flexible travel. The Scene+ loyalty program has been well received as evidenced by the strong membership, high engagement and satisfaction levels of its program members. Management believes Scene+ will drive further growth and engagement by providing members with more reward options and ways to earn and redeem points. Through Scene+, Cineplex has gained a more thorough understanding of its customers, driven increased customer frequency, increased overall customer spending across its businesses and provides Cineplex with the targeted ability to communicate directly and regularly with customers. The Scene+ customer database has allowed Cineplex to segment the member population and provide special offers to Cineplex’s guests, implement targeted marketing programs and deliver tailored messages to subsets of the membership base, providing members with relevant information and offers which in turn drive increased frequency and spend. Cineplex continues to influence consumer behavior through the use of Scene+ points and experience upgrades for Scene+ members in its initiatives as well as in partnership with movie studios. Cineplex has gained tremendous insight into customer behavior with over 14 years of data collected. Cineplex will continue to focus on leveraging this data through marketing automation to drive customer behavior as well as accelerating the adoption of artificial intelligence and machine learning for more robust consumer insight. Scene+ will continue to build its strategic marketing partnerships with participating partners across Canada, providing promotions and offerings. 4. OVERVIEW OF OPERATIONS Revenues Cineplex generates revenues primarily from box office and food service sales. These revenues are affected primarily by theatre attendance levels and by changes in BPP and CPP. Box office revenue represented 36.0% of revenue in 2021. Revenues continue to be materially impacted due to the ongoing negative impact of the COVID-19 pandemic. The following table presents the revenue mix for comparative years: Revenue mix % by period Box office Food service Media Amusement Other Total 2021 36.0 % 28.5 % 9.9 % 20.5 % 5.1 % 2020 31.8 % 26.0 % 15.6 % 18.6 % 8.0 % 2019 42.4 % 29.0 % 11.8 % 13.7 % 3.1 % 2018 44.9 % 29.5 % 10.1 % 12.8 % 2.7 % 2017 46.2 % 28.5 % 10.8 % 11.9 % 2.6 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cineplex has four reportable segments, film entertainment and content, media, amusement and leisure and location- based entertainment. The reportable segments are business units offering differing products and services and managed separately due to their distinct natures. These four reportable segments are based on the information used CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 29 21 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— by Cineplex’s chief operating decision makers. The revenue mix percentages for the four reportable segments during the year continue to be materially impacted by reduced capacities of theatres and LBE locations as a result of COVID-19. Revenue mix % by year Film Entertainment and Content Media Amusement and Leisure LBE Total Year to date 2021 68.0 % 9.9 % 15.3 % 6.8 % 2020 64.0 % 15.5 % 14.4 % 6.1 % 100.0 % 100.0 % A key component of Cineplex’s business strategy is to position itself as the leading exhibitor in the Canadian market by focusing on providing customers with an exceptional entertainment experience. Cineplex has focused on optimizing revenues during the COVID-19 closures by offering a catalog of classic film products along with new releases and expanding product offerings through the Cineplex Store. In addition, prior to COVID-19, as a result of Cineplex’s focus on diversifying the business beyond the traditional movie exhibition model, its revenue mix has shifted from box office revenue to other revenue sources. The commercial appeal of the films and alternative content released during a given period, and the success of marketing as well as promotion for those films by film studios, distributors and content providers all drive theatre attendance. BPP is affected by the mix of film and alternative content product that appeals to certain audiences (such as children or seniors who pay lower ticket prices), ticket prices during a given period and the appeal of premium priced product available that increase BPP. While BPP was negatively impacted by CineClub, the Cineplex Tuesdays program and the Scene+ loyalty program, these programs are designed to increase theatre attendance frequency at Cineplex’s theatres. Cineplex’s main focus is to drive incremental visits to theatres, to employ a ticket price strategy which takes into account the local demographics at each individual theatre and to maximize BPP through premium offerings. Food service revenues are comprised primarily of concession revenues, arising from food and beverage sales at theatre locations, as well as food and beverage sales at LBE venues including The Rec Room and Playdium. In addition, food service revenues include home delivery serviced by Uber Eats and by Skip the Dishes. CPP represents theatre food service revenues divided by theatre attendance, and is impacted by the theatre food service product mix, theatre food service prices, film genre, promotions, discounts for CineClub members, and the impact of SCENE points on the purchases of food and beverages at theatres prior to the introduction of Scene+. Films targeted to families and teenagers tend to result in a higher CPP and more adult-oriented product tends to result in a lower CPP. As a result, CPP can fluctuate from quarter to quarter depending on the genre of film product playing. Prior to the launch of Scene+, the SCENE points on theatre food service purchases decreased food service revenues on individual purchases. Cineplex believes the Scene+ and CineClub programs drive incremental purchase incidence, increasing overall revenues. Cineplex focuses primarily on growing CPP by optimizing the product offerings, improving operational excellence and strategic pricing to increase purchase incidence and transaction value. Food service revenues from LBE include food and beverage revenues from the various bars and restaurants located throughout the venues. Media revenues include both cinema media (Cineplex Media) and digital place-based media (Cineplex Digital Media) revenues. Cineplex Media generates revenues primarily from selling pre-show and show-time advertising in Cineplex’s theatres as well as other circuits through representation sales agreements. Cineplex’s media advertising arrangements are impacted by theatre attendance levels which drive impressions and ultimately impact media revenue generated by Cineplex. Additionally, Cineplex Media sells media placements throughout Cineplex’s circuit including digital poster cases, as well as sponsorship and advertising in LBE venues. Cineplex Media also sells digital advertising for cineplex.com, the Cineplex mobile app and on third party networks operated by Cineplex Digital Media. Cineplex Digital Media designs, installs, maintains and operates digital signage networks in four verticals including DOOH (in public spaces such as shopping malls and office towers), quick service restaurants, financial institutions and retailers. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 30 22 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Amusement revenues include amusement solutions revenues from P1AG, which supplies and services all of the games in Cineplex’s theatre circuit while also supplying equipment to third party arcades, amusement parks and centres, bowling alleys and theatre circuits across Canada and the United States, in addition to owning and operating FECs. Additionally, included in amusement revenues are revenues generated by Cineplex’s XSCAPE Entertainment Centres and game rooms in theatres as well as revenues generated at LBE venues. Cineplex generates other revenues from the Cineplex Store, promotional activities, screenings, private parties, corporate events and breakage on gift card sales. Cost of Sales and Expenses Film cost represents the film rental fees paid to distributors on films exhibited in Cineplex theatres. Film costs are calculated as a percentage of box office revenue and are dependent on various factors including the performance of the film. Film costs are accrued on the related box office receipts at either mutually agreed-upon terms established prior to the opening of the film, or estimated terms where a mutually agreed settlement is reached upon conclusion of the film’s run, depending upon the film licensing arrangement. There can be significant variances in film cost percentage between quarters due to, among other things, the concentration of box office revenues amongst the top films in the period with stronger performing films having a higher film cost percentage. Cost of food service represents the cost of concession items and other theatre food service items sold and varies with changes in concession and other theatre food service revenues as well as the quantity and mix of concession and other food service offerings sold. Cost of food and beverages sold at LBE is also included in cost of food service. Depreciation - right-of-use assets, represents the depreciation of Cineplex’s right-of-use assets related to leases. Depreciation is calculated on a straight-line basis from the date of commencement of the lease to the earlier of the end of the useful life of the asset or the end of the lease term. Depreciation and amortization - other, represents the depreciation and amortization of Cineplex’s property, equipment and leaseholds, as well as certain of its intangible assets. Depreciation and amortization are calculated on a straight-line basis over the useful lives of the assets. Gain on disposal of assets represents the gain recognized on assets or components of assets that were sold or otherwise disposed. Other costs are comprised of theatre occupancy expenses, other operating expenses and general and administrative expenses. These categories are described below. Theatre occupancy expenses include lease related expenses, percentage rent, property related taxes, business related taxes and insurance and exclude cash rent. Other operating expenses consist of fixed and variable expenses, with the largest component being theatre salaries and wages. Although theatre salaries and wages net of subsidies (CEWS and THRP) include a fixed cost component, these expenses vary in relation to revenues as theatre staffing levels are adjusted to handle fluctuations in theatre attendance. Other components of this category include marketing and advertising, media, amusement and leisure (including P1AG and LBE), loyalty, digital commerce, supplies and services, utilities and maintenance. To the extent these costs are variable, they can be curtailed with changes in business volumes. General and administrative expenses are primarily costs associated with managing Cineplex’s business, including film buying, marketing and promotions, operations and theatre food service management, accounting and financial reporting, legal, treasury, design and construction, real estate development, communications and investor relations, information systems and administration. Included in these costs are payroll (including Cineplex’s Omnibus Incentive Plan costs), occupancy costs related to Cineplex’s corporate offices, professional fees (such as public accountant and legal fees) and travel and related costs. Cineplex maintains general and administrative staffing and associated costs at a level that it deems appropriate to manage and support the size and nature of its theatre portfolio and its business activities. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 31 23 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Accounting for Joint Arrangements The financial statements incorporate the operating results of joint arrangements in which Cineplex has an interest using either the equity accounting method (for joint ventures and associates) or recognizing Cineplex’s share of the assets, liabilities, revenues and expenses in Cineplex’s consolidated results (for joint operations). Under IFRS 11, Cineplex’s 50% share of one IMAX auditorium in Ontario, its 78.2% interest in the Canadian Digital Cinema Partnership (“CDCP”), 50% interest in YoYo’s Yogurt Cafe (“YoYo’s”) are classified as joint ventures or associates. Through equity accounting, Cineplex’s share of the results of operations for these joint ventures and associates are reported as a single item in the statements of operations, ‘Share of income of joint ventures and associates’. Theatre attendance for the IMAX auditorium held in a joint venture is not reported in Cineplex’s consolidated theatre attendance as the line-by-line results of the joint venture are not included in the relevant lines in the statement of operations. As part of the ongoing reorganization of Scene GP (“SCENE”) which began in December 2020, Cineplex and its loyalty partner launched Scene+ on December 13, 2021 and as a result, Cineplex began equity accounting for its 50% economic interest in Scene LP (“Scene+”), the operator of the Scene+ loyalty program. In addition to the joint ventures which are equity accounted, Cineplex consolidates its 50% share of assets, liabilities, revenues and expenses of its joint operation, which includes Scene GP, and up to December 12, 2021 Scene LP. In the fourth quarter of 2020, Cineplex announced that it had entered into an agreement with its existing partner Scotiabank to enhance and expand the SCENE loyalty program. Cineplex received $60.0 million in December 2020 from its existing partner with respect to the agreement to reorganize the program and reposition it for future growth. In conjunction with the agreement, Cineplex’s ownership in Scene+, was reduced to 33.3%. Cineplex continues to be entitled to and responsible for 50% of the economic benefits and obligations until specific non-financial milestones are met, resulting in the deferral of the recognition of the proceeds in deferred revenue and other. As a result of the December 13, 2021 step in the reorganization, Cineplex will no longer consolidate 50% of the results of Scene LP, but will continue to consolidate 50% of Scene GP which subsequent to December 12, 2021 holds the deferred revenue obligation for SCENE points issued up to December 12, 2021. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 32 24 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 5. RESULTS OF OPERATIONS 5.1 SELECTED FINANCIAL DATA The following table presents summarized financial data for Cineplex for the three most recently completed financial years (expressed in thousands of dollars except Shares outstanding, per Share data and per patron data, unless otherwise noted): Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Box office revenues Food service revenues Media revenues Amusement revenues Other revenues Total revenues Film cost Cost of food service Depreciation - right-of-use assets Depreciation and amortization - other assets (Gain) loss on disposal of assets Other costs (a) Impairment of long-lived assets and goodwill Costs of operations Net (loss) income from continuing operations Net loss from discontinued operations Net (loss) income Adjusted EBITDA (i) (v) Adjusted EBITDAaL (i) (v) (a) Other costs include: Theatre occupancy expenses Other operating expenses General and administrative expenses (v) Total other costs $ 236,320 $ 186,998 65,330 134,473 33,548 656,669 114,674 41,683 102,247 113,042 132,820 $ 108,632 65,358 77,901 33,552 418,263 66,922 30,667 128,393 124,846 (28,283) (13,101) 439,554 3,717 786,634 375,690 294,863 1,008,280 (248,722) $ (624,001) $ — (4,952) (248,722) $ (628,953) $ 59,927 $ (84,295) $ (55,866) $ (182,815) $ $ $ $ $ 40,945 339,313 59,296 60,514 276,092 39,084 $ 439,554 $ 375,690 $ 705,521 483,330 196,755 228,231 51,309 1,665,146 369,386 106,823 145,946 128,883 1,764 782,693 — 1,535,495 36,516 (7,625) 28,891 405,786 230,546 71,867 629,849 80,977 782,693 0.58 (0.12) 0.46 Net (loss) income per share from continuing operations - basic and diluted (iii) $ Net loss per share from discontinued operations - basic and diluted Net (loss) income per share - basic and diluted (v) Total assets Long-term debt (iv) Shares outstanding at period end Cash dividends declared per Share Adjusted free cash flow per Share (ii) Box office revenue per patron (iii) Concession revenue per patron (iii) Film cost as a percentage of box office revenues Theatre attendance (in thousands of patrons) (iii) Theatre locations (at period end) Theatre screens (at period end) $ $ $ $ $ $ $ (3.93) $ — (3.93) $ (9.85) $ (0.08) (9.93) $ 2,114,838 $ 2,333,870 $ 739,211 $ 725,271 $ 63,344,298 63,333,238 3,100,412 625,000 63,333,238 — $ (2.392) $ 11.77 $ 7.93 $ 48.5% 20,080 160 1,652 0.150 $ (2.556) $ 10.17 $ 6.99 $ 50.4% 13,065 162 1,667 1.780 2.660 10.63 6.73 52.4% 66,360 165 1,693 (i) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. (ii) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. (iii) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. (iv) Represents the principal component as presented on the financial statements net of any equity component and unamortized costs of long- term debt, Debentures, and Notes Payable. Excludes share-based compensation, lease obligations, fair value of interest rate swap agreements, post-employment benefit obligations and other liabilities. (v) 2021 includes expenses related to the Cineworld Transaction and resulting litigation in the amount of $11.4 million (2020 - $4.1 million). CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 33 25 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 5.2 OPERATING RESULTS FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 2021 Total revenues Total revenues for the three months ended December 31, 2021 increased $247.5 million (471.9%) to $300.0 million as compared to the prior year period. Total revenues for the year ended December 31, 2021 increased $238.4 million (57.0%) to $656.7 million as compared to the prior year. A discussion of the factors affecting the changes in box office, food service, media, amusement and other revenues for the two periods is provided below. Non-GAAP and other financial measures discussed throughout this MD&A, including adjusted EBITDA, adjusted EBITDAaL, adjusted store level EBITDAaL, adjusted EBITDAaL margin, adjusted store level EBITDAaL margin, adjusted free cash flow, theatre attendance, BPP, premium priced product, same theatre metrics, CPP, film cost percentage, food service cost percentage, concession margin per patron and net cash burn are defined and discussed in Section 17, Non-GAAP and other financial measures. Box office revenues The following table highlights the movement in box office revenues, theatre attendance and BPP for the fourth quarter and the full year (in thousands of dollars, except theatre attendance reported in thousands of patrons and per patron amounts, unless otherwise noted): Box office revenues Box office revenues Theatre attendance (i) Box office revenue per patron (i) BPP excluding premium priced product (i) Same theatre box office revenues (i) Same theatre attendance (i) % Total box from premium priced product (i) Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 125,890 10,245 12.29 10.40 $ $ $ 124,747 10,187 $ $ $ $ 47.3 % 7,260 786 9.23 8.61 7,239 783 19.1 % NM $ 236,320 20,080 NM 11.77 33.2 % $ 10.25 20.8 % $ NM $ 234,474 19,982 NM $ 132,820 13,065 10.17 9.18 $ $ $ 131,601 12,920 28.2 % 38.7 % 28.1 % 77.9 % 53.7 % 15.7 % 11.7 % 78.2 % 54.7 % 10.6 % (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. Box office continuity Fourth Quarter Full Year 2020 as reported Same theatre attendance change Impact of same theatre BPP change New and acquired theatres (i) Disposed and closed theatres (i) 2021 as reported $ Box Office 7,260 86,915 30,595 1,123 (3) $ 125,890 Theatre Attendance 786 $ 9,404 — 56 (1) 10,245 $ Box Office 132,820 71,939 30,937 1,722 (1,098) 236,320 Theatre Attendance 13,065 7,062 — 85 (132) 20,080 (i) See Section 17, Non-GAAP and other financial measures. Represents theatres opened, acquired, disposed or closed subsequent to the start of the prior year comparative period and is used to report on Cineplex’s supplementary financial measures. Fourth Quarter and Full Year Fourth Quarter 2021 Top Cineplex Films 1 Spider-Man: No Way Home 2 No Time To Die 3 Dune 4 Venom: Let There Be Carnage 5 Eternals 3D % Box Fourth Quarter 2020 Top Cineplex Films a 23.7 % 1 Honest Thief a 13.4 % 2 Tenet a 11.4 % 3 The War With Grandpa a 8.4 % 4 The Croods: A New Age a 8.3 % 5 100% Wolf 3D % Box 11.9 % 11.3 % 10.3 % 7.6 % 5.3 % CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 34 26 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Full Year 2021 Top Cineplex Films 1 Spider-Man: No Way Home 2 Shang-Chi And The Legend Of The Ten Rings 3 No Time To Die 4 Dune 5 Venom: Let There Be Carnage 3D % Box Full Year 2020 Top Cineplex Films a 12.6 % 1 1917 a 8.0 % 2 Star Wars: The Rise of Skywalker a 7.1 % 3 Jumanji: The Next Level a 6.1 % 4 Bad Boys For Life a 4.5 % 5 Sonic The Hedgehog 3D % Box 8.1 % a 7.7 % a 7.6 % 7.2 % 5.4 % Fourth Quarter and Full Year Box office revenues increased $118.6 million to $125.9 million during the fourth quarter of 2021, compared to $7.3 million recorded in the same period in 2020. This increase was mainly due to a 9.5 million increase in theatre attendance as Cineplex’s theatre circuit commenced reopening during the third quarter, compared to closures that remained in effect for a majority of the prior year period. The release of Marvel’s highly anticipated Spider-Man: No Way Home also contributed to the significant increase in box office revenues when compared to the prior year; it had the second biggest North American opening weekend of all-time, grossing $260.1 million becoming the fourth highest grossing film in North America and eighth highest worldwide of all-time. It is also the first film to generate in excess of $200.0 million during its opening weekend since Avengers: Endgame which debuted in 2019. However, government imposed capacity restrictions were reinstated in December 2021 impacting the majority of Cineplex’s theatres, limiting Cineplex’s ability to fully benefit from the strong slate of film releases in December. BPP for the three months ended December 31, 2021 was $12.29, an all-time quarterly record for Cineplex. Price increases in select key markets and additional VIP theatre locations which drive higher per patron spend attributed to the increase. The release of first run film product available in the current period drove guests to premium experiences compared to limited film product in the prior year, further contributing to the increase in BPP. When compared to the prior year period, BPP increased $3.06 or 33.2% from $9.23 due to more new releases and premium offerings in the current period as compared to the prior period which focused on discounted pricing for older and more classic film products. Cineplex reported box office revenues for the year ended December 31, 2021 of $236.3 million, an increase of $103.5 million or 77.9% from the prior year. The increase in box office revenues was primarily due to a 7.0 million increase in theatre attendance as a result of the full reopening of Cineplex’s theatres that commenced during the third quarter compared to prolonged closures or significant capacity restrictions that remained in effect for a majority of the prior year period. Cineplex’s BPP for the year ended December 31, 2021 increased $1.60, or 15.7%, from $10.17 in 2020 to an all- time annual record of $11.77 in 2021, eclipsing a record previously established in 2019. This increase was primarily due price increases in select key markets, and more first run film product available in the current period driving guests to premium experiences in the current period as compared to the prior period which focused on discounted pricing for older and more classic film products. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 35 27 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Food service revenues The following table highlights the movement in food service revenues, theatre attendance and CPP for the quarter and the full year (in thousands of dollars, except theatre attendance and same store attendance reported in thousands of patrons and per patron amounts): 74.2 % 59.7 % 64.5 % -31.1 % 72.1 % 53.7 % 13.4 % 73.6 % 54.7 % Food service revenues Food service - theatres Food delivery - theatres Food service - LBE Food delivery - LBE Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 76,695 $ 2,999 7,524 26 7,122 2,660 632 129 976.8 % $ 159,201 $ 91,384 12.7 % 13,052 NM $ 14,613 -79.9 % 132 8,175 8,882 191 Total food service revenues $ 87,244 $ 10,543 727.5 % $ 186,998 $ 108,632 Theatre attendance (i) CPP (i) (ii) (iii) Same theatre food service revenues (i) Same theatre attendance (i) $ $ 10,245 7.49 $ 786 9.06 NM 20,080 13,065 -17.3 % $ 7.93 $ 6.99 75,594 $ 7,189 951.5 % $ 157,465 $ 90,695 10,187 783 NM 19,982 12,920 (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. (ii) Food service revenue from LBE and delivery is not included in the CPP calculation. (iii) 2021 CPP was negatively impacted by government restrictions prohibiting concession sales effective December 18, 2021, in Ontario. Theatre food service revenue continuity Fourth Quarter Full Year 2020 as reported Same theatre attendance change Impact of same theatre CPP change New and acquired theatres (i) Disposed and closed theatres (i) 2021 as reported Theatre Food Service Theatre Attendance Theatre Food Service Theatre Attendance $ 7,122 86,412 (17,911) 1,089 (17) 786 $ 9,404 — 56 (1) 91,384 49,576 17,193 1,651 (603) $ 76,695 10,245 $ 159,201 13,065 7,062 — 85 (132) 20,080 (i) See Section 17, Non-GAAP and other financial measures. Represents theatres opened, acquired, disposed or closed subsequent to the start of the prior year comparative period and is used to report on Cineplex’s supplementary financial measures. Fourth Quarter and Full Year Food service revenues are comprised primarily of concession revenues, which includes food service sales at theatre locations and through delivery services including Uber Eats and Skip the Dishes. Food service revenues also include food and beverage sales at The Rec Room and Playdium. Food services revenues increased by $76.7 million primarily due to the $69.6 million increase in theatre food service revenues to $76.7 million in the quarter. The increase in food service revenues is due to the reopening of theatres and LBE businesses that commenced during the third quarter resulting in an increase in attendance across Cineplex’s businesses, although government imposed capacity restrictions reinstated in December limited attendance levels that have historically been higher during the holiday period. CPP decreased by $1.57 or 17.3% to $7.49, partly due to government restrictions imposed in Ontario prohibiting food consumption which negatively impacted theatre food sales and CPP. In the prior year period, a higher percentage of theatres were open in provinces that have historically had a higher CPP, with excited movie goers incurring a higher spend per visit. Food service revenues from LBE venues increased by $6.9 million to $7.5 million compared to the prior year period due to the reopening of LBE businesses across Canada as restrictions were temporarily lifted in 2021 and the addition of new LBE locations. Annual food service revenues increased $78.4 million, or 72.1% as compared to the prior year to $187.0 million. The increase in food service revenues is primarily driven by the increase in theatre food service revenue as a result of the reopening of theatres across Canada compared to extended closure periods experienced in the prior year. CPP increased $0.94 or 13.4% to an all-time annual record of $7.93. Product mix, modest prices increases to Cineplex’s CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 36 28 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— core food service products, additional VIP theatre locations and film product targeted towards adult demographics all contributed to the increase in CPP. Media revenues The following table highlights the movement in media revenues for the quarter and the full year (in thousands of dollars): Media revenues Cinema media Digital place-based media Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 22,007 $ 1,368 NM $ 32,958 $ 23,568 10,788 11,128 -3.1 % 32,372 41,790 39.8 % -22.5 % — % Total media revenues from continuing operations $ 32,795 $ 12,496 162.4 % $ 65,330 $ 65,358 Media revenues from discontinued operations — — — % — 602 -100.0 % Total media revenues $ 32,795 $ 12,496 162.4 % $ 65,330 $ 65,960 -1.0 % Fourth Quarter and Full Year Total media revenues from continuing operations increased $20.3 million or 162.4% to $32.8 million in the fourth quarter of 2021 compared to the prior year period. This increase was due to a $20.6 million increase in Cinema media as a result of the reopening of theatres leading to significant increases in pre-show and show-time advertising revenues. Cineplex’s cinema media arrangements are impacted by theatre attendance levels which drive impressions and ultimately impact media revenue generated by Cineplex. Accordingly, the increase in cinema media revenue is consistent with the increase in attendance levels when compared to the prior period. The release of the highly anticipated films Spider-Man: No Way Home and The Matrix Resurrections during the fourth quarter of 2021 contributed to the increase in both pre-show and show-time advertising revenue compared to the prior year period which had limited first run product releases. The increase in Cinema media revenues was partially offset by a $0.3 million decrease in digital place-based media revenues. Total media revenues from continuing operations remained flat at $65.3 million for the year ended December 31, 2021. Cineplex recognized a $9.4 million increase in Cinema media revenue primarily due to the reopening of theatres resulting in an increase in pre-show and show time advertising revenue. This was offset by a decrease in digital place-based media revenue of $9.4 million due to lower project revenue (hardware sales), creative and digital advertising revenue. The following table shows a breakdown of the nature of digital place-based media revenues for the quarter and the full year (in thousands of dollars): Digital place-based media revenues Fourth Quarter 2021 2020 Change 2021 Full Year 2020 Project revenues (i) Other revenues (ii) $ 3,502 $ 7,286 1,972 9,156 77.6 % $ 10,516 $ 11,066 -20.4 % 21,856 30,724 Change -5.0 % -28.9 % Total digital place-based media revenues $ 10,788 $ 11,128 -3.1 % $ 32,372 $ 41,790 -22.5 % (i) Project revenues include hardware sales and professional services. (ii) Other revenues include sales of software and its support as well as media advertising. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 37 29 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Amusement revenues The following table highlights the movement in amusement revenues for the quarter and the full year (in thousands of dollars): Amusement revenues Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Amusement - P1AG excluding Cineplex exhibition and LBE (i) Amusement - Cineplex exhibition (i) Amusement - LBE Total amusement revenues $ 31,804 $ 11,815 169.2 % $ 100,282 $ 60,027 1,963 11,329 130 1,652 NM 4,943 585.7 % 29,248 2,457 15,417 $ 45,096 $ 13,597 231.7 % $ 134,473 $ 77,901 67.1 % 101.2 % 89.7 % 72.6 % (i) Cineplex receives a venue revenue share on games revenues earned at in-theatre game rooms and XSCAPE Entertainment Centres. Amusement - Cineplex exhibition reports the total of this venue revenue share which is consistent with the historical presentation of Cineplex’s amusement revenues. Amusement - P1AG excluding Cineplex exhibition and LBE reflects P1AG’s gross amusement revenues, net of the venue revenue share paid to Cineplex reflected in Amusement - Cineplex exhibition above. Fourth Quarter and Full Year Amusement revenues increased $31.5 million or 231.7% to $45.1 million during the quarter compared to the prior year period. The quarterly increase in revenues was primarily due to the reopening of P1AG US and Canada route locations at FECs and theatres. Additionally, the reopening of LBE businesses also resulted in increased amusement revenues when compared to the prior year period. However, government imposed restrictions reinstated during December in several key provinces in which Cineplex operates, reduced operations to below normal capacity levels negatively impacting Cineplex’s revenue generating potential. For the annual period, amusement revenues increased by $56.6 million or 72.6% compared to the prior year period to $134.5 million. The increase was due to strong reopening of P1AG US route locations at FECs, theatres and increased equipment sales when compared to the prior year where government mandated closures resulted in prolonged closures of P1AG route locations, Cineplex theatres and LBE venues. The opening of an additional Playdium location in Dartmouth, Nova Scotia and two additional The Rec Room locations in Burnaby, British Columbia and Barrie, Ontario during year also contributed to the increase in LBE amusement revenues. The following table presents the adjusted EBITDAaL for the quarter and the full year for P1AG (in thousands of dollars): P1AG Summary Amusement revenues Operating Expenses Cash rent related to lease obligations (i) Total adjusted operating expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 31,804 $ 11,815 169.2 % $ 100,282 $ 60,027 26,940 14,900 80.8 % 87,579 913 594 53.7 % 3,994 69,216 2,422 $ 27,853 $ 15,494 79.8 % $ 91,573 $ 71,638 P1AG adjusted EBITDAaL (ii) $ 3,951 $ (3,679) NM $ 8,709 $ (11,611) P1AG adjusted EBITDAaL Margin (iii) (i) Cash rent that has been reallocated to offset the lease obligations. 12.4 % (31.1) % 43.5 % 8.7 % (19.3) % (ii) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. (iii) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. 67.1 % 26.5 % 64.9 % 27.8 % NM 28.0 % CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 38 30 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— When compared to the prior year period, P1AG’s adjusted EBITDAaL margins have improved for both the three month and annual periods due to the increased revenues from the strong reopening of P1AG US route locations through 2021, and the Canadian route locations that began to reopen during the third quarter. However, when compared to the third quarter of 2021, P1AG’s adjusted EBITDAaL margins decreased from 19.8% to 12.4%, primarily due to reinstated capacity restrictions as a result of the rise in COVID-19 cases an a reduction in route revenue due to seasonality changes. Continued cost management of operating expenses, including realizing the benefits of subsidy programs where available, allowed for the growth in margins when compared to the prior year period. Payroll costs were reduced by the CEWS or THRP wage subsidy programs for the quarter and the year to date period by $0.3 million (2020 - $0.7) and $3.1 million (2020 - $4.6 million), respectively. Certain operating expenses which are fixed in nature, such as salaries, rent and utilities, created a downward pressure on margins during the periods when locations were closed or subject to operating restrictions. The following table presents the adjusted store level EBITDAaL for the quarter and the full year for LBE (in thousands of dollars): LBE Summary Fourth Quarter Full Year Food service revenues Amusement revenues Media and other revenues Total revenues Cost of food service Operating expenses before adjustments (i) Cash rent related to lease obligations (ii) Total adjusted costs Adjusted store level EBITDAaL (iii) 2021 2020 Change 2021 2020 Change $ 7,550 $ 761 892.1 % $ 14,745 $ 9,073 11,329 522 1,652 78 585.8 % 29,248 569.2 % 769 15,417 1,040 $ 19,401 $ 2,491 678.8 % $ 44,762 $ 25,530 1,976 10,357 2,335 $ 14,668 $ 4,733 $ $ 285 3,057 1,979 5,321 593.3 % 3,986 238.8 % 23,482 18.0 % 7,849 2,822 21,258 5,473 175.7 % $ 35,317 $ 29,553 (2,830) NM $ 9,445 $ (4,023) 62.5 % 89.7 % -26.1 % 75.3 % 41.2 % 10.5 % 43.4 % 19.5 % NM Adjusted store level EBITDAaL Margin (iv) 36.9 % 24.4 % (i) Includes operating costs of LBE. Pre-opening costs relating to LBE and overhead relating to management of LBE portfolio are not included. (ii) Cash rent that has been reallocated to offset the lease obligations. (iii) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. (iv) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. (113.6) % 138.0 % (15.8) % 21.1 % During the fourth quarter of 2021, revenues increased by $16.9 million or 678.7% when compared to the prior year period to $19.4 million. Revenues for the annual period increased by $19.2 million or 75.3% when compared to the prior period to $44.8 million. The increase in revenues during both periods is due to the strong reopening of LBE businesses across Canada as mandated operating restrictions were gradually lifted. The opening of an additional Playdium location in Dartmouth, Nova Scotia and two additional The Rec Room locations in Burnaby, British Columbia and Barrie, Ontario during the year also contributed to the increase in revenues. Adjusted EBITDAaL for the fourth quarter and annual period was $4.7 million and $9.4 million, respectively. The increase in adjusted EBITDAaL is primarily due to increased amusement revenues which have historically contributed the highest margin to LBE locations. Cineplex’s LBE venues were closed or operating at significantly reduced capacities in the prior period leading to negative Adjusted EBITDAaL. Management was able to reduce costs where applicable including the receipt of funds under the CEWS and THRP wage subsidy programs, CERS rent subsidy program, utility and realty tax subsidy programs for total costs reductions during the quarter and annual period of $1.2 million (2020 - $1.2 million) and $7.6 million (2020 - $6.0 million), respectively. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 39 31 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Other revenues The following table highlights the other revenues which includes revenues from the Cineplex Store, promotional activities, screenings, private parties, corporate events, breakage on gift card sales and revenues from management fees for the quarter and the full year (in thousands of dollars): Other revenues Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Other revenues from continuing operations Other revenues from discontinued operations Total other revenues $ $ 8,926 $ 8,556 4.3 % $ 33,548 $ 33,552 — % — — — — 199 -100.0 % 8,926 $ 8,556 4.3 % $ 33,548 $ 33,751 -0.6 % Fourth Quarter and Full Year The quarterly increase in other revenues from continuing operations is primarily due to the resumption of the recognition of breakage revenues relating to gift card sales, net of lower digital commerce sales. The annual increase in other revenues from continuing operations was primarily due to the resumption of the recognition of breakage revenues relating to gift card sales compared to the prior year where the recognition of breakage revenue was suspended during the shutdown of theatres and LBE venues. Film cost The following table highlights the movement in film cost and the film cost percentage for the quarter and the full year (in thousands of dollars, except film cost percentage): Film cost Film cost Film cost percentage (i) Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 61,990 $ 3,151 NM $ 114,674 $ 66,922 49.2 % 43.4 % 5.8 % 48.5 % 50.4 % 71.4 % -1.9 % (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. Fourth Quarter and Full Year Film cost varies primarily with box office revenues and can vary from quarter to quarter usually based on the relative strength of the titles exhibited during the period, impacted by film cost terms which vary by title and distributor. The increase in film cost and film cost percentage in the fourth quarter over the prior year period is due to the release of first run film product including Spider-Man: No Way Home, Dune, Ghostbusters: Afterlife and No Time to Die, compared to limited releases in the comparative period. The increase in film cost for the annual period is due to the release of first run film product in the current period compared to limited releases and older and classic film product with lower settlement rates in the prior year. In the prior year period, there were a limited number of theatres open operating at significantly reduced capacities, resulting in a less meaningful comparison of film cost percentages. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 40 32 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Cost of food service The following table highlights the movement in cost of food service and food service cost as a percentage of food service revenues (“concession cost percentage”) for both theatres and LBE for the quarter and the full year (in thousands of dollars, except percentages and margins per patron): Cost of food service Cost of food service - theatre Cost of food service - LBE Total cost of food service Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 19,066 $ 3,704 414.8 % $ 37,697 $ 27,845 1,976 285 593.2 % 3,986 2,822 $ 21,042 $ 3,989 427.5 % $ 41,683 $ 30,667 Theatre concession cost percentage (i) LBE food cost percentage (i) 23.9 % 26.2 % Theatre concession margin per patron (i) $ 5.70 $ 37.9 % 37.4 % 5.63 -14.0 % -11.2 % 21.9 % 27.0 % 1.2 % $ 6.19 $ 28.0 % 31.1 % 5.04 (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. 35.4 % 41.2 % 35.9 % -6.1 % -4.1 % 22.8 % Fourth Quarter and Full Year Cost of food service at the theatres varies primarily with theatre attendance as well as the quantity and mix of offerings sold. Cost of food service at LBE venues varies primarily with the volume of guests who visit the location as well as the quantity and mix between food and beverage items sold. The quarterly and annual increase in cost of food service is positively correlated to the increase in food service revenues recognized during the quarter and annual period as a result of the reopening of Cineplex theatres and LBE businesses, compared to closures that remained in effect for a majority of the prior year period. The quarterly and annual decrease in theatre concession cost percentage and LBE food cost percentage when compared to the prior year is due to higher costs resulting from extended closure periods of theatres and LBE businesses in 2020 resulting in lower volume of food sales and increased reserves on perishable inventory as a result of mandated closures with limited notice in 2020. Depreciation and amortization The following table highlights the movement in depreciation and amortization expenses during the quarter and the full year (in thousands of dollars): Depreciation and amortization expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Depreciation of property, equipment and leaseholds $ 24,754 $ 27,043 -8.5 % $ 102,277 $ 113,346 Amortization of intangible assets and other 2,747 1,707 60.9 % 10,765 11,500 Sub-total - depreciation and amortization - other assets $ 27,501 $ 28,750 -4.3 % $ 113,042 $ 124,846 Depreciation - right-of-use assets Total depreciation and amortization 25,041 28,136 -11.0 % 102,247 128,393 $ 52,542 $ 56,886 -7.6 % $ 215,289 $ 253,239 -9.8 % -6.4 % -9.5 % -20.4 % -15.0 % Fourth Quarter and Full Year Depreciation of property, equipment and leaseholds decreased by $2.3 million, or 8.5% during the quarter compared to the prior year period, and by $11.1 million or 9.8% for the year compared to the prior year period. The decrease was due primarily to fully depreciated property, equipment and leaseholds. The quarterly increase in amortization of intangible assets and other relates to software developments and additions in the current period. The decrease in amortization of intangible assets and other assets as compared to the prior full year period is due to fully amortized intangible assets. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 41 33 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— The quarterly and annual decrease of $3.1 million and $26.1 million, respectively, in depreciation of right-of-use assets is primarily due to modifications to lease agreements as a result of COVID-19 which reduced the corresponding right-of-use asset and related depreciation recognized. Impairment of long-lived assets, goodwill and investments The following table highlights the movement in impairment of long-lived assets, goodwill and investments during the quarter and the full year (in thousands of dollars): Impairment of long-lived assets, goodwill and investments Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Impairment of property, equipment and leaseholds $ 943 $ 5,243 -82.0 % $ 943 $ 39,192 Impairment of right-of-use assets Impairment of goodwill Impairment of investments 2,774 — — 21,236 26,906 2,790 -86.9 % 2,774 NM NM — — 71,846 181,035 2,790 -97.6 % -96.1 % NM NM Impairment of long-lived assets, goodwill and investments $ 3,717 $ 56,175 -93.4 % $ 3,717 $ 294,863 -98.7 % Fourth Quarter and Full Year Cineplex generally performs its annual test for impairment of goodwill and indefinite-lived intangible assets in the fourth quarter, in accordance with the policy described in its annual consolidated financial statements. Assessment of impairment for long-lived assets, including property, equipment, leaseholds, right-of-use assets, intangible assets and goodwill is performed more frequently as specific events or circumstances dictate triggering events and changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. In early 2020, in response to the outbreak of the COVID-19 pandemic as declared by the WHO, the government of Canada announced mandated closure of schools, public facilities and non-essential businesses. Consequently, effective March 16, 2020 and continuing throughout the remainder of the year, Cineplex had to either temporarily close its theatres and location-based entertainment venues or operate with strict capacity restrictions across its operations, resulting in material decreases in revenues, results of operations and cash flows and a material decrease in Cineplex’s market value due to a sharp decline in its share price. These represented triggering events at each balance sheet date in 2020. The following discussion is qualified in its entirety by the caution regarding forward-looking statements at the beginning of this MD&A and Section 14, Risks and uncertainties. Increasing concerns over the new highly transmissible Omicron COVID-19 variant and increased daily COVID-19 case counts led to shutdowns and restrictions in several provinces that materially affected operations representing a triggering event requiring impairment testing for long-lived assets, indefinite-lived intangible assets and goodwill at December 31, 2021. During the fourth quarter of 2021, government imposed restrictions were reinstituted in Ontario, British Columbia, New Brunswick, Nova Scotia and Prince Edward Island, reducing capacity limits to 50% and requiring temporary theatre closures in Quebec. Further government-imposed restrictions were reinstated or modified subsequent to December 31, 2021 resulting in temporary theatre closures in Ontario, Newfoundland and New Brunswick. Based on the results of the impairment tests, Cineplex recognized non-cash impairment charges of $0.9 million to property, equipment and leaseholds and $2.8 million to right-of-use assets for the year ended December 31, 2021. If the discount rates were to increase by 2.0%, assuming a constant cash flow margin, or discounted cash flows were 13% less than estimated, there would not be any further material impairments to property, equipment and leaseholds, and right-of-use assets. Fair value less cost to sell is determined using Level 3 inputs such as attendance and the related revenue growth rates, variable and fixed cash flows, operating margins, and discount rates based on Cineplex’s internal budget. Cineplex projects revenue, operating margins and cash flows for a period of five years, and applies a perpetual long- term growth rate thereafter. In arriving at its forecasts, Cineplex considers past experience, economic trends such as inflation, as well as industry and market trends. Cineplex has considered the significant impact of COVID-19 on the business with the capacity restrictions and/or temporary theatre closures reinstated during and subsequent to CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 42 34 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— December 2021. Estimates have been applied for the impact of temporary closures and for operations with capacity restrictions, for both Cineplex and customer locations for the first quarter of 2022. Subsequent to 2022, a range of estimates for growth in adjusted EBITDAaL (Section 17, Non-GAAP and other financial measures) from 1% to 6% has been applied across locations for the period 2023-2026 to reflect a staged reopening and other scenarios. Cineplex’s estimated adjusted EBITDAaL for 2022 contemplates the latest information provided by government, at the measurement date, related to the timing of the lifting of restrictions on locations and available information related to the release of film content, as well as observable evidence from other territories of consumer behaviour upon the reopening of theatres. Cineplex’s projected revenue and cash flows for 2022 assume business will be negatively impacted by the further government-imposed restrictions reinstituted or modified in Ontario, Quebec, British Columbia, Newfoundland and New Brunswick subsequent to December 31, 2021 For every quarter Cineplex stays closed, additional impairment charges could be required. Discount rates applied to the groups of goodwill cash-generating units (“CGUs”) represent Cineplex’s assessment of the risks specific to each group of CGUs regarding the time value of money and individual risks of the underlying assets. Cineplex used discount rates between 8.0% and 13.6% (2020 - between 11.0% and 16.7%), and no change to the perpetual growth rates between 0.5% and 1.0% (2020 - between 0.5% and 1.0%), which are consistent with the observed long-term average growth rates in the exhibition, amusement and leisure, and digital media industries. The determination of fair value less costs of disposal is sensitive to the growth rates, discount rates, and long-term growth rates used. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ, depending on economic conditions and other events. Accordingly, it is reasonably possible that future changes in assumptions may negatively impact future assessments of the recoverable amount for groups of CGUs. If the return to business continues to be delayed as a result of actions outside of the control of management, including but not limited to additional changes to the film slate release schedule, ongoing government restrictions impacting the re-opening of entertainment venues and delays in the vaccine roll out, management's estimates of operating results and further cash flows for the forecasted period may be negatively impacted. As a result, they may be insufficient to support the recoverability of goodwill and long lived assets in certain CGUs, thus requiring further impairment charges. Cineplex will continue to evaluate the recoverability of goodwill at the cash generating unit level on an annual basis during its fourth quarter and whenever events or changes in circumstances indicate there may be a potential impairment. For goodwill, Cineplex concluded there were no non-cash impairment losses in the exhibition business within the Film Entertainment and Content segment. For one group of CGUs in the Film Entertainment and Content segment, if the discount rates were to increase by 2.0%, assuming a constant cash flow margin, or discounted cash flows were 13% less than estimated, the carrying amount of the group of CGUs would exceed the reasonable range for the recoverable amounts by $5.2 million. The goodwill for this group of CGUs represents 8% of the total carrying amount of goodwill. For all other CGUs, no reasonably possible change in assumption would cause the recoverable amount to fall below the carrying value. At the end of each future reporting period Cineplex will assess whether there are indications that the impairment loss recognised for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the Company will estimate the recoverable amount of that asset and may reverse previously recorded impairment losses. Impairment of intangible assets - discontinued operations The following table highlights the movement in impairment of intangible assets - discontinued operations during the quarter and the full year (in thousands of dollars): CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 43 35 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Impairment of intangible assets - discontinued operations Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Impairment of intangible assets - discontinued operations $ — $ — NM $ — $ 5,156 NM Intangible assets included in assets held for sale were written down in 2020 prior to disposition to reflect their expected net realizable value. On June 29, 2020, Cineplex sold all of its interest in WorldGaming Network LP for a nominal amount. No other operations were classified as a discontinued operation in the current period. Loss (gain) on disposal of assets The following table shows the movement in the loss on disposal of assets during the quarter and the full year (in thousands of dollars): Loss (gain) on disposal of assets Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Loss (gain) on disposal from continuing operations Loss on disposal from discontinued operations Loss (gain) on disposal of assets $ $ 1,576 $ — 1,576 $ (283) — (283) NM $ (28,283) $ (13,101) 115.9 % — — 129 -100.0 % NM $ (28,283) $ (12,972) 118.0 % The annual gain on disposal of assets was primarily from the sale of the head office buildings completed in the first quarter of 2021, for gross proceeds of $57.0 million. Cineplex continues to occupy its head office buildings as a tenant. The prior full year gain includes the sale of certain restrictive lease rights in the third quarter. Other costs Other costs include three main sub-categories of expenses: theatre occupancy expenses, which capture associated occupancy costs for Cineplex’s theatre operations; other operating expenses, which include the costs related to running Cineplex’s film entertainment and content, media, as well as amusement and leisure; and general and administrative expenses, which includes costs related to managing Cineplex’s operations, including head office expenses. Please see the discussions below for more details on these categories. The following table highlights the movement in other costs for the quarter and the full year (in thousands of dollars): Other costs Theatre occupancy expenses Other operating expenses General and administrative expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 13,176 $ 9,891 33.2 % $ 40,945 $ 60,514 -32.3 % 129,023 15,771 55,567 11,755 132.2 % 339,313 276,092 34.2 % 59,296 39,084 22.9 % 51.7 % 17.0 % Total other costs from continuing operations $ 157,970 $ 77,213 104.6 % $ 439,554 $ 375,690 Other costs from discontinued operations — — — % — 2,212 -100.0 % Total other costs $ 157,970 $ 77,213 104.6 % $ 439,554 $ 377,902 16.3 % CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 44 36 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Theatre occupancy expenses The following table highlights the movement in theatre occupancy expenses for the quarter and the full year (in thousands of dollars): Theatre occupancy expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Cash rent paid/payable (i) Other occupancy One-time items (ii) $ 32,415 $ 23,727 36.6 % $ 113,080 $ 109,161 14,786 12,820 15.3 % 57,852 65,545 (863) (169) 410.7 % (4,690) (2,108) Total theatre occupancy including cash lease payments $ 46,338 $ 36,378 27.4 % $ 166,242 $ 172,598 Cash rent paid/payable related to lease obligations (iii) (33,162) (26,487) 25.2 % (125,297) (112,084) Theatre occupancy as reported $ 13,176 $ 9,891 33.2 % $ 40,945 $ 60,514 3.6 % -11.7 % 122.5 % -3.7 % 11.8 % -32.3 % (i) Represents the cash payments for theatre rent paid or payable during the quarter. (ii) One-time items include amounts related to both theatre rent and other theatre occupancy costs including real estate taxes, business taxes and common area maintenance. They are isolated here to illustrate Cineplex’s theatre rent and other theatre occupancy costs excluding these one- time, non-recurring items. (iii) Cash rent paid/payable that has been reallocated to offset the lease obligations. Theatre occupancy continuity 2020 as reported Impact of new and acquired theatres Impact of disposed theatres Same store rent change (i) One-time items Other Impact of IFRS 16 adoption: Cash rent related to lease obligations 2021 as reported Fourth Quarter Occupancy Full Year Occupancy $ $ 9,891 $ 218 (179) 7,100 (694) 3,515 (6,675) 13,176 $ 60,514 363 (1,410) 14,566 (2,582) (17,293) (13,213) 40,945 (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. Fourth Quarter Theatre occupancy expenses increased $3.3 million or 33.2% during the fourth quarter of 2021 compared to the prior year period. This increase was primarily due to the reduction in subsidies received as a result of the reopening of Cineplex’s businesses. The increase was also attributable to the increase theatre rent related expenses including common area maintenance and taxes incurred as Cineplex’s theatres were open during the period. During the prior year period, Cineplex recognized lower theatre occupancy expenses as a majority of theatres were closed or operating at far below normal capacity levels. As a result, rent relief measures negotiated with landlord partners were higher in the prior year period as compared to the current period. Cineplex was able to reduce theatre occupancy expenses through the receipt of realty tax and rent subsidies of $0.5 million (2020 - $2.9 million) and $1.0 million ($2.7 million), respectively. Full Year The decrease in theatre occupancy expenses of $19.6 million or 32.3% for the 2021 year compared the prior year was due to lower theatre rent related expenses including common area maintenance and taxes as compared to the prior year period. Cineplex recognized realty tax subsidies of $11.0 million (2020 - $2.9 million) and rent subsidies of $12.9 million (2020 - $2.7 million), contributing to the decrease in theatre occupancy expenses. Other operating expenses CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 45 37 ————————————————————————————————————————————— Cineplex Inc. Management’s Discussion and Analysis Theatre occupancy expenses thousands of dollars): Cash rent paid/payable (i) Other occupancy One-time items (ii) The following table highlights the movement in theatre occupancy expenses for the quarter and the full year (in Theatre occupancy expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 32,415 $ 23,727 36.6 % $ 113,080 $ 109,161 14,786 12,820 15.3 % 57,852 65,545 (863) (169) 410.7 % (4,690) (2,108) Total theatre occupancy including cash lease payments $ 46,338 $ 36,378 27.4 % $ 166,242 $ 172,598 Cash rent paid/payable related to lease obligations (iii) (33,162) (26,487) 25.2 % (125,297) (112,084) Theatre occupancy as reported $ 13,176 $ 9,891 33.2 % $ 40,945 $ 60,514 (i) Represents the cash payments for theatre rent paid or payable during the quarter. (ii) One-time items include amounts related to both theatre rent and other theatre occupancy costs including real estate taxes, business taxes and common area maintenance. They are isolated here to illustrate Cineplex’s theatre rent and other theatre occupancy costs excluding these one- time, non-recurring items. (iii) Cash rent paid/payable that has been reallocated to offset the lease obligations. 3.6 % -11.7 % 122.5 % -3.7 % 11.8 % -32.3 % 60,514 363 (1,410) 14,566 (2,582) (17,293) (13,213) 40,945 Fourth Quarter Occupancy Full Year Occupancy $ $ 9,891 $ 218 (179) 7,100 (694) 3,515 (6,675) 13,176 $ Theatre occupancy continuity 2020 as reported Impact of new and acquired theatres Impact of disposed theatres Same store rent change (i) One-time items Other Impact of IFRS 16 adoption: Cash rent related to lease obligations 2021 as reported Fourth Quarter (i) Represents a supplementary financial measure. See Section 17, Non-GAAP and other financial measures. Theatre occupancy expenses increased $3.3 million or 33.2% during the fourth quarter of 2021 compared to the prior year period. This increase was primarily due to the reduction in subsidies received as a result of the reopening of Cineplex’s businesses. The increase was also attributable to the increase theatre rent related expenses including common area maintenance and taxes incurred as Cineplex’s theatres were open during the period. During the prior year period, Cineplex recognized lower theatre occupancy expenses as a majority of theatres were closed or operating at far below normal capacity levels. As a result, rent relief measures negotiated with landlord partners were higher in the prior year period as compared to the current period. Cineplex was able to reduce theatre occupancy expenses through the receipt of realty tax and rent subsidies of $0.5 million (2020 - $2.9 million) and $1.0 million ($2.7 million), respectively. Full Year The decrease in theatre occupancy expenses of $19.6 million or 32.3% for the 2021 year compared the prior year was due to lower theatre rent related expenses including common area maintenance and taxes as compared to the prior year period. Cineplex recognized realty tax subsidies of $11.0 million (2020 - $2.9 million) and rent subsidies of $12.9 million (2020 - $2.7 million), contributing to the decrease in theatre occupancy expenses. Cineplex Inc. Management's Discussion and Analysis Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Other operating expenses CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS The following table highlights the movement in other operating expenses during the quarter and the full year (in thousands of dollars): 37 Other operating expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Theatre payroll Theatre operating expenses Media P1AG LBE (i) LBE pre-opening (ii) SCENE Marketing Other (iii) $ 30,766 $ 5,157 496.6 % $ 63,818 $ 40,689 27,146 13,146 27,853 12,692 — 8,641 5,211 7,605 12,717 8,513 15,494 5,037 785 4,890 2,136 5,093 113.5 % 54.4 % 79.8 % 152.0 % NM 76.7 % 144.0 % 49.3 % 66,188 37,263 91,573 31,331 1,354 29,019 10,710 24,676 61,359 42,913 71,638 26,731 1,907 13,423 7,223 24,389 Other operating expenses including cash lease payments $ 133,060 $ 59,822 122.4 % $ 355,933 $ 290,272 Cash rent paid/payable related to lease obligations (iv) (4,037) (4,255) -5.1 % (16,620) (14,180) Other operating expenses from continuing operations $ 129,023 $ 55,567 132.2 % $ 339,313 $ 276,092 56.8 % 7.9 % -13.2 % 27.8 % 17.2 % -29.0 % 116.2 % 48.3 % 1.2 % 22.6 % 17.2 % 22.9 % Other operating expenses from discontinued operations — — — — 2,212 -100.0 % Total other operating expenses $ 129,023 $ 55,567 132.2 % $ 339,313 $ 278,304 21.9 % (i) Includes operating costs of LBE locations. Overhead relating to management of LBE portfolio are included in the ‘Other’ line. (ii) Includes pre-opening costs of LBE. (iii) Other category includes overhead costs related to LBE and other Cineplex internal departments. (iv) Cash rent paid/payable that has been reallocated to offset the lease obligations. Other operating continuity from continuing operations Fourth Quarter Full Year 2020 as reported Impact of new and acquired theatres Impact of disposed theatres Same theatre payroll change (i) Same theatre operating expenses change (i) Media operating expenses change P1AG operating expenses change LBE operating expenses change LBE pre-opening change SCENE change Marketing change Other Impact of IFRS 16 adoption: Cash rent related to lease obligations 2021 as reported $ 55,567 $ 788 21 24,834 14,451 4,633 12,359 7,655 (785) 3,751 3,075 2,456 $ $ 218 $ 129,023 $ 276,092 1,238 (1,071) 22,542 5,276 (5,650) 19,935 4,600 (553) 15,596 3,487 261 (2,440) 339,313 (i) See Section 17, Non-GAAP and other financial measures. These are measures included as part of Cineplex’s supplementary financial measure calculations. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 46 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 38 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Fourth Quarter Other operating expenses increased $73.5 million or 132.2% during the fourth quarter of 2021 compared to the prior year period. The increase was primarily driven by increases in same store theatre payroll and theatre operating expenses of $25.6 million and $14.4 million, respectively, as Cineplex’s theatres were operating at a greater capacity in the current period as compared to extended closures in effect during the prior year. Cineplex also recognized P1AG other operating expenses of $27.9 million, an increase of $12.4 million when compared to the prior year due to the reopening of P1AG US and Canadian route locations. With the lifting of government-imposed restrictions, Cineplex’s LBE locations were also open for the majority of the fourth quarter resulting in LBE other operating expenses of $12.7 million an increase of $7.7 million when compared to the prior year. Cineplex also recognized a $3.8 million increase in SCENE operating costs prior to the launch of Scene+, and a $3.1 million increase in marketing expenses primarily related to the launch of Cineplex’s national brand campaign, Where Escape Begins which launched on September 27, 2021. Cineplex received $8.9 million of subsidies in the current period, comprised of $8.8 million (2020 -$14.3 million) of payroll subsidies of which $6.5 million (2020 - $6.9 million) was offset against theatre payroll, and $0.1 million (2020 - $1.8 million) of non-theatre rent, realty tax and utilities subsidies. Full Year The overall increase in other operating expenses was a result of the reopening of Cineplex’s theatres, LBE businesses and P1AG US and Canada route locations at FEC’s and theatres. The increase is also attributable to the increase in SCENE operating costs prior the launch of Scene+. In the prior year period, Cineplex experienced extended closure periods of its theatres, LBE locations and P1AG route locations resulting in a significant decrease in business volumes. For the annual period, Cineplex received $54.8 million (2020 - $49.8 million) of subsidies in the current period, comprised of $48.4 million (2020 - $47.6 million) of payroll subsidies of which $30.6 million (2020 - $25.3 million) was offset against theatre payroll, and $6.4 million (2020 - $2.2 million) non-theatre rent, realty tax and utility subsidies. General and administrative expenses The following table highlights the movement in general and administrative (“G&A”) expenses during the quarter and the full year, including share-based compensation costs, and G&A net of these costs (in thousands of dollars): G&A expenses Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change G&A excluding the following items $ 12,730 $ Restructuring Transaction / Litigation costs LTIP (i) Option plan — 2,275 800 523 7,261 2,396 1,279 248 718 75.3 % $ 44,239 $ 43,717 -100.0 % — 77.9 % 11,395 8,258 4,101 1.2 % -100.0 % 177.9 % 222.6 % -27.2 % 4,065 1,903 (15,104) -126.9 % (1,203) -258.2 % G&A expenses including cash lease payments $ 16,328 $ 11,902 37.2 % $ 61,602 $ 39,769 54.9 % Cash rent paid/payable included as part of lease obligations (ii) (557) (147) 278.9 % (2,306) (685) 236.6 % G&A expenses as reported $ 15,771 $ 11,755 34.2 % $ 59,296 $ 39,084 51.7 % (i) LTIP includes the expense for RSUs and PSUs, as well as the expense for the executive and Board deferred share unit plans. (ii) Cash rent paid/payable that has been reallocated to offset the lease obligations. Fourth Quarter and Full Year G&A expenses increased $4.0 million during the fourth quarter of 2021 compared to the prior year period. The change is attributable to higher head office payroll expenses and professional fees incurred related to the litigation against Cineworld. Cineplex incurred $2.3 million (2020 - $1.3 million) of expenses related to litigation arising from the Cineworld Transaction during the quarter (Section 1.1, Cineworld Transaction). Variable wage subsidies declined as business volumes increased, resulting in lower wage benefits received in the current period, contributing to the higher G&A expenses compared to the prior year. Employee payroll was reduced by $0.8 million (2020 - $2.3 million) under the THRP. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 47 39 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— G&A expenses for the annual period increased $20.2 million as compared to the prior year. The change was primarily due to a significant decrease in LTIP expense in the prior period due to the sharp decline in Cineplex’s Share price as a result of the impact of the COVID-19 pandemic on Cineplex’s business, which fell from $33.90 at the beginning of 2020 to $9.27 per Share at December 31, 2020. Cineplex also recognized total costs relating to litigation arising from the Cineworld Transaction of $11.4 million, an increase of $7.3 million when compared to the prior year. (Section 1.1, Cineworld Transaction). Employee payroll was reduced by $7.8 million (2020 - $9.4 million) received under the CEWS and THRP program in 2021. Share of (income) loss of joint ventures and associates Cineplex’s joint ventures and associates include its 78.2% interest in CDCP (2020 - 78.2%), 50% economic interest in Scene+, 50% interest in one IMAX screen in Ontario (2020 - 50%) and a 50% interest in YoYo’s (2020 - 50%). The following table highlights the components of share of (income) loss of joint ventures and associates during the quarter and the full year (in thousands of dollars): Share of (income) loss of joint ventures and associates Fourth Quarter Full Year Share of (income) loss of CDCP Share of loss of Scene+ Share of income (loss) of other joint ventures and associates 2021 2020 Change 2021 2020 Change $ (2,439) $ 2,085 -217.0 % $ (146) $ 7,279 -102.0 % 794 (136) — 260 NM -152.3 % 794 107 — 1,130 8,409 NM -90.5 % -91.0 % Total (income) loss of joint ventures and associates $ (1,781) $ 2,345 -175.9 % $ 755 $ CDCP revenues were positively impacted by the reopening of theatres that commenced during the third quarter and from the release of first-run movies, resulting in a $4.5 million increase in share of income from CDCP for the quarter and $7.4 million increase for the annual period. This was partially offset by losses of $0.8 million recognized from Cineplex’s investment in Scene+. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 48 40 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Interest expense The following table highlights the movement in interest expense during the quarter and full year (in thousands of dollars): Interest expense Interest expense on long-term debt Lease interest expense Financing fees Sub-total - cash interest expense Deferred financing fee accretion and other non-cash interest, net Accretion expense on Debentures and Notes Payable Interest rate swap - non-cash Sub-total - non-cash interest expense Total interest expense Total cash interest paid Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ $ $ $ 16,127 $ 14,533 542 31,202 $ 148 4,164 (5,282) (970) 30,232 $ 42,379 $ 12,712 13,858 700 27,270 368 3,428 2,509 6,305 33,575 40,450 26.9 % $ 4.9 % -22.6 % 14.4 % $ 119,525 $ 60,918 $ 57,744 863 38,485 47,794 1,500 87,779 -59.8 % 21.5 % -310.5 % -115.4 % 1,396 960 7,471 15,973 13,922 (12,730) 22,789 4,203 -10.0 % $ 123,728 $ 110,568 80,230 4.8 % $ 108,851 $ 58.3 % 20.8 % -42.5 % 36.2 % -31.2 % 113.8 % -191.4 % -81.6 % 11.9 % 35.7 % Total interest expense decreased $3.3 million for the quarter when compared to the prior year period. The decrease was caused by changes in the fair value of the interest rate swap resulting in a $7.8 million decrease in non-cash interest expense. This was partially offset by a $3.9 million increase in cash interest expense primarily relating to the issuance of Notes Payable (Section 7.4, Long-term debt) completed in the first quarter of 2021 and Debentures (as described in Section 7.4, Long-term debt) during the third quarter of 2020, resulting in Notes Payable cash interest expense of $4.7 million (2020 - $nil) and Debentures cash interest of $4.6 million (2020 - $4.6 million). Lower Credit Facilities balances in 2021 as compared to the prior year quarter resulted in a decrease of $1.4 million of interest on Cineplex’s outstanding Credit Facilities. Lease interest expense increased by $0.7 million as a result of lease modifications negotiated with landlord partners resulting in higher incremental borrowing rates (and lower principal balances), contributing to the increase in cash interest expense . Cineplex recognized accretion expense relating to the issuance of Notes Payable and Debentures of $0.2 million (2020 - $nil) and $3.9 million (2020 - $3.4 million), respectively. For the full year, interest expense increased $13.2 million when compared to the prior year period. The increase was due to increases in cash interest expense as a result of the issuance of Notes Payable (Section 7.4, Long-term debt) completed in the first quarter of 2021 and Debentures (Section 7.4, Long-term debt) during the third quarter of 2020, resulting in Notes Payable cash interest expense of $15.8 million (2020 - $nil) and Debentures cash interest of $18.2 million (2020 - $8.5 million). Lower Credit Facilities balances in 2021 as compared to the prior year quarter resulted in a decrease of $2.9 million of interest on Cineplex’s outstanding Credit Facilities. Cash interest relating to lease obligations increased by $10.0 million when compared to the prior period as a result of higher incremental borrowing rates due to lease modifications negotiated with landlord partners. Non-cash interest expense decreased by $18.6 million when compared to the prior year. The decrease in non-cash interest is due to changes in the fair value of the interest rate swap resulting in a $26.7 million decrease in non-cash interest expense. This was partially offset by an increase in accretion expense relating to the issuance of Notes Payable and Debentures of $0.8 million (2020 - $nil) and $15.2 million (2020 - $7.5 million), respectively. Interest income Interest income during the fourth quarter and the full year was as follows (in thousands of dollars): Interest income Interest income Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change $ 30 $ 33 -9.1 % $ 232 $ 182 27.5 % CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 49 41 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Foreign exchange The following table highlights the movement in foreign exchange during the quarter and the full year (in thousands of dollars): Foreign exchange Fourth Quarter 2021 2020 Change 2021 Full Year 2020 Foreign exchange (gain) loss from continuing operations Foreign exchange gain from discontinued operations Total foreign exchange (gain) loss $ $ (109) $ — (109) $ 759 — 759 NM $ NM NM $ (43) $ — (43) $ 57 (117) (60) Change NM NM -28.3 % The movement in the quarterly and full year foreign exchange was due to the change in the CAD/USD foreign exchange month end rate from 1.2741 at September 30, 2021 and 1.2732 at December 31, 2020 to 1.2678 at December 31, 2021. Change in fair value of financial instruments The following table highlights the movement in change in fair value of financial instruments during the quarter and the year to date (in thousands of dollars): Change in fair value of financial instruments Fourth Quarter 2021 2020 Change 2021 Year to Date 2020 Change Change in fair value of financial instruments $ (5,420) $ — NM $ (8,790) $ — NM The gain on change in fair value of financial instruments in the current period was due to the revaluation of Cineplex’s call option relating to the Notes Payable that were issued in the first quarter of 2021 (Section 7.4, Long- term debt). Income taxes The following table highlights the movement in current and deferred income tax expense during the quarter and the full year (in thousands of dollars): Income taxes Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Current income tax (recovery) expense Deferred income tax expense (recovery) Provision for income taxes from continuing operations Provision for income taxes from discontinued operations Provision for income taxes $ $ $ — $ — — $ — — $ (65,776) 114,854 49,078 — 49,078 NM $ -100.0 % -100.0 % $ — -100.0 % $ 3,339 $ — 3,339 $ (73,495) (11,373) (84,868) — 3,339 $ (1,627) (86,495) NM -100.0 % NM -100.0 % NM At December 31, 2020 the recoverability of the net deferred income tax assets in the normal course of business was uncertain and accordingly the net deferred tax assets were derecognized. Cineplex will evaluate the likelihood of recoverability in the ordinary course of business at each balance sheet date, and will recognize net deferred tax assets when and if appropriate. The 2021 current tax expense represents Ontario corporate minimum tax paid on the filing of 2020 tax returns as a result of losses carried back to offset taxable income. The minimum tax paid is creditable against future Ontario corporate income tax payable. In 2021, Cineplex recovered income taxes paid in prior periods of $62.6 million as a result of its tax returns filed for the 2020 taxation year. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 50 42 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— By Notice of Reassessment (“NOR”) dated January 22, 2019, the Canada Revenue Agency (“CRA”), disallowed the deduction of $26.6 million of losses of AMC Ventures Inc. (“AMC”) that Cineplex had obtained on the acquisition of AMC in 2012. The disallowance of the losses, which offset taxable income generated in 2014, increased taxes and interest payable by approximately $8.6 million, 50% of which was required to be paid immediately (interest continues to accrue on the unpaid amount). Cineplex disagrees with the CRA’s position, and has commenced an appeal to the Tax Court of Canada in respect of the NOR. On June 28, 2021, Cineplex received a response from the Attorney General of Canada representing the CRA confirming its position with respect to the disallowance of the losses. The appeals process is continuing and Cineplex believes that it should prevail in defending its original filing position, although no assurance can be given in this regard as the appeal process proceeds. Cineplex’s combined statutory income tax rate at December 31, 2021 was 26.3% (2020 - 26.8%). Non-capital losses available for carry-forward expire as follows: 2027 2028 2029 2030 2032 2034 2035 2036 2037 2038 2040 2041 Indefinite $2,502 8,822 5,122 2,184 254 1,947 2,770 2,749 18,546 3,110 16,977 221,169 28,423 314,575 $ Losses denominated in US dollars are presented at the Canadian dollar equivalent using the December 31, 2021 exchange rate. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 51 43 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 5.3 NET LOSS AND EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION (“EBITDA”) (see Section 17, Non-GAAP and other financial measures) The following table presents net loss, EBITDA, adjusted EBITDA and adjusted EBITDAaL for the three months and year ended December 31, 2021 as compared to the prior year periods (expressed in thousands of dollars, except adjusted EBITDAaL margin): NET LOSS AND EBITDA Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Net loss $ (21,778) $ (230,403) -90.5 % $ (248,722) $ (624,001) Net loss as a percentage of sales (7.3) % (439.3) % 432.0 % (37.9) % (149.2) % EBITDA Adjusted EBITDA Adjusted EBITDAaL $ 60,966 $ (90,897) NM $ 93,402 $ (345,244) $ 58,328 $ (32,097) NM $ 59,927 $ (55,866) $ 20,198 $ (65,948) NM $ (84,295) $ (182,815) Adjusted EBITDAaL margin 6.7 % (125.7) % 132.4 % (12.8) % (43.7) % -60.1 % 111.3 % NM NM -53.9 % 30.9 % Net loss and adjusted EBITDAaL for the fourth quarter of 2021 were $(21.8) million and $20.2 million, respectively, as compared to the net loss of $(230.4) million and adjusted EBITDAaL of $(65.9) million, respectively, in the prior year period. The movement in both net loss and adjusted EBITDAaL was primarily due to the reopening of Cineplex’s entire circuit of theatres and LBE venues during the majority of the fourth quarter, despite capacity restrictions reinstated in Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and British Columbia on December 18, 2021 and theatres in Quebec mandated to close effective December 20, 2021 in response to a surge in COVID-19 cases. Cinema media revenues and amusement revenues from route operations in both Canada and the United States also increased in the periods of reopening. In the prior year period, the second wave of COVID-19 in the winter resulted in another round of closures of Cineplex’s theatres and LBE venues in several provinces during the latter half of the fourth quarter of 2020. Net loss for the year ended December 31, 2021 was $(248.7) million, as compared to the net loss of $(624.0) million in the prior year period. Adjusted EBITDAaL for the year ended December 31, 2021 was a loss of $(84.3) million as compared to a loss of $(182.8) million for the same period in 2020. The movements in both net loss and adjusted EBITDAaL were primarily due to the lifting of some restrictions on the theatre and LBE businesses commencing near the end of the second quarter of 2021, and reopening of Cineplex’s entire circuit of theatres and LBE venues as of July 17, 2021, continuing into the third and fourth quarters. In response to a surge in COVID-19 cases, capacity restrictions were reinstated in Ontario, New Brunswick, Nova Scotia, Prince Edward Island and British Columbia effective December 18, 2021 and theatres in Quebec were mandated to close effective December 20, 2021. In the prior year period, Cineplex operated at full capacity until restrictions and closures began in March 2020 which continued until the latter half of August subsequent to which limited reopenings were allowed. The second wave of COVID-19 in the winter resulted in another round of closures in Cineplex’s theatres and LBE venues in several provinces during the latter half of the fourth quarter of 2020. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 52 44 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 6. BALANCE SHEETS The following sets out significant changes to Cineplex’s consolidated balance sheets during the year ended December 31, 2021 as compared to December 31, 2020 (in thousands of dollars): December 31, 2021 December 31, 2020 Change ($) Change (%) Assets Current assets Cash and cash equivalents Trade and other receivables Income taxes receivable Inventories Prepaid expenses and other current assets Non-current assets Property, equipment and leaseholds Right-of-use assets Interests in joint ventures Intangible assets Goodwill Derivative financial instrument Liabilities Current liabilities Accounts payable and accrued expenses Share-based compensation Income taxes payable Deferred revenue and other Lease obligations Fair value of interest rate swap agreements Non-current liabilities Share-based compensation Long-term debt Fair value of interest rate swap agreements Lease obligations Post-employment benefit obligations Other liabilities Shareholders’ (deficit) equity Total shareholders’ (deficit) equity $ 26,938 $ 16,254 $ 80,679 1,984 24,899 13,365 147,865 464,439 768,675 7,423 81,651 635,545 9,240 51,834 66,551 21,712 11,613 10,684 28,845 (64,567) 3,187 1,752 167,964 (20,099) 555,340 881,418 8,644 84,922 635,582 — (90,901) (112,743) (1,221) (3,271) (37) 9,240 $ $ 2,114,838 $ 2,333,870 $ (219,032) 157,950 $ 82,992 $ — 1,945 293,206 101,058 8,063 562,222 4,940 739,211 6,160 1,004,465 9,973 7,590 2,334,561 482 802 219,983 97,259 7,202 408,720 2,670 725,271 19,157 1,073,666 11,503 68,649 2,309,636 74,958 (482) 1,143 73,223 3,799 861 153,502 2,270 13,940 (12,997) (69,201) (1,530) (61,059) 24,925 65.7 % 55.6 % -97.0 % 14.7 % 15.1 % -12.0 % -16.4 % -12.8 % -14.1 % -3.9 % — % NM -9.4 % 90.3 % -100.0 % 142.5 % 33.3 % 3.9 % 12.0 % 37.6 % 85.0 % 1.9 % -67.8 % -6.4 % -13.3 % -88.9 % 1.1 % $ (219,723) 2,114,838 $ 24,234 2,333,870 $ (243,957) (219,032) -1,006.7 % -9.4 % Cash and cash equivalents. The increase in cash and cash equivalents is due to the higher cash in transit in resulting from reopening of entire circuit of theatres and LBE venues since July 17, 2021. Trade and other receivables. The increase in trade and other receivables is primarily due to timing of billing and collection based on higher business volumes including the sale of gift cards and coupons in the current year. With restrictions being reinstated in several provinces as a result of rising case counts of COVID-19 in the latter half of December 2021, accounts receivables also included $9.9 million of labour, utilities and other occupancy subsidies at December 31, 2021 (2020 - $15.8 million). Income taxes receivable. The decrease in income taxes receivable is primarily due to the receipt of tax refunds of $62.6 million, resulting from loss carrybacks realized in 2020 used to offset taxable income in prior years. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 53 45 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Inventories. The increase in inventories is primarily due to increased inventory with anticipated higher business volumes resulting from reopening of the entire circuit of theatres and LBE venues since July 17, 2021. Prepaid expenses and other current assets. The increase in prepaid expenses and other current assets is primarily due to technology service contracts extending into the next period and an increase in annual insurance premiums during the fourth quarter of 2021. Property, equipment and leaseholds. The decrease in property, equipment and leaseholds is due to amortization expense ($102.3 million), asset dispositions ($13.9 million), foreign exchange impact ($0.3 million), and an impairment charge ($0.9 million). This is offset by additions to new build and other capital expenditures ($19.6 million) and maintenance capital expenditures ($6.9 million). Right-of-use assets. The decrease in right-of-use assets is due to amortization expense ($102.2 million), lease modifications ($7.6 million), and an impairment charge ($2.8 million) recorded during the fourth quarter. During the second quarter of 2021, Cineplex derecognized right-of-use assets in accordance with an amended lease agreement entered with the landlord ($6.3 million). Interests in joint ventures. The decrease in interest in joint ventures is primarily due to the $2.0 million cash received from CDCP in 2021, as well as the equity loss realized by Scene+ which adopted equity accounting as of December 13, 2021, with the launch of Scene+. Intangible assets. The decrease in intangible assets is due to amortization expense ($10.8 million), and asset dispositions ($1.4 million), partially offset by the capitalization of software development costs ($9.5 million). Derivative financial instrument. The increase in derivative financial instrument is due to the change in fair value of Notes Payable prepayment option. Accounts payable and accrued expenses. The increase in accounts payable and accrued liabilities is primarily due to increased business volumes arising from the reopening of the entire circuit of theatres and LBE venues since July 17, 2021. Share-based compensation. The increase in share-based compensation is due to the increase in Share price, which was $13.49 per Share at December 31, 2021 as compared to $9.27 at December 31, 2020, increasing the fair value of the compensation liability (see Section 8, Share activity) Income taxes payable. The increase in income taxes payable represents minimum tax payable by certain entities as a result of losses used to offset taxable income in prior years. Deferred revenue and other. The deferred revenue increase is primarily due to higher sales volume of gift cards and vouchers with the reopening of theatres and LBE venues in the fourth quarter of 2021, in excess of redemption. In addition, deferred revenue includes $60.0 million from the SCENE reorganisation that was reclassified from other liability and will be recognized when the economic substance of the transaction is realized in 2022. Lease obligations. The decrease in lease obligations is primarily due to the payment of lease obligations and lease modifications recognized from leases renegotiated due to the impact of COVID-19 on the business. Fair value of interest rate swap agreements. Represents the fair values of Cineplex’s outstanding interest rate swap agreements (see Section 7.4 Long-term debt). Long-term debt. Long-term debt consists of the Credit Facilities, Debentures and Notes Payable. The increase in long-term debt is primarily due to the accretion of the Debentures and Notes Payable. The Credit Facilities were reduced by the application of proceeds from the issuance of the Notes Payable and the sale of the head office buildings (Section 7.4 Long-term debt). CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 54 46 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 7. LIQUIDITY AND CAPITAL RESOURCES 7.1 OPERATING ACTIVITIES Cash flow is generated primarily from film entertainment (the sale of admission tickets and food service sales), media sales and services, amusement and leisure (amusement and food service sales) and other revenues. Generally, this provides Cineplex with positive working capital, since certain cash revenues are normally collected in advance of the payment of certain expenses. Box office revenues are directly related to the success and appeal of the film product produced and distributed by the studios. The following table highlights the movements in cash from operating activities for the three months and year ended December 31, 2021 and 2020 (in thousands of dollars): Cash flows provided by operating activities Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Net loss from continuing operations $ (21,778) $ (230,403) $ 208,625 $ (248,722) $ (624,001) $ 375,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of other assets (i) Depreciation of right-of-use assets Unrealized foreign exchange Interest rate swap agreements - non-cash interest Accretion of convertible debentures Other non-cash interest (ii) Loss (gain) on disposal of assets Deferred income taxes (recovery) Non-cash Share-based compensation Impairment of long-lived assets and goodwill Change in fair value of financial instrument Net change in interests in joint ventures and associates Changes in operating assets and liabilities 27,501 25,041 78 (5,282) 4,164 148 1,576 — 1,228 3,717 (5,420) (2,088) (1,405) 28,750 28,136 787 2,509 3,428 368 (1,249) 113,042 (3,095) 102,247 (709) 55 124,846 128,393 342 (11,804) (26,146) (287) (7,791) (12,730) 13,922 (26,652) 736 (220) 15,973 960 (283) 114,854 (3,149) 56,175 — 5,044 (67,257) 1,859 (114,854) 4,377 (52,458) (5,420) (7,132) 65,852 (28,283) — 4,292 3,717 (8,790) 1,805 117,438 7,471 1,396 (13,101) (11,373) 1,228 294,863 — 12,878 (43,178) 8,502 (436) (15,182) 11,373 3,064 (291,146) (8,790) (11,073) 160,616 Net cash provided by (used in) operating activities $ 27,480 $ (61,041) $ 88,521 $ 61,004 $ (106,314) $ 167,318 (i) Includes depreciation of property, equipment and leaseholds and amortization of intangible assets. (ii) Includes accretion of asset retirement obligations and non-cash interest costs on lease obligations. Fourth Quarter Cash provided by operating activities was $27.5 million as compared to cash flows of $61.0 million used in operating activities in the prior year period. The movement was primarily due to Cineplex’s improved operating results arising from the reopened theatres and LBE venues for the majority of the fourth quarter. The timing of the settlement of accounts receivables and payables balances also positively contributed to the movement. Full Year For the year ended December 31, 2021, cash provided by operating activities was $61.0 million compared to cash flows of $106.3 million used in the prior year period. The movement was primarily due to the reopening of Cineplex’s entire circuit of theatres and LBE venues as of July 17, 2021 leading to improved operating results in the third and fourth quarters of 2021, despite the negative impact from capacity restrictions reinstated in Ontario, New Brunswick, Nova Scotia, Prince Edward Island and British Columbia effective December 18, 2021 and from temporary theatre closures in Quebec in response to a surge in COVID-19 cases. The timing of settlement of operating assets and liabilities in 2021 including the receipt of the $62.6 million tax refunds, also positively contributed to the movement. During the prior year period, Cineplex operated at full capacity until restrictions and closures began in March 2020 which continued until the latter half of August at which time limited reopenings were allowed. The second wave of COVID-19 emerging during the winter of 2020 resulted in another round of closures in Cineplex’s theatres and LBE venues in several provinces during the latter half of the fourth quarter of 2020. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 55 47 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 7.2 INVESTING ACTIVITIES The following table highlights the movements in cash used in investing activities for the three months and year ended December 31, 2021 and 2020 (in thousands of dollars): Cash flows provided by (used in) investing activities Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Proceeds from disposal of assets, net Purchases of property, equipment and leaseholds Intangible assets additions Tenant inducements Net cash received from joint ventures and associates $ 68 $ (5,052) (1,992) 1,044 1,995 59,870 $ (9,969) (2,106) 2,697 — (59,802) $ 4,917 114 (1,653) 1,995 63,215 $ (23,627) (9,200) 8,068 1,995 80,920 $ (73,411) (9,005) 24,296 3,910 (17,705) 49,784 (195) (16,228) (1,915) Net cash (used in) provided by investing activities $ (3,937) $ 50,492 $ (54,429) $ 40,451 $ 26,710 $ 13,741 Fourth Quarter Cash used in investing activities during the fourth quarter of 2021 was $3.9 million, as compared to cash provided by investing activities of $50.5 million in the prior year period. The movement was primarily due to cash proceeds of $60.0 million that were received in the prior year period as a result of Cineplex’s reorganization of its joint operation with SCENE. Full Year For the full year, cash provided by investing activities was $13.7 million higher than the prior year. The increase was primarily due to a reduction of capital expenditures net of tenant inducement received in response to the pandemic. The increase was partially offset by the movement in cash proceeds. During 2021 cash proceeds received were for the sale of Cineplex’s head office buildings and the sale of certain restrictive lease rights, while cash proceeds received in the prior year period were with respect to Cineplex’s reorganization of its joint operation with SCENE. The COVID-19 pandemic continues to have a material negative effect on Cineplex’s business. Management continues to focus on reducing capital expenditures and believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic in the regions in which Cineplex operates. Components of capital expenditures include (in thousands of dollars): Capital expenditures Gross capital expenditures Less: tenant inducements Net capital expenditures Net capital expenditures consists of: Growth and acquisition capital expenditures (i) Tenant inducements Media growth capital expenditures Premium formats (ii) Amusement and leisure growth capital expenditures (excluding LBE build expenditures) Maintenance capital expenditures Other (iii) Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change 5,052 $ (1,044) 4,008 $ 9,969 $ (2,697) 7,272 $ (4,917) $ 1,653 (3,264) $ 23,627 $ (8,068) 15,559 $ 73,411 $ (24,296) 49,115 $ (49,784) 16,228 (33,556) 2,525 $ (1,044) 2,647 399 445 5,335 (6,299) 4,008 $ 8,823 $ (2,697) — 541 372 1,171 (938) 7,272 $ (6,298) $ 1,653 2,647 (142) 73 4,164 (5,361) (3,264) $ 13,110 $ (8,068) 4,238 258 1,133 6,937 (2,049) 15,559 $ 37,104 $ (24,296) 198 2,884 (23,994) 16,228 4,040 (2,626) 877 5,379 26,969 49,115 $ 256 1,558 (29,018) (33,556) $ $ $ $ (i) Growth and acquisition capital expenditures include expenditures on the construction of new locations (including VIP cinemas) and other Board approved growth projects with the exception of premium formats, media growth, and amusement gaming and leisure growth capital expenditures. (ii) Premium formats include capital expenditures for recliner seating, IMAX, UltraAVX, 3D, 4DX and ScreenX. (iii) Primary component of Other is the impact of the timing of cash payments relating to the purchases of property, equipment and leaseholds. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 56 48 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 7.3 FINANCING ACTIVITIES The following table highlights the movements in cash from financing activities for the three months and year ended December 31, 2021 and 2020 (in thousands of dollars): Cash flows provided by (used in) financing activities Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Dividends paid Borrowings (repayments) under credit facility, net Repayments of lease obligations - principal Issuance of convertible debentures, net Insurance of notes payable, net Financing fees $ — $ — $ 1,000 (25,525) 46,000 (32,323) — — (542) — — (700) — $ (45,000) 6,798 — — 158 — $ (246,000) (88,259) — 243,996 (863) (19,000) $ (119,000) (91,946) 303,063 — (1,500) 19,000 (127,000) 3,687 (303,063) 243,996 637 Net cash (used in) provided by financing activities $ (25,067) $ 12,977 $ (38,044) $ (91,126) $ 71,617 $ (162,743) Fourth Quarter Cash flows used in financing activities were $25.1 million in the fourth quarter of 2021, as compared to cash provided in the prior year comparative period of flows of $13.0 million. The movement was mainly due to borrowings under the Credit Facilities to fund operations during the COVID-19 driven closures in the prior year period. Full Year Cash flows used in financing activities were $91.1 million for the year ended December 31, 2021, as compared to cash provided financing activities in the prior year in the amount of $71.6 million. The movement was mainly due to the net proceeds arising from the debt financing and repayment of amounts borrowed under the Credit Facilities in both 2020 and 2021. During the first quarter of 2021, the net proceeds of the Notes Payables and sale of head office buildings were used to repay the Credit Facilities ($100.0 million of which was a permanent repayment). During the third quarter of 2020, the net proceeds of the issuance of the Debentures was used to repay the Credit Facilities, of which $100.0 million was permanent. Dividends were suspended under the terms of the Arrangement Agreement subsequent to the dividend paid on February 28, 2020 and remained suspended after the termination of the Arrangement Agreement as a result of the terms of the Credit Agreement Amendments (see Section 7.4, Credit Facilities). In response to the impact of the COVID-19 pandemic, Cineplex is closely monitoring its liquidity. Details with respect to its ongoing measures to maximize liquidity are detailed in Section 1.1 Response to COVID-19. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 57 49 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 7.4 LONG-TERM DEBT Credit facilities Cineplex has bank facilities with a syndicate of lenders which includes a revolving facility (the “Revolving Facility”) and non-revolving credit facility (the “Term Facility”, and together with the Revolving Facility, the “Credit Facilities”) pursuant to a seventh amended and restated credit agreement between Cineplex, Cineplex Entertainment Limited Partnership, the guarantors from time to time party thereto, and a syndicate of lenders dated November 13, 2018 (as further amended from time to time, the “Credit Agreement”). The Term Facility was repaid in full in the first quarter of 2021 and is no longer available for future borrowing. At December 31, 2021, the Credit Facilities consisted of the following (in millions of dollars), subject to amendments described below pursuant to the Credit Agreement Amendments: Revolving Facility Letters of credit outstanding at December 31, 2021 of $11.0 million are reserved against the Revolving Facility. 541.7 $ $ 260.0 $ Available Drawn Reserved Remaining 270.7 11.0 $ The Credit Facilities bear interest at a floating rate based on the Canadian dollar prime rate, U.S. Base Rate, LIBOR or bankers’ acceptances rates plus, in each case, an applicable margin to those rates. The Revolving Facility matures in November 2023. Borrowings on the Revolving Facility can be made in either Canadian or US dollars. Cineplex’s Credit Facilities contain restrictive covenants that limit the discretion of Cineplex’s management with respect to certain business matters. These covenants place limits and restrictions on, among other things, the ability of Cineplex to create liens or other encumbrances, to pay dividends or make certain other payments, minimum liquidity covenants, anti-hoarding provisions, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. The Credit Facilities are secured by all of Cineplex’s assets. The Revolving Facility is drawn upon and repaid on a regular basis and as such is presented on a net basis in the Statement of Cash flows. On June 29, 2020, Cineplex entered into the First Credit Agreement Amendment, following which, on November 12, 2020 Cineplex entered into the Second Credit Agreement Amendment, on February 8, 2021 Cineplex entered into the Third Credit Agreement Amendment and on December 30, 2021 Cineplex entered into the Fourth Credit Agreement Amendment. The amendments provided certain financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s businesses, while applying additional restrictive covenants and required repayments in certain circumstances. The following is a summary of the key terms of the Third Credit Agreement Amendment entered into on February 8, 2021 that are updated from the First and Second Credit Agreement Amendments (certain of which have been modified further by the Fourth Credit Agreement Amendment described below): • The following amendments to the Credit Facilities became effective upon the completion of the issuance of $250,000 Notes Payable during the first quarter of 2021: ▪ The suspension of financial covenant testing was extended until the fourth quarter of 2021. On resumption of financial covenant testing in the fourth quarter of 2021: • • • for the fourth quarter of 2021, testing will be based on an annualized calculation of Adjusted EBITDA (as further adjusted in accordance with the Credit Agreement definitions) based on the actual results for such quarter; for the quarter ending on March 31, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on actual results for the fourth quarter of 2021 and the first quarter of 2022 multiplied by 2; and for the quarter ending on June 30, 2022, testing will be based on an annualized calculation of Adjusted EBITDA for the fourth quarter of 2021, the first quarter of 2022 and the second of 2022 multiplied by 4/3. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 58 50 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— ▪ ▪ ▪ ▪ ▪ ▪ Thereafter, testing will be based on an annualized calculation of the cumulative Adjusted EBITDA on a trailing four fiscal quarter basis; The Total Leverage Ratio of 3.75x will apply when financial covenants are reinstated, and will be reduced until the third quarter of 2022 at which point it will reach a level of 3.00x; The liquidity covenant will continue and be amended and extended beginning in February 2021, through to and including December 2021, requiring available liquidity as defined on a monthly basis (November 1, 2020 through January 31, 2021 - $100.0 million; February 2021 - $75.0 million; March 2021 - $60.0 million; April 1, 2021 through December 31, 2021 - $100.0 million; The addition of a Senior Leverage Ratio to be based on annualized Adjusted EBITDA and set at 1.0x lower than the Total Leverage Ratio. Senior Leverage Ratio to be defined as (i) Total Debt (as defined in the Credit Agreement) less any Notes Payable to (ii) Adjusted EBITDA; Effective with the fourth quarter of 2021, additional growth capital expenditures will be subject to pro-forma Total Leverage covenant of 2.75x (both prior to and immediately after giving effect to any such growth capital expenditure) based on actual last 12 months’ EBITDA; and Distributions continue to be blocked during the extended financial covenant suspension period and only permitted when the Total Leverage ratio is less than 2.75x (both prior to and immediately after giving effect to any such distribution). On December 30, 2021, Cineplex entered into the Fourth Credit Agreement Amendment, which, among other things, extended the suspension of financial covenant testing until the second quarter of 2022 and liquidity covenant requirement until June 30, 2022. The following is a summary of the key terms of the Fourth Credit Agreement Amendment: • The suspension of financial covenant testing was extended until the second quarter of 2022. On resumption of financial covenant testing in the second quarter of 2022: • • • for the second quarter of 2022, testing will be based on an annualized calculation of Adjusted EBITDA (as further adjusted in accordance with the Credit Agreement definitions) based on the actual results for such quarter multiplied by 4; for the quarter ending on September 30, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on actual results for the second quarter of 2022 and the third quarter of 2022 multiplied by 2; and for the quarter ending on December 31, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on the actual results of the second quarter of 2022, the third quarter of 2022 and the fourth quarter of 2022 multiplied by 4/3. Thereafter, testing will be based on an annualized calculation of the cumulative Adjusted EBITDA on a trailing four fiscal quarter basis; The Total Leverage Ratio of 3.75x will apply when financial covenants are reinstated, and will be reduced quarterly by 0.25x until the first quarter of 2023 at which point it will reach a level of 3.00x; The liquidity covenant will continue and be amended requiring available liquidity (as defined) to be maintained at all times at no less than $100.0 million; The Senior Leverage Ratio to be based on annualized Adjusted EBITDA and set at 1.0x lower than the Total Leverage Ratio. Senior Leverage Ratio is defined as (i) Total Debt (as defined in the Credit Agreement) less any Notes Payable to (ii) Adjusted EBITDA; and From and after April 1, 2022, a fixed charge coverage ratio of greater than 1.25x will apply. ▪ ▪ ▪ ▪ ▪ CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 59 51 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— During the first quarter of 2021, Cineplex completed a sale-leaseback transaction for its head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57.0 million, recognizing a gain of $30.1 million. Net proceeds from the sale, in addition to the net proceeds from the issuance of the Notes Payable (discussed below) were used to repay the Credit Facilities, a portion of which was permanent. As a result, Cineplex permanently repaid the remaining $50.0 million balance of its outstanding Term Facility. This summary of the Credit Agreement is qualified in its entirety by reference to the provisions of the Credit Agreement which contains a complete statement of those terms and conditions. The Credit Agreement and each of the First, Second, Third and Fourth Credit Agreement Amendment were filed on SEDAR on June 30, 2020, November 13, 2020, February 8, 2021 and January 4, 2022, respectively, for each of Credit Agreement Amendments.. One of the key financial covenants in the Credit Facilities is the Total Leverage Ratio which is calculated in accordance with IFRS in effect at November 13, 2018, which excludes the impact of the adoption of IFRS 16 on Cineplex’s financial reporting. The definition of debt in the Credit Facilities for the purposes of the Total Leverage Ratio includes the Credit Facilities, financing leases and letters of credit but does not include Debentures, Notes Payable, the lease obligations arising on the adoption of IFRS 16 or a reduction for cash on hand. For the purposes of the Credit Facilities definition, EBITDA is adjusted for certain non-cash, non-recurring items, excluded subsidiaries and the annualized impact of new operating locations or acquisitions. Additional transactions focused on enhancing Cineplex’s liquidity included amendments to the Credit Facilities that have provided Cineplex with financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s businesses, and the issuance of Notes Payable for gross proceeds of $250.0 million. Cineplex used the net proceeds from the issuance of the Notes Payable to permanently repay $50.0 million of its Revolving Facility and $50.0 million of its Term Facility. Cineplex remains focused on exploring other measures to maintain adequate liquidity for the duration of the pandemic and beyond. Interest rate swap agreements. Cineplex entered into interest rate swap agreements where Cineplex agreed to pay fixed rates per annum, plus an applicable margin and receive a floating rate of interest equal to the three-month Canadian deposit offering rate set quarterly in advance, with net settlements quarterly. The following table outlines Cineplex’s current interest rate swap agreements as of December 31, 2021: Interest rate swap agreements Notional amount Inception date Effective date Maturity date Fixed rate payable Swap - 1 Swap - 2 Swap - 3 $200.0 million November 13, 2018 April 26, 2021 November 14, 2023 $100.0 million November 13, 2018 November 13, 2018 November 14, 2023 $150.0 million November 13, 2018 November 13, 2018 November 14, 2025 2.945 % 2.830 % 2.898 % Cineplex ceased the use of hedge accounting for the interest rate swaps during the fourth quarter of 2019 as a result of the terms of the Arrangement Agreement. The interest rate swaps are measured at fair market value at each reporting period with changes in fair market value recorded in interest expense - other, in the consolidated statement of operations. Despite the termination of the Arrangement Agreement, the swaps can only be re-designated on a prospective basis for hedge accounting treatment. Based on the Credit Agreement in effect at December 31, 2021 Cineplex’s effective cost of borrowing on the $450.0 million hedged borrowings was 6.904% (December 31, 2020 - $450.0 million hedged borrowings - 5.754%). Convertible debentures On July 17, 2020, Cineplex issued $316.3 million aggregate principal amount of convertible unsecured subordinated debentures, which mature on September 30, 2025 (the “Maturity Date”) and bear interest at a rate of 5.75% per annum, payable semi-annually in arrears on September 30 and March 31 in each year. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 60 52 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— The Debentures are not redeemable by Cineplex prior to September 30, 2023. On or after September 30, 2023 and prior to September 30, 2024, Cineplex may, at its option, redeem the Debentures in whole or in part from time to time provided that the volume weighted average trading price of the Share on the Toronto Stock Exchange during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On or after September 30, 2024, the Debentures may be redeemed in whole or in part from time to time at the option of Cineplex at a price equal to their principal amount plus accrued and unpaid interest. Redemption may be in the form of cash or in the form of Shares, at the option of Cineplex. At the holder’s option, the Debentures may be converted into Shares at a conversion price of $10.94 per Share at any time prior to the close of business on the earlier of: (i) five business days prior to the Maturity Date, and (ii) if called for redemption, five business days immediately preceding the dated fixed for redemption of the Debentures, at a conversion price to be determined at the time of pricing. Holders who convert their Debentures into Shares will receive accrued and unpaid interest for the period from the date of the latest Interest Payment Date to the date of conversion. Conversion of outstanding Debentures will result in the issuance of Shares from treasury. The fair value of the liability component of the Debentures was assessed at inception based on an estimated market discount rate of 14.1% less the pro-rata portion of transaction costs, and will be accreted to the full face value over the term of the Debentures. Cineplex recorded cash interest expense on the Debentures during the quarter and year to date of $4.6 million (2020 - $4.6 million) and $18.2 million (2020 - $8.5 million), respectively. Furthermore, Cineplex recorded accretion expense during the quarter and year to date of $3.9 million (2020 - $3.4 million) and $15.2 million (2020 - $7.5 million), respectively, both of which are included as part of the interest expense in the consolidated statement of operations. The residual value was allocated to the equity component less the pro-rata portion of transaction costs as prescribed by IFRS 9, Financial Instruments. The foregoing is a summary of the key terms of the Debentures. This summary is qualified in its entirety by reference to the provisions of the Debentures trust indenture which contains a complete statement of those terms and conditions. The Debenture trust indenture was filed on SEDAR on July 15, 2020. Notes Payable On February 26, 2021, Cineplex completed the $250.0 million Notes Payable offering. The Notes Payable mature on February 26, 2026 and bear interest at a rate of 7.50% per annum, payable semi-annually in arrears on January 31 and July 31 of each year, commencing July 31, 2021. The Notes Payable are subordinate to the security granted for the obligations under the Credit Facilities, and are subject to the terms of an intercreditor agreement with the agent under the Credit Facilities. Cineplex recorded cash interest expense on the Notes Payable during the quarter and year to date of $4.7 million (2020 - $nil) and $15.8 million (2020 - $nil), respectively. Furthermore, Cineplex recorded accretion expense during the quarter and year to date of $0.2 million (2020 - $nil) and $0.8 million (2020 - $nil), respectively, both of which are included as part of interest expense in the consolidated statement of operations. As at December 31, 2021, Cineplex has $250.0 million principal amount of Notes Payable outstanding. Cineplex’s derivative financial instrument relates to the early prepayment option that fluctuates in value based on market interest rates. The fair value of the embedded derivative was determined using an option pricing model with observable market inputs and are consistent with accepted methods for valuing financial instruments. Cineplex has estimated the fair value of this embedded derivative at $9.2 million as at December 31, 2021 which is presented on the consolidated balance sheets. The foregoing is a summary of the key terms of the Notes Payable. This summary is qualified in its entirety by reference to the provisions of the Notes Payable trust indenture which contain a complete statement of those terms and conditions. The Notes Payable trust indenture was filed on SEDAR on February 26, 2021. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 61 53 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 7.5 FUTURE OBLIGATIONS At December 31, 2021, Cineplex had the following contractual or other commitments authorized by the Board (expressed in thousands of dollars): Contractual obligations Total Within 1 year 2-3 years 4-5 years After 5 years Payments due by period Accounts payable and accrued liabilities $ Interest rate swap agreements Long-term debt Interest on long-term debt Equipment obligations Deferred consideration - AMC Convertible debentures Convertible debentures interest Notes payable Notes payable interest 157,950 14,223 260,000 33,539 3,045 3,134 316,250 68,154 250,000 78,083 157,950 8,063 — 17,950 1,963 — — 18,184 — 18,750 — 5,081 260,000 15,589 829 3,134 — 36,369 — 37,552 — 1,079 — — 160 — 316,250 13,601 250,000 21,781 Total contractual obligations $ 1,184,378 $ 222,860 $ 358,554 $ 602,871 $ The following table discloses the undiscounted cash flow for lease obligations as of December 31, 2021: — — — — 93 — — — — — 93 Less than one year One to five years More than five years Total undiscounted lease obligations $ $ 173,086 637,415 610,456 1,420,957 Cineplex has aggregate gross capital commitments of $71.2 million ($53.1 million net of tenant inducements) related to the completion of construction of 5 operating locations including both theatres and location-based entertainment locations, in addition to the ongoing rollout of expanded entertainment offerings at select theatres and location-based entertainment locations, over the next four years. As a result of the negative impact of COVID-19 on its business, Cineplex continues to focus on reducing capital expenditures and believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic in the regions in which Cineplex operates. With the uncertainty surrounding the timing and impact of the theatre and LBE venue closures, management will continue to assess its future capital spending taking into consideration its legal commitments, restrictions imposed by the Credit Facilities (as amended) and requirements of the business on a short and long-term basis. Cineplex conducts a significant part of its operations in leased premises. Cineplex’s leases generally provide for minimum rent and a number of the leases also include percentage rent based primarily upon sales volume. Cineplex’s leases may also include escalation clauses, guarantees and certain other restrictions, and generally require it to pay a portion of the real estate taxes and other property operating expenses. Initial lease terms generally range from 15 to 20 years and contain various renewal options, generally in intervals of five to ten years. In response to the COVID-19 pandemic and resulting government mandated closures, Cineplex temporarily closed all of its theatres and LBE locations on March 16, 2020, then reopened all theatres and LBE venues on July 17, 2021, but operated the theatres under capacity restrictions reinstated on December 18, 2021 in Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and British Columbia on December 18, 2021, and further temporarily closed theatres in Quebec on December 20, 2021. Cineplex is guarantor under the leases for the remainder of the lease terms for certain theatres that it has sold in the event that the purchaser of the theatres does not fulfill its obligations under the respective lease; nine or fewer of those theatres are still operated by a third-party lease under which Cineplex arguably could be responsible as a CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 62 54 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— guarantor. Cineplex has assessed the fair value of the lease guarantees and determined that the fair value of these guarantees at December 31, 2021 is nominal. As such, no additional amounts have been provided in the consolidated financial statements for these guarantees. Should the purchasers of the theatres fail to fulfill their lease commitment obligations, Cineplex could face a substantial financial burden, which could be mitigated by Cineplex operating any theatres under default. 8. ADJUSTED FREE CASH FLOW AND DIVIDENDS (see Section 17, Non-GAAP and other financial measures) Cineplex’s dividend policy is subject to the discretion of the Board and may vary depending on, among other things, Cineplex’s results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that the Board may deem relevant. As a result of the Arrangement Agreement, Cineplex stopped paying dividends after the monthly dividend that was paid on February 28, 2020. Cineplex does not expect to return to paying dividends until the negative impact of the COVID-19 crisis has been addressed, the contractual restrictions imposed by the terms of its long-term debt agreements permit, and liquidity has improved. Cineplex hereby currently designates all dividends paid or deemed to be paid as “eligible dividends” for purposes of subsection 89(14) of the Income Tax Act (Canada), and similar provincial and territorial legislation, unless indicated otherwise. 8.1 ADJUSTED FREE CASH FLOW Prior to the monthly dividend that was paid on February 28, 2020, Cineplex distributed cash to its shareholders on a monthly basis. The following table illustrates adjusted free cash flow per Share, dividends paid per Share, and the payout ratio of dividends relative to adjusted free cash flow for the three months and year ended December 31, 2021 and 2020: Adjusted free cash flow Fourth Quarter Full Year Adjusted free cash flow per Share (i) Dividends declared per Share Payout ratio - year ended December 31 2021 2020 Change 2021 2020 Change $ $ (0.016) $ (0.482) -96.7 % $ (2.392) — $ — — — NM $ — — — % $ $ (2.556) 0.150 -6.4 % -100.0 % (5.9) % 5.9 % (i) Represents a non-GAAP ratio. See Section 17, Non-GAAP and other financial measures. Adjusted free cash flow per Share for the fourth quarter and full year were negative for both 2020 and 2021. The year-over-year movement was mainly due to improved operating results as a result of reopening of Cineplex’s entire circuit of theatres and LBE venues as of July 17, 2021, continuing to the third quarter and the majority of the fourth quarter of 2021. Measures relevant to the discussion of adjusted free cash flow per Share are as follows (expressed in thousands of dollars except Shares outstanding): Fourth Quarter Full Year 2021 2020 Change 2021 2020 Change Cash flows provided by (used in) continuing operations Net loss from continuing operations Standardized free cash flow (i) Adjusted free cash flow (i) Cash dividends declared $ $ $ $ $ 27,480 $ (61,041) NM $ 61,004 $ (106,314) NM (21,778) $ (230,403) -90.5 % $ (248,722) $ (624,001) -60.1 % 22,495 $ (71,140) NM $ 40,709 $ (179,725) (1,032) $ (30,530) -96.6 % $ (151,517) $ (161,870) NM -6.4 % — $ — NM $ — $ 9,500 -100.0 % Average number of Shares outstanding 63,343,223 63,333,238 — % 63,339,239 63,333,238 — % (i) Represents a non-GAAP financial measure. See Section 17, Non-GAAP and other financial measures. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 63 55 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— 8.2 DIVIDENDS Cineplex has not paid any dividends after the monthly dividend that was paid on February 28, 2020 and is currently restricted from paying any dividends under the Credit Facilities. The following table outlines Cineplex’s distribution and dividend history: Distribution and dividend history Effective Date January 2004 (i) May 2007 May 2008 May 2011 May 2012 May 2013 May 2014 May 2015 May 2016 May 2017 May 2018 May 2019 - January 2020 (i) Cineplex Galaxy Income Fund, the predecessor to Cineplex (“The Fund”) declared and paid distributions at a rate of $0.1050 per month from May 2008 until December 2010. The Fund converted to a corporation on January 1, 2011, at which time distributions ceased and dividends began at the same rate of $0.1050 per month. Monthly Distribution/Dividend per Unit/Share $0.0958 $0.1000 $0.1050 $0.1075 $0.1125 $0.1200 $0.1250 $0.1300 $0.1350 $0.1400 $0.1450 $0.1500 9. SHARE ACTIVITY Share capital at December 31, 2021 and the transactions during the year are as follows (expressed in thousands of dollars except Share amounts): Balance - December 31, 2020 Issuance of shares on exercise of options Balance - December 31, 2021 Shares Number of common shares issued and outstanding 63,333,238 $ 11,060 63,344,298 $ Shares Number of common shares issued and outstanding Common shares 852,379 $ 86 852,465 $ Common shares Balance - December 31, 2020 63,333,238 $ 852,379 $ Omnibus Incentive Plan Amount Total 852,379 86 852,465 Amount Total 852,379 On November 12, 2020, the Board of Directors approved a new Omnibus Incentive Plan (the “Incentive Plan”). This plan supersedes the former incentive plans (collectively, the “Legacy Plan”) that included Options, Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”). All employees and consultants are eligible to participate in the Incentive Plan. The Incentive Plan consists of stock options, RSUs and PSUs. Awards of RSUs and PSUs granted during a service year will be subject to a service period as determined by management at the time of issuance. The aggregate number of Shares that may be issued under the Incentive Plan is 3,487,960 provided that no more than 1,904,538 Shares may be issued in aggregate pursuant to the settlement of RSUs and PSUs. Options that were issued under the Legacy Plan and are subsequently cancelled will be available to be issued under the Incentive Plan. The base Share equivalents granted as RSU and PSU awards attract compounding notional dividends at the same rate as outstanding Shares, which are notionally re-invested as additional base Share equivalents. PSU and CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 64 56 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— RSU awards may be settled in Shares issued from treasury, cash, or a mix of Shares and cash, at Cineplex’s option at the time of settlement. Awards outstanding under prior plans shall remain in full force and effect under the prior plans according to their respective terms. Under the prior plans, the effects of changes in estimates of performance results are recognized in the year of change. As at December 31, 2021, 1,489,143 Shares are available to be issued under the Incentive Plan (2020 - 2,111,140). Stock Options Stock options issued under the Incentive Plan will be administered by the Board of Directors which will establish the exercise price at the time each option is granted, which in all cases will not be less than the market price on the grant date. All of the options must be exercised over specified periods not to exceed ten years from the date granted. Options issued under the Incentive Plan may be exercised for cash or on a cashless basis, both of which result in the issuance of Shares from treasury. Options granted will be accounted for as equity-settled. A summary of option activities for the year ended December 31, 2021 and 2020 is as follows: Options outstanding - January 1 Granted Cancelled Forfeited Exercised Weighted average remaining contractual life (years) 7.64 2021 2020 Number of underlying Shares 2,042,019 $ 459,501 (188,303) (87,049) (27,363) Weighted average exercise price 25.37 12.69 43.90 21.89 8.25 Number of underlying Shares 3,123,521 725,758 (1,408,439) (398,821) — Weighted average exercise price 38.62 8.25 44.70 29.64 — Options outstanding – end of period 7.44 2,198,805 $ 21.48 2,042,019 $ 25.37 Effective December 15, 2019, as a result of the terms of the Arrangement Agreement, options were considered cash- settled, and the fair value of the options outstanding in excess of their respective exercise price was recognized as a current share-based compensation liability, and changes in value were reflected in the statement of operations. Stock options impacted by the termination of the Arrangement Agreement were revalued and accounted for as equity- settled and any previously recognized share based compensation liability was reclassified to contributed surplus. The accelerated recognition of unvested options was reversed and is being recognized over their remaining vesting periods at the value determined at March 31, 2020. Forfeitures are estimated to be nominal, based on historical forfeiture rates. Cineplex recorded $1.9 million of employee benefits cost with respect to the options during the year ended December 31, 2021 (2020 recovery - $1.2 million). The intrinsic value of vested share options at December 31, 2021 is $0.7 million (2020 - $nil), based on the closing Share price of $13.49 per share (2020 - $9.27). In 2021, 165,146 (2020 - 1,307,301) stock options issued under the Legacy Plan were cancelled for total consideration of $60 (2020 - $0.5 million) as part of a voluntary stock option cancellation program that was initiated in the fourth quarter of 2020. Upon cashless exercises, the options exercised in excess of Shares issued are cancelled and returned to the pool available for future grants. At December 31, 2021, 532,760 options are available for grant (2020 - 1,900,606, of which a maximum of 1,200,000 were allocated to PSU/RSU availability in 2021). CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 65 57 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— RSU and PSU awards 2021 LTIP awards granted in Q2 2021 2020 LTIP award granted in Q3 2020 2019 LTIP award granted in Q1 2019 RSU PSU Share equivalents granted 167,546 284,214 105,777 RSU Share equivalents granted PSU Share equivalents minimum payout PSU Share equivalents maximum payout 315,619 277,105 54,940 — — 7,788 335,092 568,428 211,553 Valuation of restricted stock units is based on Cineplex’s closing Share price on the grant date. On April 12, 2021, Cineplex issued 262,487 equity settled RSUs with a fair value of $12.87 per unit (total fair value of $3.4 million on issuance), that will fully vest in November 2023, at the completion of the three year performance period. On May 10, 2021, Cineplex issued 53,132 cash settled RSUs with a fair value of $14.95 (total fair value of $0.8 million on issuance) and will fully vest on the second anniversary of the grant date. The valuation was based on Cineplex’s Share price on the grant date and will fluctuate in value based on Cineplex’s Share price. A summary of RSU activities during the year ended December 31, 2021 is as follows: RSUs outstanding, January 1 Granted Notional dividends Settled Cancelled RSUs outstanding, December 31 2021 295,189 315,619 — (44,041) (30,420) 536,347 2020 93,835 277,105 415 (37,572) (38,594) 295,189 The RSUs associated with the 2019 LTIP were settled in 2021 for $0.6 million cash. PSU On April 12, 2021, Cineplex issued 167,546 PSUs which will be equity-settled in November 2023, representing the completion of the three year performance period. Compensation expense is recorded based on the number of units expected to vest, the current market price of Cineplex’s Shares, and the application of a performance multiplier that ranges from a minimum of zero to a maximum of two. Performance multipliers are developed based on Total Shareholder Return percentile rank relative to a select peer group and composite group. Participants will receive one fully paid Share issued from treasury that can vary depending on the achievement of established performance targets. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 66 58 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— A summary of PSU activities during the year ended December 31, 2021 is as follows: PSUs outstanding, January 1 Granted Notional dividends Settled Cancelled PSUs outstanding, December 31 2021 333,908 167,546 — (88,422) (1,774) 411,258 2020 183,323 284,214 1,624 (18,455) (116,798) 333,908 Incentive Plan costs are estimated at the grant date based on expected performance results then accrued and recognized on a graded basis over the vesting period. Forfeitures are estimated to be nominal. For the year ended December 31, 2021, Cineplex recognized compensation cost of $2.9 million (2020 recovery - $6.9 million) under the Incentive Plan relating to RSU and PSU. At December 31, 2021, $0.2 million (2020 - $0.4 million) was included in current share-based compensation liability and $2.8 million in contributed surplus (2020 - $nil). The PSUs associated with the 2019 LTIP were settled in 2021 for $0.1 million cash. Deferred equity units Members of the Board of Directors and certain officers of Cineplex may elect to defer a portion of their compensation in the form of deferred equity units. For the year ended December 31, 2021, Cineplex recognized compensation cost of $1.2 million (2020 recovery - $8.2 million) associated with the deferred equity units. At December 31, 2021, $4.7 million (2020 - $2.8 million) was included in share-based compensation liability. 10. SEASONALITY AND QUARTERLY RESULTS Historically, Cineplex’s revenues have been seasonal, coinciding with the timing of major film releases. The most marketable motion pictures were traditionally released during the summer and the late-November through December holiday season. This caused changes from quarter to quarter in theatre attendance, affecting theatre exhibition reported results. The seasonality of theatre attendance has become less pronounced as film studios have expanded the historical summer and holiday release windows and increased the number of heavily marketed films released during traditionally weaker periods. The impact COVID-19 has also impacted the timing of major film releases as distributors has been moving their films out to future dates in response to government restrictions for theatres in different countries. Cineplex’s diversification into other businesses such as digital media and amusement and leisure, which are not dependent on motion picture content, has contributed to reduce the impact of this seasonality on Cineplex’s consolidated results. To meet working capital requirements during lower revenue quarters, Cineplex can draw upon the Revolving Facility, which had $260.0 million drawn and $270.7 million available as of December 31, 2021, subject to restrictions under the Credit Facilities including the liquidity covenant described above (Section 7.4, Long-term debt). In response to the impact of the COVID-19 pandemic, Cineplex is closely monitoring its liquidity. Details with respect to its ongoing measures are detailed in Section 1.1, COVID-19 business impacts, risks and liquidity. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 67 59 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Summary of Quarterly Results (in thousands of dollars except per Share, per patron, theatre attendance and theatre location and screen data, unless otherwise noted): Q4 2021 Q3 Q2 Q1 Q4 2020 Q3 Q2 Q1 Revenues Box office revenues Food service revenues Media revenues Amusement revenues Other revenues Expenses Film cost Cost of food service $ 125,890 $ 94,114 $ 12,498 $ 3,818 $ 7,260 $ 14,531 $ 27 $ 111,002 87,244 79,971 13,258 6,525 10,543 15,468 3,256 79,365 32,795 14,060 9,401 9,074 12,496 12,825 7,880 32,157 45,096 53,319 22,184 13,874 13,597 13,236 3,731 47,337 8,926 8,916 7,585 8,121 8,556 4,962 7,094 12,940 299,951 250,380 64,926 41,412 52,452 61,022 21,988 282,801 61,990 45,838 21,042 16,362 5,611 2,867 1,235 1,412 3,151 3,989 7,261 3,680 10 56,500 789 22,209 Depreciation - right-of-use assets 25,041 25,151 25,737 26,318 28,136 30,539 34,185 35,533 Depreciation and amortization - other 27,501 28,297 27,735 29,509 28,750 30,375 31,759 33,962 Loss (gain) on disposal of assets 1,576 22 179 (30,060) (283) (14,113) 478 817 Other costs 157,970 139,527 73,352 68,705 77,213 78,754 62,175 157,548 Impairment of long-lived assets and goodwill Income (loss) from continuing operations 3,717 — — — 56,175 65,634 — 173,054 298,837 255,197 135,481 97,119 197,131 202,130 129,396 479,623 $ 1,114 $ (4,817) $ (70,555) $ (55,707) $ (144,679) $ (141,108) $ (107,408) $ (196,822) Adjusted EBITDA (i) $ 58,328 $ 48,606 $ (16,902) $ (30,105) $ (32,097) $ (28,928) $ (41,313) $ 46,472 Adjusted EBITDAaL (i) $ 20,198 $ 10,762 $ (53,165) $ (62,090) $ (65,948) $ (46,725) $ (72,532) $ 2,390 Net loss from continuing operations $ (21,778) $ (33,552) $ (103,704) $ (89,688) $ (230,403) $ (121,209) $ (98,234) $ (174,155) Net loss from discontinued operations — — — — — — (693) (4,259) Net loss $ (21,778) $ (33,552) $ (103,704) $ (89,688) $ (230,403) $ (121,209) $ (98,927) $ (178,414) EPS - basic and diluted from continuing operations EPS - basic and diluted from discontinued operations $ (0.34) $ (0.53) $ (1.64) $ (1.42) $ (3.64) $ (1.91) $ (1.55) $ (2.75) — — — — — — (0.01) (0.07) EPS - basic and diluted $ (0.34) $ (0.53) $ (1.64) $ (1.42) $ (3.64) $ (1.91) $ (1.56) $ (2.82) Cash provided by (used in) operating activities Cash (used in) provided by investing activities Cash (used in) provided by financing activities Effect of exchange rate differences on cash $ 27,480 $ 52,023 $ 17,133 $ (35,632) $ (61,041) $ (86,558) $ 18,095 $ 23,190 (3,937) (2,374) (1,761) 48,523 50,492 11,384 (8,947) (26,219) (25,067) (50,191) (6,086) (9,782) 12,977 74,252 (2,793) (12,819) (9) (189) 413 140 650 292 560 (950) Net change in cash $ (1,533) $ (731) $ 9,699 $ 3,249 $ 3,078 $ (630) $ 6,915 $ (16,798) Cash flows used in discontinued operations BPP (ii) CPP (ii) $ — $ — $ — $ — $ — $ — $ 12.29 $ 11.38 $ 10.89 $ 7.49 $ 8.58 $ 7.86 $ $ 9.20 6.12 $ $ 9.23 9.06 $ $ 9.30 7.37 $ $ (253) $ (2,138) 4.50 $ 10.36 $ 10.33 $ 6.79 Film cost percentage (ii) 49.2 % 48.7 % 44.9 % 32.3 % 43.4 % 50.0 % 37.0 % 50.9 % Theatre attendance (in thousands of patrons) (ii) Theatre locations (at period end) Theatre screens (at period end) 10,245 160 1,652 8,272 161 1,656 1,148 160 1,651 415 161 786 162 1,657 1,667 1,563 164 1,687 6 10,710 164 1,687 164 1,687 (i) Represents a non-GAAP financial measure. See section 17, Non-GAAP and other financial measures. (ii) Represents a supplementary financial measure. See section 17, Non-GAAP and other financial measures. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 68 60 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Summary of adjusted free cash flow by quarter Management calculates adjusted free cash flow per Share as follows (see Section 17, Non-GAAP and other financial measures, for a discussion of adjusted free cash flow) (in thousands of dollars except per Share data and number of Shares outstanding): Q4 2021 Q3 Q2 Q1 Q4 2020 Q3 Q2 Q1 Cash (used in) provided by operating activities (i) Less: Total capital expenditures net of proceeds on sale of assets $ 27,480 $ 52,023 $ 17,133 $ (35,632) $ (61,041) $ (86,558) $ 18,095 $ 23,190 (4,985) (1,603) (4,992) (8,715) (10,099) (11,418) (14,391) (37,503) Standardized free cash flow 22,495 50,420 12,141 (44,347) (71,140) (97,976) 3,704 (14,313) Add/(Less): Changes in operating assets and liabilities 1,405 (32,640) (62,622) (23,581) 67,257 34,894 (69,401) 10,428 Changes in operating assets and liabilities of joint ventures 307 (31) (524) (802) (2,699) 372 (986) (1,156) Principal component of lease obligations (25,525) (24,191) (19,086) (19,457) (32,323) (24,811) (993) (33,819) Principal portion of cash rent paid not pertaining to current period Growth capital expenditures and other Share of income of joint ventures, net of non-cash depreciation Non-controlling interests Net cash received from CDCP (737) (350) — 736 (369) 4,511 1,106 8,461 (357) (357) (357) 1,071 8,928 10,801 13,777 34,526 (622) (47) — 1,995 — — (165) (196) (255) (331) — — — — — — 4 782 2 — — 0 (73) 1 3,128 (207) Adjusted free cash flow $ (1,032) (5,753) $ (65,947) $ (78,785) $ (30,530) $ (77,332) $ (53,801) $ Average number of Shares outstanding 63,343,223 63,342,557 63,339,618 63,334,317 63,333,238 63,333,238 63,333,238 63,333,238 Adjusted free cash flow per Share $ (0.016) $ (0.091) $ (1.041) $ (1.244) $ (0.482) $ (1.221) $ (0.849) $ (0.003) 11. RELATED PARTY TRANSACTIONS Cineplex may have transactions in the normal course of business with entities whose management, directors or trustees are also directors of Cineplex. Any such transactions are in the normal course of operations and are measured at market-based exchange amounts. Unless otherwise noted, these transactions are not considered related party transactions for financial statement purposes. The Chair of Riocan Real Estate Investment Trust (“Riocan”) served as a Board member until May 5, 2020. Prior to his departure, Cineplex incurred theatre expenditures for theatres under lease commitments with Riocan in the amount of $20.2 million during the prior year period. No material related party transactions were recorded during the year ended December 31, 2021. 12. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATION UNCERTAINTIES Cineplex makes estimates and assumptions concerning the future that may not equal actual results. The following are the estimates and judgments applied by management that most significantly impact Cineplex’s consolidated financial statements. These estimates and judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 69 61 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Goodwill and long lived assets- recoverable amount Cineplex tests at least annually whether goodwill suffered any impairment. Assessment of impairment for long-lived assets, including property, equipment, leaseholds, right-of-use assets, intangible assets and goodwill is performed more frequently as specific events or circumstances dictate triggering events and changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. Management makes key assumptions and estimates in determining the recoverable amount of its long lived assets and groups of CGUs’ goodwill, including attendance and the related revenue growth rates, variable and fixed cash flows, operating margins and discount rates. Financial instruments - fair value of over-the-counter derivatives Cineplex’s over-the-counter derivatives include interest rate swaps used to economically hedge exposure to variable cash flows associated with interest payments on Cineplex’s borrowings. Management estimates the fair values of these derivatives as the present value of expected future cash flows to be received or paid, based on available market data, which includes market yields and counterparty credit spreads. Cineplex also has a prepayment option on the Notes Payable. The fair market value of prepayment option on Notes Payable was determined using an option pricing model with observable market inputs consistent with accepted methods for valuing financial instruments. Revenue recognition - gift cards Management estimates the value of gift cards that are not expected to be redeemed by customers, based on the terms of the gift cards and historical redemption patterns, including industry data. The estimates are reviewed annually, or when evidence indicates the existing estimate is not valid. Revenue recognition - SCENE The timing and number of points redeemed by Scene+ members affects the timing and amount of both revenue and cost of redemptions recognized by Cineplex. If the number of points actually redeemed by members is lower than Cineplex’s estimate of points expected to be redeemed, the estimate of average revenue per point will be prospectively revised, and net income would be higher over time. Income taxes The timing of reversal of timing differences and the expected income allocation to various tax jurisdictions within Canada affect the effective income tax rate used to compute the deferred income tax asset. Management will assess the recoverability of deferred tax assets as economic conditions improve. There are material uncertainties relating to the recoverability of losses incurred in the current year. Accordingly, no deferred tax assets were recognized in the current period. Management estimates the reversals and income allocation based on historical and budgeted operating results and income tax laws existing at the consolidated balance sheet dates. In addition, management occasionally estimates the current or future deductibility of certain expenditures, affecting current or deferred income tax balances and expenses. Fair value of identifiable assets acquired and liabilities assumed in business combinations Significant judgment is required in the identifying tangible and intangible assets and liabilities of the acquired businesses, as well as determining their fair values. Share-based compensation Management is required to make certain assumptions and to estimate future financial performance to estimate the fair value of share-based awards at each consolidated balance sheet date. The LTIP and Incentive Plan requires management to estimate future non-GAAP earnings measures, future revenue growth relative to specified industry peers, and total shareholder return, both absolutely and relative to specified industry peers. Future non-GAAP earnings are estimated based on current projections, updated at least annually, taking into account actual performance since the grant of the award. Future revenue growth relative to peers is based on historical performance and current projections, updated at least annually for actual performance since the grant of the award by Cineplex CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 70 62 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— and its peers. Total shareholder return for Cineplex and its peers is updated at each consolidated balance sheet date based on financial models, taking into account financial market observable inputs. Lease terms Some leases of property contain extension options exercisable by Cineplex up to one year before the end of the non- cancellable contract period. Where practicable, Cineplex seeks to include extension options in new leases to provide operational flexibility. In determining the lease term, Cineplex considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. 13. ACCOUNTING POLICIES ACCOUNTING STANDARDS APPLIED OR ADOPTED IN THE CURRENT YEAR Management of Cineplex reviews all changes to the IFRS when issued. The International Accounting Standards Board (“IASB”) has issued the following standards, which have not yet been adopted by Cineplex. The following is a description of the new standards: Cloud Computing Arrangements In April 2021, the International Financial Reporting Interpretations Committee (IFRIC) finalized their decision with respect to configuration and customization costs in a cloud computing arrangement, particularly surrounding the recognition of an expense or an intangible asset. Cineplex has evaluated the impact regarding the changes surrounding the configuration or customization costs in a cloud computing arrangement and has determined that there is no material effect on its consolidated financial statements. In January 2020, the International Accounting Standards Board issued Classification of Liabilities as Current or Non-current, which amended IAS 1 Presentation of Financial statements. The amendments clarified how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. Cineplex has not applied the accounting pronouncement issued. In May 2021, the International Accounting Standards Board (Board) issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which amended IAS 12 Income Taxes. The amendments require companies to recognize deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Earlier application is permitted. Cineplex has not applied the accounting pronouncement issued. 14. RISKS AND UNCERTAINTIES Cineplex is exposed to a number of risks and uncertainties in the normal course of business that have the potential to affect operating performance. Cineplex has operating and risk management strategies and insurance programs to help minimize these operating risks and uncertainties. In addition, Cineplex has entity level controls and governance procedures including a corporate code of business conduct and ethics, whistle blowing procedures, clearly articulated corporate values and detailed policies outlining the delegation of authority within Cineplex. Cineplex typically conducts an annual enterprise risk management assessment which is overseen by Cineplex’s executive management team and the audit committee of the Board and is reported to the full Board. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across Cineplex. Senior management participate in a detailed review of enterprise risk in four major categories: environment risks, process risks, information risks and business unit risks. In addition, Cineplex monitors risks and changing economic conditions on an ongoing basis and adapts its operating strategies as required. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 71 63 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— This section describes the principal risks and uncertainties that could have a material adverse effect on Cineplex’s business and financial results. The risks and uncertainties described below are not the only risks that may impact Cineplex’s business. Additional risks not currently known to Cineplex or that management currently believes are immaterial may also have a material adverse effect on future business and operations. Any discussion about risks should be read in conjunction with “Forward-Looking Statements”. Impact of COVID-19 on the Business, Financial Condition and Results of Operations of Cineplex The outbreak of the COVID-19 pandemic has had an unprecedented impact on all of Cineplex’s business segments. As an entertainment company that operates in spaces where guests gather in close proximity, including theatres and LBE venues, Cineplex has been significantly impacted by the actions taken to control the spread of COVID-19. On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE venues across Canada, as well as substantially all route locations operated by P1AG. On April 1, 2020, in response to applicable government directives and guidance from Canadian public health authorities, Cineplex announced that the closure of its theatres and LBE venues across Canada would remain in effect and that the reopening of such locations would be reassessed as further guidance is provided by Canadian public health authorities and applicable government authorities. Although restrictions on social gatherings were temporarily lifted in many of the markets in which Cineplex operated over the summer and into the fall of 2020, social gathering restrictions were reinstituted in the late fall and winter with the increased number of COVID-19 cases and the onset of a third wave in the latter half of the first quarter of 2021, involving more transmissible variants. As of July 17, 2021, Cineplex had reopened its entire circuit of theatres after months of extended closure periods, subject to capacity limitations. The reopening included Cineplex’s then 161 theatre locations, encompassing 1,656 screens across Canada including 18 VIP Cinemas locations. However, during the fourth quarter of 2021, capacity restrictions were reinstated in Ontario, Cineplex’s largest market, limiting indoor capacity to 50% along with prohibiting the consumption of concessions in theatres effective December 18, 2021. Theatres in Quebec were also mandated to temporarily close effective December 20, 2021. Subsequent to December 31, 2021, social gathering restrictions were further modified or reinstituted in several key markets that Cineplex operates, resulting in theatre closures and prohibiting indoor dining in Ontario, Newfoundland and New Brunswick. The uncertainty of when such lockdown measures will be lifted or the introduction of further lockdown measures will delay Cineplex’s return to profitability. The impact of the COVID-19 pandemic cannot be quantified at this time because of the significant uncertainty around the timing of the reductions of government imposed restrictions and the potential long-term effects that COVID-19 may have on Cineplex’s exhibition and amusement and leisure businesses. Cineplex cannot predict how quickly guests will return to its locations, which may be a function of (i) continued health and safety concerns, (ii) additional regulatory requirements, and/or (iii) depressed consumer sentiment, among other things. If Cineplex does not continue to respond appropriately to the pandemic, or if guests do not perceive its response to be adequate, Cineplex could suffer damage to its reputation, which could adversely affect its business. Additional significant impacts on Cineplex’s business caused by the COVID-19 pandemic include, and are likely to continue to include, among others: • • • • • lack of availability of films in the short or long-term, including as a result of (i) potential delays in film releases; (ii) release of scheduled films on alternative channels, (iii) disruptions or suspensions of film production, or (iv) the reduction or elimination of the theatrical exclusive release window including the introduction of a PVOD window and direct to streaming services releases; increased operating costs resulting from additional regulatory requirements enacted in response to the COVID-19 pandemic and from precautionary measures it voluntarily takes at Cineplex’s locations for the health and well being of its guests and employees; unavailability of employees and/or their inability or unwillingness to conduct work under revised work environment protocols; reductions and delays associated with planned operating and capital expenditures; Cineplex’s inability to generate significant cash flow from operations if Cineplex’s theatres continue to operate at significantly lower than historical levels, which could, in the long-term, lead to a substantial increase in indebtedness and may negatively impact Cineplex’s ability to comply with the financial covenants in the Credit Facilities; CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 72 64 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— • • • • Cineplex’s inability to further access lending, capital markets and other sources of liquidity, if needed, on reasonable terms, or at all, or obtain amendments, extensions and waivers of financial maintenance or other material terms; Cineplex’s inability to effectively meet short-term and long-term obligations which it does not have the ability to eliminate or reduce (including interest payments, critical maintenance capital expenditures and compensation and benefits payments); Cineplex’s inability to service its existing and future indebtedness; and decreased attendance at Cineplex’s theatres and LBE locations after they reopen, including due to (i) continued health and safety concerns or (ii) a change in consumer behaviour in favour of alternative forms of entertainment. The longer and more severe the COVID-19 pandemic is, including new outbreaks in the future, the more significant the negative effects will be on Cineplex’s business, financial conditions and results of operations. Even when the COVID-19 pandemic subsides, Cineplex cannot guarantee that it will recover as rapidly as other industries, or as other operators within the movie exhibition industry, due to its strong footprint in densely populated areas. Further, if Canada experiences additional outbreaks of COVID-19, governmental officials may order additional closures, impose further restrictions on travel or introduce social distancing measures such as limiting the number of people allowed in a theatre or other venue at any given time. While Cineplex has eliminated certain variable costs and reduced fixed costs to the extent possible, Cineplex continues to incur significant expenses, including interest payments, critical maintenance capital expenditures, occupancy costs, and compensation and benefits payments. If there are further shutdowns, Cineplex cannot be certain that it will have access to sufficient liquidity to meet its obligations for the time required to allow its operations to resume or normalize. If further lockdown measures and mandatory closure requirements are reinstituted in the future, Cineplex’s net cash burn may worsen and may not be sustainable. Further, the extent of Cineplex’s net cash burn in the future will also be dependent on attendance, which will drive admissions, food and beverage and other revenues. Cineplex may not be able to obtain additional liquidity and any relief provided by lenders, governmental agencies, and business partners may not be adequate or may include onerous terms. Cineplex continues to actively monitor all aspects of its business and operations in order to minimize the impact of COVID-19 on its operations wherever possible. However, the outbreak of COVID-19 has caused significant disruptions to Cineplex’s ability to generate profitability and cash flows. Cineplex will continue to monitor the ongoing COVID-19 pandemic. The events and circumstances resulting from the COVID-19 and any future pandemics could have a material negative impact on its business, financial condition and results for the remainder of 2022 and potentially longer. Litigation Arising Out of the Cineworld Transaction Cineplex commenced an action against Cineworld as a result of Cineworld’s repudiation of the Arrangement Agreement. Cineworld filed a counterclaim against Cineplex for an unspecified amount of costs that it incurred as a result of Cineplex’s alleged breaches of the Arrangement Agreement (Section 1.1, Cineworld Transaction). On December 14, 2021, the Court released its Decision. The Court held that Cineplex did not breach any of its covenants in the Arrangement Agreement, and that Cineworld had no basis for terminating the Arrangement Agreement. The Court held that Cineworld breached the Arrangement Agreement and repudiated the transaction to acquire Cineplex, which actions precluded Cineplex from seeking specific performance and entitled Cineplex to monetary damages. The Court awarded damages for breach of contract to Cineplex in the amount of $1.24 billion on account of lost synergies, and $5.5 million for transaction costs, exclusive of pre-judgment interest. The Court also held that Cineplex’s shareholders did not have any rights under the Arrangement Agreement to enforce the agreement or sue Cineworld for any breach. The Court also denied Cineworld’s counterclaim against Cineplex. On January 12, 2022, Cineworld filed a Notice of Appeal with the Court of Appeal for Ontario. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 73 65 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Due to uncertainties inherent in appeals, it is not possible for Cineplex to predict the timing or final outcome of the appeal of the Decision announced by Cineworld. Further, even if Cineworld’s appeal is not successful, Cineworld may not have the ability to pay the full amount of any damages or costs awarded by the Court. General Economic Conditions Entertainment companies compete for guests’ entertainment time and spending, and as such can be sensitive to global, national or regional economic conditions and any changes in the economy may either adversely influence these revenues in times of an economic downturn or positively influence these revenue streams should economic conditions improve. Historical data shows that movie theatre attendance has not been negatively affected by economic downturns over the past 25 years. Cineplex has never previously experienced a sustained complete halt of its operations across Canada, and as a result, its ability to predict the impact of such a halt on its operations and future prospects is uncertain. Negative Cash Flow from Operations The COVID-19 pandemic continues to have a negative impact on Cineplex’s operating margins and cash flows. There can be no assurance that Cineplex will generate sufficient revenues to achieve or maintain profitability or positive cash flow from operations in the future. If Cineplex does not achieve or maintain profitability or positive cash flow from operating activities, then there could be a material adverse effect on Cineplex’s business, financial condition and results of operation. Business Continuity Risk Cineplex’s primary sources of revenues are derived from providing an out of home entertainment experience. Our business results could be significantly impacted by a terrorist threat, severe weather incidents, and have been by the outbreak of a pandemic or general fear of community gatherings that may cause people to stay away from public places including movie theatres, malls and amusement and leisure locations. Cineplex operates in locations spread throughout North America which mitigates the risk to a specific location or locations. Cineplex has procedures to manage such events should they occur. These procedures identify risks, prioritize key services, plan for large staff absences and clarify communication and public relations processes. However, should there be a large-scale threat or occurrence, it is uncertain to what extent Cineplex could mitigate this risk and the costs that may be associated with any such crises. Further, Cineplex purchases insurance coverage from third-party insurance companies to cover certain operational risks, and is self-insured for other matters. During the reopening period of its theatres and location-based entertainment venues following the closures resulting from COVID-19, there is a risk that locations operate at significantly lower levels than prior to the COVID-19 pandemic and as a result this may negatively impact the ability of Cineplex to meet its financial covenants, access debt or equity capital markets for sources of additional liquidity on reasonable terms, and meet its short and long- term obligations. Customer Risk In its consumer-facing entertainment businesses, Cineplex competes for the leisure time and disposable income of all potential customers. All other forms of entertainment are substantial competitors to the movie-going experience including home and online consumption of content, sporting events, streaming services, gaming, live music concerts, live theatre, other entertainment venues and restaurants. Cineplex aims to deliver value to its guests through a wide variety of entertainment experiences and price points. However, the COVID-19 pandemic has created supply shortages and imbalances in the supply and demand of products causing commodity prices to increase, escalating the risk of inflation that consumers will be exposed to. Significant price increases may deter consumer spending on entertainment options to other alternatives, which will negatively impact Cineplex’s business operations. Cineplex monitors pricing in all markets to ensure that it offers a reasonably priced out of home experience compared to other entertainment alternatives. If Cineplex is too aggressive in raising ticket prices or concession prices, there may be an adverse effect on theatre attendance and food service revenues. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 74 66 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— To mitigate this risk, Cineplex offers CineClub membership providing members with benefits accessible across Cineplex’s businesses nationwide including Cineplex theatres, the Cineplex Store and LBE venues. Cineplex also offers the Scene+ loyalty program, which rewards guests for their patronage with special offers as well as the ability to earn and redeem points. However, loyalty programs also carry a risk in that customers may not be satisfied with the offering or any change in offerings. As a result, there is a risk of customer migration to other subscription or loyalty programs. There also exists a risk of saturation of loyalty programs in a market or the inability to further grow membership such that the program may generate costs in excess of the benefits. Cineplex monitors customer needs to try and ensure that its entertainment experiences meet the anticipated needs of key demographic groups. Cineplex is differentiating the movie-going experience by providing premium alternatives such as UltraAVX, VIP, 4DX, ScreenX, Cineplex Clubhouse and D-BOX seating. Cineplex also includes XSCAPE Entertainment Centres in select theatres and provides alternative programming which appeals to specific demographic groups. Cineplex continues to evolve the movie-going experience by launching Canada’s first of its kind movie subscription program, CineClub, providing members with benefits accessible at Cineplex theatres, the Cineplex Store and LBE venues. In addition, digital technology has allowed for more niche programming. In the event that consumer preferences change, Cineplex may need to incur further capital expenditures to redevelop or upgrade existing locations. Cineplex continues to improve the quality of its theatre assets through ongoing renovations and theatre recliner retrofits. If Cineplex’s execution of processes does not consistently meet or exceed customer expectations due to poor customer service or poor quality of assets, movie theatre attendance may be adversely affected. Cineplex monitors customer satisfaction through surveys and focus groups and maintains a guest services department to address customer concerns. Guest satisfaction is tied to performance measures for theatre management ensuring alignment between corporate and operational objectives. Even when government restrictions are fully lifted as the number of COVID-19 cases subside, it is unclear how quickly customers will return to Cineplex’s theatres and location-based entertainment venues, which may be a function of continued concerns over safety and social distancing and/or depressed consumer sentiment due to adverse economic conditions. Even once theatres resume operations at unrestricted capacity levels, increasing COVID-19 case counts could result in additional costs and further closures. If Cineplex does not respond appropriately to the COVID-19 pandemic, or if customers do not perceive its response to be adequate, Cineplex could suffer damage to its reputation, which could significantly adversely affect its business, financial condition and results of operations. There is the potential for misinformation to be spread virally through social media relating to Cineplex’s assets as well as the quality of its customer service. In response to this risk, Cineplex monitors commentary on social media in order to respond quickly to potential social media misinformation or service issues. Cineplex developed its Cineplex Store in response to the risk created by new in-home and on-the-go entertainment offerings. Cineplex’s offerings through the Cineplex Store of TVOD movies are delivered online via third-party technology platforms. Technological issues relating to online delivery of content could negatively impact customer satisfaction. Cineplex monitors performance metrics for electronic delivery in order to proactively manage any potential customer satisfaction issues. Regarding its media sales businesses, certain of Cineplex’s media customers have signed contracts of finite lengths or that allow for early termination. There is a risk that these customers could choose not to renew these contracts at their maturity, or take steps to terminate them prior to maturity, which would have adverse effects on Cineplex’s media revenues. In its digital place-based media and amusement solutions businesses, Cineplex engages with multiple businesses where it provides products and services. These arrangements include the risk that businesses could decide to source the same products or similar services from a competitor, delay the timing of contract fulfillment or curtail spending due to economic conditions, which would have a negative impact on Cineplex’s results. Film Entertainment and Content Risk Cineplex’s ability to operate successfully depends upon the availability, diversity and appeal of filmed content, the ability of Cineplex to license films and the performance of these films in Cineplex’s markets. Cineplex primarily CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 75 67 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— licenses first-run films, the success of which is dependent upon their quality, as well as on the marketing efforts of film studios and distributors. To mitigate this risk, Cineplex continues to diversify its entertainment offerings. Nonetheless, Cineplex is highly dependent on film product and film performance, including the number and success of blockbuster films. A reduction in quality or quantity of both 2D and 3D film product, any disruption or delay in the production or release of films, the introduction of new delivery platforms for first run product, a strike or threat of a strike in film production, a reduction in the marketing efforts of film studios and distributors or a significant change in film release patterns, would have a negative effect on movie theatre attendance and adversely affect Cineplex’s business and results of operations. The impact of COVID-19 has led to less film productions by studios, delayed film releases, reductions to the exclusive theatrical release window and redirection of a limited number of theatrical releases to streaming services. Certain film studios have also launched their own streaming services resulting in a change in release strategies. Cineplex box office revenues depend upon movie production and its relationships with film distributors, including a number of major Hollywood and Canadian distributors. In 2019, the last full year of unrestricted operations, seven major film distributors accounted for approximately 86% of Cineplex’s box office revenues, which is consistent with industry standards. Deterioration in Cineplex’s relationships with any of the major film distributors or an increase in studio concentration or consolidation could affect its ability to negotiate film licenses on favourable terms or its ability to obtain commercially successful films. Cineplex actively works on maintaining good relations with these distributors, as this affects its ability to negotiate commercially favourable licensing terms for first-run films or to obtain licenses at all. In addition, a change in the type and breadth of movies offered by studios may adversely affect the demographic base of moviegoers. Cineplex competes with other consumption platforms, including cable, satellite, internet television, and Blu-rays, as well as TVOD, SVOD and other over the top operators via the Internet. The release date of a film in other channels of distribution such as over the top internet streaming, pay television and SVOD is at the discretion of each distributor and day and date release or earlier release windows for these or new alternative channels including the recent pilots by certain studios with PVOD models could have a negative impact on Cineplex’s business. Exhibition Industry Risk Cineplex operates in each of its local markets with other forms of entertainment, as well as in some of its markets with national and regional film exhibition circuits and independent film exhibitors. In respect of other film exhibitors, Cineplex primarily competes with respect to film licensing, attracting guests and acquiring and developing new theatre sites and acquiring existing theatres. Movie-goers are generally not brand conscious and usually choose a theatre based on its location, the films showing, showtimes available and the theatre’s amenities. As a result, the building of new theatres, renovations or upgrades to existing theatres, or the addition of screens to existing theatres by competitors in areas in which Cineplex operates theatres may result in reduced theatre attendance levels at Cineplex’s theatres. In response to this risk, management continually reviews and upgrades its existing locations. Cineplex also fosters strong ties with the real estate and development communities and monitors potential development sites. Most prime locations in larger markets have been developed such that significant further development would be generally uneconomical. In addition, the exhibition industry is capital intensive with high operating costs and long-term contractual commitments. Significant increases in construction and real estate costs could make it increasingly difficult to develop new sites profitably. In response to risks to theatre attendance, Cineplex continues to pursue other revenue opportunities including media in the form of in-theatre and out of home advertising, amusement and leisure, promotions and alternative uses of its theatres during non-peak hours. Amusement and leisure includes amusement solutions offered by P1AG, in-theatre gaming locations, XSCAPE Entertainment Centres and in-theatre at select Cineplex locations and location-based entertainment including The Rec Room and Playdium. Cineplex’s ability to achieve its business objectives may depend in part on its ability to successfully increase these revenue streams. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 76 68 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Media Risk Media revenue has been shown to be particularly sensitive to economic conditions and any changes in the economy may either adversely influence this revenue stream in times of a downturn or positively influence this revenue stream should economic conditions improve. Cineplex has numerous large media and digital place-based media customers, the loss of which could impact Cineplex’s results. There is no guarantee that Cineplex could replace the revenues generated by these large customers if their business was lost. The majority of Cineplex’s advertising revenue is earned at Cineplex theatres. There is a risk of decreased attendance at theatres during the reopening phase and beyond as a result of continued health and safety concerns and depressed consumer sentiment due to adverse economic conditions, arising from the impact of COVID-19 pandemic. This could result in media customers electing to reduce their spending in cinemas and advertise through alternative channels. Cineplex’s media advertising arrangements are impacted by theatre attendance levels which drive impressions and ultimately impact media revenue generated by Cineplex. Amusement and Leisure Risk Cineplex’s amusement and leisure operations compete against other offerings for guests’ entertainment spending. In each of the local markets in which Cineplex operates and will operate, it faces competition from local, national or international brands that also offer a wide variety of restaurant and/or amusement and gaming experiences, including sporting events, bowling alleys, entertainment centres, nightclubs and restaurants. Competition for guests’ entertainment time and spending also extends to in-home entertainment such as internet or video gaming and other in-home leisure activities. Cineplex’s inability to compete favourably in these markets could have a material adverse effect on Cineplex’s business, results of operations and financial condition. Cineplex’s new location-based entertainment locations may not meet or exceed the performance of its existing locations or its performance targets. New locations may even operate at a loss, which could have a significant adverse effect on the overall operating results. Cineplex’s results of operations are subject to fluctuations due to the timing of location-based entertainment openings which may result in significant fluctuations in our quarterly performance. Cineplex typically incurs most cash pre-opening costs for a new location within the two months immediately preceding, and the month of, the location’s opening. In addition, the labor and operating costs for a newly opened store during the first three to six months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Additionally, a portion of a current fiscal year new location capital expenditures is related to locations that are not expected to open until the following fiscal year. To mitigate these risks, Cineplex leverages its core competencies in food service execution, its partnership in Scene+ and its knowledge of the trends in amusement and gaming via its P1AG operations to continuously update its amusement and leisure offerings in order to provide guests with the most compelling offerings available in Canada. Due to the outbreak of the COVID-19 pandemic, there is a risk of a permanent decrease in guests and corporate events frequenting LBE locations. Cineplex’s LBE venues have a larger guest-facing footprint and higher levels of customer traffic than other concepts in the dining and entertainment industry. The effects of the COVID-19 pandemic as a result of continued concerns over safety and social distancing and/or depressed consumer sentiment due to adverse economic conditions could have an adverse effect on Cineplex’s business, financial conditional and results of operations. P1AG’s procurement of games and amusement offerings is dependent upon a few suppliers, the ability to continue to procure new games, amusement offerings and other entertainment-related equipment. To the extent that the number of suppliers declines, P1AG could be subject to the risk of distribution delays, pricing pressure, lack of innovation and other associated risks. In addition, any increase in cost or decrease in availability of new amusement offerings that appeal to customers could have a negative impact on Cineplex’s revenues from its amusement and leisure businesses. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 77 69 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— P1AG competes with other providers of amusement and gaming services across North America. P1AG manages the risk of customers switching gaming providers by continually monitoring the performance of its amusement solutions and reacting quickly to replace underperforming solutions with newer or more relevant equipment. P1AG’s expertise and experience in the industry and proven success maximizing revenue for its customers helps mitigate this switching risk. A material amount of P1AG’s revenue is dependent on the customer traffic in venues in which they operate. The COVID-19 pandemic in North America resulted in extended closure periods of venues in which P1AG operates gaming equipment which materially impacted its results of operations. There is a risk that these venues will have long term decreased customer traffic. Any reduction in traffic or permanent shutdown of venues could have a material impact on their business. Technology Risk Technological advances have made it easier to create, transmit and electronically share unauthorized high-quality copies of films during theatrical release. Some consumers may choose to obtain unauthorized copies of films rather than attending the theatre which may have an adverse effect on Cineplex’s business. In addition, as home entertainment technology becomes more sophisticated and additional technologies become available to consume content, consumers may choose other technology options rather than attending a theatre. To mitigate these risks, Cineplex continues to enhance the out of home experience through the addition of new technologies and experiences including 3D, VIP, UltraAVX, D-BOX, 4DX, ScreenX and digital projection in order to further differentiate the theatrical product from the home product. Cineplex has also diversified its offerings to customers by operating the Cineplex Store which sells TVOD movies in order to participate in the in-home and on- the-go entertainment markets. Changing platform technologies and new emerging technologies in the digital commerce industry, and specifically relating to the delivery of TVOD and SVOD services, present a risk to the Cineplex Store’s operations. Should Cineplex’s supplier cease operations or have its technology platform rendered obsolete, Cineplex’s sales of TVOD products could be jeopardized. Cineplex relies on various information technology solutions to provide its services to guests and customers, as well in running its operations from its various office locations. Cineplex may be subject to information technology malfunctions, outages, thefts or other unlawful acts that could result in loss of communication, unauthorized access to data, change in data, or loss of data which could compromise Cineplex’s operations and/or the privacy of Cineplex’s guests, customers and suppliers. Information Management Risk Cineplex needs an effective information technology infrastructure including hardware, networks, software, people and processes to effectively support the current and future needs of the business in an efficient, cost-effective and well-controlled fashion. To mitigate this risk, Cineplex is continually upgrading systems and infrastructure to meet business needs. Cineplex requires relevant and reliable information to support the execution of its business model and reporting on performance. The integrity, reliability and security of information are critical to Cineplex’s daily and strategic operations. Inaccurate, incomplete or unavailable information or inappropriate access to information could lead to incorrect financial or operational reporting, poor decisions, privacy breaches or inappropriate disclosure of sensitive information. To mitigate this risk, Cineplex continues to strengthen general information technology controls by developing operating policies and procedures in the areas of change management, computer operations and security access. At select times during the normal course of business, Cineplex and its subsidiary and joint venture partners store sensitive data, including intellectual property, proprietary business information including data with respect to suppliers, employees and business partners, as well as some personally identifiable information on their customers and employees. Further, Cineplex regularly works with third party suppliers in the delivery of services to their customers and employees where such data is provided in the normal course of the commercial relationship. The secure processing, maintenance and transmission of this information is critical to Cineplex’s operations and business CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 78 70 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— strategies. As such Cineplex adheres to industry standards for the payment card industry (“PCI”) data security standard (“DSS”) compliance, as well as undertaking commercially reasonable efforts for non-financial data. Cineplex recognizes that security breaches of the information systems of Cineplex or any one of its third-party suppliers could compromise this information and expose Cineplex to liability, which could cause their businesses or reputations to suffer. Despite security measures, information technology and infrastructure may be vulnerable to unforeseen attacks by hackers or breached due to employee error, malfeasance, computer viruses, malware, phishing, denial of service attacks, unauthorized access to confidential, proprietary or sensitive information, industrial espionage or other disruptions. Any such breach could compromise networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disrupt operations and the services provided to customers, damage reputation and cause a loss of confidence in products and services, which could adversely affect business, financial condition, results of operations and cash flows. In response to this risk, Cineplex has employees whose role is to monitor information technology and processes to ensure risk is minimized. Currently, as the majority of Cineplex’s corporate employees have moved to a work-from-home platform, there is an increased risk to Cineplex’s technology systems. In response, Cineplex has implemented additional security measures, including training, monitoring and testing and contingency plans, to protect systems. Real Estate Risk The acquisition and development of potential operating locations by Cineplex is dependent on the ability of Cineplex to identify, acquire and develop suitable sites for these locations with favourable economic terms in both new and existing markets, while competing with other entertainment and non-entertainment companies for site locations. The cost to develop a new building is substantial and its success is not assured. The negative economic impact of the COVID-19 pandemic magnifies inflationary risks and consequently impacts Cineplex’s capital expenditures to generate future economic benefits. The inflationary risks increases the costs to execute planned capital investments and the timing of investments which will delay Cineplex’s return to profitability. While Cineplex is diligent in selecting sites, the significant time lag from identifying a new site to opening can result in a change in local market circumstances and could negatively impact the location’s chance of success. In addition, building new operating locations may draw audiences away from existing sites operated by Cineplex. Cineplex considers the overall return for the theatres in a geographic area when making the decision to build new locations. The majority of Cineplex’s operating sites are subject to long-term leases. In accordance with the terms of these leases, Cineplex is responsible for costs associated with utilities consumed at the location and property taxes associated with the location. Cineplex has no control over these costs and these costs have been increasing over the last number of years. Furthermore, due to the outbreak of the COVID-19 pandemic, Cineplex continued its negotiations with landlord partners with respect to reductions in rent payments for current and future periods. While Cineplex works hard to maintain positive relationships with its landlords, we cannot guarantee continued reductions in future rent payments and there exists a potential for a default on existing lease obligations should the pandemic continue. Cineplex continues to be liable for obligations under theatre leases in respect of certain divested theatres. If the transferee of any such theatres fails to satisfy the obligations under such leases, Cineplex may be required to assume the lease obligations. Sourcing Risk Cineplex relies on a small number of companies for the distribution of a substantial portion of its concession supplies. If these distribution relationships were disrupted, Cineplex could be forced to negotiate a number of substitute arrangements with alternative distributors that could, in the aggregate, be less favourable to Cineplex than the current arrangements. Substantially all of Cineplex’s non-alcohol beverage concessions are products of one major beverage company. If this relationship was disrupted, Cineplex may be forced to negotiate a substitute arrangement that could be less favourable to Cineplex than the current arrangement. Any such disruptions could therefore increase the cost of concessions and harm Cineplex’s operating margins, which would adversely affect its business and results of operations. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 79 71 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Cineplex relies on one major supplier to source popcorn seed, and has entered contracts with this supplier to guarantee a fixed supply. As crop yields can be affected by drought or other environmental factors, the supplier may be unable to fulfill the whole of its contractual commitments, such that Cineplex would need to source the remaining needed corn product from other suppliers at a potentially higher cost. In order to minimize these operating risks, Cineplex actively monitors and manages its relationships with its key suppliers. The economic impacts of COVID-19 may have a negative impact on Cineplex’s suppliers and as a result its suppliers may not be able to sustain operations after the pandemic or be forced to increase costs to combat inflationary risks associated with input materials. The COVID-19 pandemic has caused supply chain disruptions across the globe substantially increasing production and transportation costs as well as delaying and curtailing the production of products potentially effecting the procurement of services that are impacted by the delays. A reduction in the number of suppliers, the loss of critical suppliers, or delays in supplier production may result in increased costs or the inability to find satisfactory replacement goods and services in the short or long-term which will negatively impact Cineplex’s operating margins and cash flows. Human Resources Risk The success of Cineplex depends upon the retention of senior executive management, including its Chief Executive Officer, Ellis Jacob. The loss of services of one or more members of the management team could adversely affect Cineplex’s business, results of operations and Cineplex’s ability to effectively pursue its business strategy. Cineplex does not maintain key-man life insurance for any of its employees but does provide long-term incentive programs to retain key personnel and undertakes a comprehensive succession planning program. Cineplex typically employs approximately over 10,000 people, of whom approximately 90% are hourly workers whose compensation is based on the prevailing provincial minimum wages with incremental adjustments as required to match market conditions. Wage inflation and any increase in minimum wages will have an adverse effect on employee related costs. In order to mitigate the impact of the proposed increases, Cineplex works to expand automation, take advantage of technological efficiencies and continually reviews pricing. Approximately 6% of Cineplex’s employees are represented by unions, located primarily in the province of Quebec. Because of the small percentage of employees represented by unions, the impact of labour disruption nationally is low. As a result of previous and ongoing government mandated closures and continuous capacity restrictions due to the impact of the COVID-19 pandemic, Cineplex has had to temporarily lay off some or all of its part-time staff members. There is a risk that Cineplex may not be able to rehire enough staff to sustain operations due to their unavailability, inability, unwillingness to rejoin the workforce. There is also increased risk that Cineplex will have a shortage of staff in the short-term due to employee illnesses as a result of rising COVID-19 cases. Health and Safety Risk Cineplex is subject to risks associated with food safety, alcohol consumption by guests, product handling and the operation of machinery. Cineplex is in compliance with health and safety legislation and conducts employee awareness and training programs on a regular basis. Health and safety issues related to our guests such as pandemics and bedbug concerns are risks that may deter people from attending places of public gathering, potentially including movie theatres, gaming centres, malls and dining locations. For those risks that it can control, Cineplex has programs in place to mitigate its exposure. Cineplex will investigate further methods in order to keep guests and employees safe at both locations and corporate offices. There is a significant risk that concerns over health and safety as a result of COVID-19 will be long lasting and will have an adverse impact on the business of Cineplex. In order to help mitigate these risks, Cineplex has made changes to its operations to enable social distancing, as well as increasing safety measures by reducing capacity where applicable, promoting cashless transactions where possible and by cleaning and disinfecting surfaces on a regular basis. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 80 72 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Environment/Sustainability Risk Cineplex’s business is primarily a service and retail business which delivers guest experiences rather than physical commercial products and thus does not have substantial environmental risk. Cineplex operates multiple locations in major urban markets and does not anticipate any significant changes to operations due to climate change. Should legislation change to require more stringent management of carbon emissions or more stringent reporting of environmental impacts, Cineplex anticipates this will result in minimal cost increases or changes to operating procedures. Severe weather incidents (as a result of environmental changes or otherwise) have potential to negatively impact Cineplex’s operation. See “Business Continuity Risk” above. Integration Risk While Cineplex has successfully integrated businesses acquired in the past, there can be no assurance that all acquisitions, including recent acquisitions, will be successfully integrated or that Cineplex will be able to realize expected operating and economic efficiencies from the acquisitions. Financial and Markets Risk Cineplex requires efficient access to capital in order to fuel growth, execute strategies and generate future financial returns. For this reason Cineplex entered into the Revolving Facility. Cineplex hedges interest rates up to $450 million of the Revolving Facility, thereby minimizing the impact of significant fluctuations in the market rates. Cineplex’s exposure to currency and commodity risk is minimal as the majority of its transactions are in Canadian dollars and commodity costs are not a significant component of the overall cost structure. Counter party risk on the interest rate swap agreements is minimized through entering into these transactions with Cineplex’s lenders. Upon the maturity of the Credit Facilities, there is a risk that Cineplex may not be able to renegotiate under favourable terms in the then current economic environment. If there is an unexpected prolonged impact of COVID-19, Cineplex may not have sufficient funds available under its current financing sources to fund operations on a short and/or long-term basis. The effects of COVID-19 on the financial markets could significantly impact the ability of Cineplex to raise capital and could increase the cost of borrowing. There is a risk that Cineplex may not be able to find timely sources of financing, which could have an adverse effect on its business, financial condition and results of operations. Foreign Currency Risk Cineplex is exposed to foreign currency risk related to transactions in its normal course of business that are denominated in currencies other than the Canadian dollar. Cineplex’s largest foreign currency exposure is to the US dollar, as its amusement solutions and digital place-based media all operate in the United States and represented 10.3% of Cineplex’s revenues in 2019 (the last full year not impacted by the COVID-19 pandemic). These revenues are naturally hedged by Cineplex’s US-based operating costs. Interest Rate Risk Cineplex is exposed to risk on the interest rates applicable on its Credit Facilities. To mitigate this risk, Cineplex has entered into interest rate swap agreements as outlined in Section 7.4, Long-term debt. Inflation Risk Cineplex is exposed to inflation risk, limiting customer purchasing power on forms of entertainment. To mitigate this risk, Cineplex actively monitors the prices of its products and services to provide competitive pricing to its customers. Legal, Regulatory, Taxation and Accounting Risk Changes to any of the various international, federal, provincial and municipal laws, tariffs, treaties, rules and regulations related to Cineplex’s business could have a material impact on its financial results. Compliance with any CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 81 73 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— changes could also result in significant cost to Cineplex. Failure to fully comply with various laws, rules and regulations may expose Cineplex to proceedings which may materially affect its performance. On an ongoing basis, Cineplex may be involved in various judicial, administrative, regulatory and litigation proceedings concerning matters arising in the ordinary course of business operations, including but not limited to, personal injury claims, landlord-tenant disputes, alcohol-related incidents, commercial disputes, tax disputes, employment disputes and other contractual disputes. Many of these proceedings seek an indeterminate amount of damages. To mitigate these risks, Cineplex promotes a strong ethical culture through its values and code of conduct. Cineplex employs in-house counsel and uses third party tax and legal experts to assist in structuring significant transactions and contracts. Cineplex also has systems and controls that ensure efficient and orderly operations. Cineplex also has systems and controls that ensure the timely production of financial information in order to meet contractual and regulatory requirements and has implemented disclosure controls and internal controls over financial reporting which are tested for effectiveness on an ongoing basis. In situations where management believes that a loss arising from a proceeding is probable and can be reasonably estimated, Cineplex records the amount of the probable loss. As additional information becomes available, any potential liability related to these proceedings is assessed and the estimates are revised, if necessary. 15. CONTROLS AND PROCEDURES 15.1 DISCLOSURE CONTROLS AND PROCEDURES Management of Cineplex is responsible for establishing and maintaining disclosure controls and procedures for Cineplex as defined under National Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such disclosure controls and procedures, or caused them to be designed under its supervision, to provide reasonable assurance that material information relating to Cineplex, including its consolidated subsidiaries, is made known to the Chief Executive Officer and the Chief Financial Officer by others within those entities, particularly during the period in which the annual filings are being prepared. Management has evaluated the design and operation of Cineplex’s disclosure controls and procedures as of December 31, 2021 and has concluded that such disclosure controls and procedures are effective. 15.2 INTERNAL CONTROLS OVER FINANCIAL REPORTING Management of Cineplex is responsible for designing and evaluating the effectiveness of internal controls over financial reporting for Cineplex as defined under National Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over financial reporting using the Integrated Control - Integrated Framework: 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. Management has used the Internal Control - Integrated Framework: 2013 to evaluate the effectiveness of internal controls over financial reporting, which is a recognized and suitable framework developed by COSO. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate. Management has evaluated the design and operation of Cineplex’s internal controls over financial reporting as of December 31, 2021, and has concluded that such controls over financial reporting are effective. There are no material weaknesses that have been identified by management in this regard. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 82 74 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— There has been no change in Cineplex’s internal controls over financial reporting that occurred during the most recently completed interim period that has materially affected, or is reasonably likely to materially affect, Cineplex’s internal control over financial reporting. 16. OUTLOOK The following discussion is qualified in its entirety by the caution regarding forward-looking statements at the beginning of this MD&A and Section 14, Risks and uncertainties. The outlook for Cineplex’s businesses is contingent on its ability to navigate the current and future impact of COVID-19 on its businesses. Canada’s vaccination rate has made tremendous progress during the year with a high percentage of the eligible population receiving at least one dose of a COVID-19 vaccine and an increasing number having received two or three doses. With increasing concerns over more transmissible variants, including the highly transmissible new Omicron variant, the Canadian government has accelerated the rollout of COVID-19 vaccine booster doses providing extra protection against COVID-19 and its variants. In order to control the spread of COVID-19, the majority of provinces across Canada require proof of vaccination as part of the reopening plans in select settings including those that operate indoors with close proximity of patrons. However, growing concerns over the highly transmissible new Omicron variant coupled with the significant rise in COVID-19 cases during the winter months resulted in the reinstatement of government imposed lockdown measures during the fourth quarter of 2021 continuing into 2022 which continue to negatively impact Cineplex’s operations and return to profitability. Subsequent to December 31, 2021, social gathering restrictions were further modified or reinstituted in several key markets that Cineplex operates, resulting in temporary theatre closures in Ontario, Newfoundland and New Brunswick. On January 20, 2022, the Ontario government announced plans to gradually ease government-imposed restrictions that were put in place to reduce the spread of the highly transmissible Omicron variant. Effective January 29, 2022, January 31, 2022 and February 7, 2022 theatres in New Brunswick, Ontario and Quebec were permitted to reopen at reduced capacity levels, respectively The release of Shang-Chi and the Legend of the Ten Rings generated strong results in North America and globally, setting the all-time box-office record for a Labour Day release generating $94.0 million, as reported, during its opening weekend, grossing total box office revenues since its release of $224.5 million and $432.0 million, as reported, respectively. On September 10, 2021 Disney announced plans for exclusive theatrical release windows for the remainder of their 2021 slate of films. The release of Marvel’s highly anticipated Spider-Man: No Way Home generated the second biggest North American opening weekend of all time grossing $260.1 million, $735.9 million in North America since its release and $1.7 billion globally since its release, as reported. Based on how the exhibition industry has historically performed during depressed economic environments, Cineplex believes, but cannot guarantee, that the industry will continue to recover as consumer demand for the theatrical experience combined with a build-up of anticipated content will help drive visitation as people look to return to normalcy. However, the significance of the COVID-19 pandemic, including the adverse impact on Cineplex’s business, financial condition and results of operations will be dictated by the duration of the pandemic and the effect on the economy and of responsive governmental directives, all of which are currently unknown. Cineplex’s business could also be significantly negatively impacted by changes in consumer behaviors as a result of COVID-19 (such as social distancing) or further revisions to the theatrical release window. Further, the effect of COVID-19 on financial markets could significantly impact the ability to raise capital and increase the cost of borrowing. There are limitations on the ability of Cineplex to mitigate the adverse financial impact of the foregoing. The COVID-19 pandemic also creates challenges for Cineplex in predicting future performance of its businesses or its liquidity needs in the near term. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 83 75 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— FINANCIAL OUTLOOK Cineplex continues to be negatively impacted by the ongoing COVID-19 pandemic and management focus continues to be on minimizing net cash burn and optimizing liquidity. During the fourth quarter of 2021, Cineplex and Cineplex Entertainment Limited Partnership entered into a fourth amendment to its Credit Facilities, providing Cineplex with certain financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s businesses (Section 7.4, Long-term debt). Cineplex continued to evaluate eligibility under relief programs and was able to materially reduce operating expenses through the receipt of assistance under Canada’s THRP as a result of reinstated government-imposed restrictions that continue to impact Cineplex’s operations. On January 11, 2021, Cineplex completed the sale of its head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for total gross cash proceeds of $57.0 million. Cineplex will continue to use the office building in accordance with the terms of the sale-leaseback transaction. Cineplex used a portion of the proceeds to permanently repay the Credit Facilities and the remaining proceeds are available to be drawn under the Credit Facilities to fund continuing operations. On February 26, 2021, Cineplex completed the offering of $250.0 million of Notes Payable that mature on February 26, 2026, allowing it to meet the conditions of the Third Credit Agreement Amendment and provide additional liquidity for the recovery period. Cineplex used the net proceeds to permanently repay the remaining $50.0 million balance of its outstanding Term Facility and $50.0 million of its Revolving Facility, with the remaining proceeds available to be drawn under the Revolving Facility to fund continuing operations, subject to certain liquidity covenants in the Credit Facilities. Cineplex filed tax returns for the 2020 taxation year claiming a $62.6 million recovery of income taxes paid in prior periods, all of which had been received as at December 31, 2021. Management continues to focus on reducing costs including the minimization of future capital expenditures and reducing net cash burn with a significant reduction to an approximately net neutral position compared to the prior six quarters. With the issuance of the Notes Payable, amendments to the Credit Facilities, the execution of planned asset sales and income tax recoveries received, management believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic. On December 14, 2021, the Court made a decision with respect to Cineplex’s trial of its action against Cineworld. The Court held that Cineplex did not breach any of its covenants in the Arrangement Agreement, and that Cineworld had no basis for terminating the Arrangement Agreement. The Court held that Cineworld breached the Arrangement Agreement. The Court awarded damages for breach of contract to Cineplex in the amount of $1,240,000 on account of lost synergies, and $5,500 for transaction costs, however, no assurance can be given on the collection of damages awarded (Section 1.1, Cineworld Transaction). 17. NON-GAAP AND OTHER FINANCIAL MEASURES National Instrument 52-112, Non-GAAP and Other Financial Measures Disclosure (“NI 52-112”) is effective for documents filed by reporting issuers for years ending on or after October 15, 2021. The Instrument imposes obligations regarding disclosure of non-GAAP financial measures, non-GAAP ratios, and other financial measures. Cineplex reports on certain non-GAAP measures, non-GAAP ratios, supplementary financial measures and total segment measures that are used by management to evaluate the performance of Cineplex. The following measures included in this MD&A do not have a standardized meaning under GAAP and may not be comparable to similar measures provided by other issuers. Cineplex includes these measures because its management believes that they assist investors in assessing financial performance. These non-GAAP and other financial measures are used throughout this report and are defined below. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 84 76 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— NON-GAAP FINANCIAL MEASURES Non-GAAP financial measures are defined in 52-112 as a financial measure disclosed that (a) depicts the historical or expected future financial performance, financial position or cash flow of an entity, (b) with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity, (c) is not disclosed in the financial statements of the entity, and (d) is not a ratio, fraction, percentage or similar representation. NON-GAAP RATIO A non-GAAP ratio is defined by 52-112 as a financial measure disclosed that (a) is in the form of a ratio, fraction, percentage or similar representation, (b) has a non-GAAP financial measure as one or more of its components, and (c) is not disclosed in the financial statements. The below are non-GAAP financial measures or non-GAAP ratios that are reported by Cineplex. 17.1 EBITDA, ADJUSTED EBITDA AND ADJUSTED EBITDAaL Management defines EBITDA as earnings before interest income and expense, income taxes and depreciation and amortization expense. Adjusted EBITDA excludes the change in fair value of financial instrument, gain on disposal of assets, foreign exchange, the equity income (loss) of CDCP, the non-controlling interests’ share of adjusted EBITDA of TG-CPX Limited Partnership, and impairment, depreciation, amortization, interest and taxes of Cineplex’s other joint ventures and associates. Adjusted EBITDAaL modifies adjusted EBITDA to deduct current period cash rent paid or payable related to lease obligations. During the year, Cineplex agreed to a variety of arrangements with landlords to reduce or defer cash rent paid or payable as a result of the impact of COVID-19. Subsequent to the adoption of IFRS 16, Leases, by Cineplex effective January 1, 2019, the calculation of EBITDA no longer includes a charge for amounts paid or payable with respect to leased property and equipment. Given the majority of Cineplex’s businesses are carried on in leased premises, Cineplex introduced the measure of adjusted EBITDAaL which includes a deduction for cash rent paid/payable related to lease obligations. Cineplex’s management believes that adjusted EBITDAaL is an important supplemental measure of Cineplex’s profitability at an operational level and provides analysts and investors with comparability in evaluating and valuing Cineplex’s performance period over period. EBITDA, adjusted for various unusual items, is also used to define certain financial covenants in Cineplex’s Credit Facilities. Management calculates adjusted EBITDAaL margin by dividing adjusted EBITDAaL by total revenues. EBITDA, adjusted EBITDA and adjusted EBITDAaL are non-GAAP measures generally used as an indicator of financial performance and they should not be seen as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Cineplex’s EBITDA, adjusted EBITDA and adjusted EBITDAaL may differ from similar calculations as reported by other entities and accordingly may not be comparable to EBITDA, adjusted EBITDA or adjusted EBITDAaL as reported by other entities. P1AG Adjusted EBITDAaL Calculated as amusement revenues of P1AG less the total operating expenses of P1AG, which excludes foreign exchange. P1AG Adjusted EBITDAaL Margin Calculated as P1AG Adjusted EBITDAaL divided by total amusement revenues for P1AG for the period. Adjusted Store Level EBITDAaL Metrics Cineplex reviews and reports adjusted EBITDAaL at the location level for the LBE which is calculated as total LBE revenues from all locations less the total of operating expenses of LBE, which excludes pre-opening costs and overhead relating to the management of LBE. Adjusted Store Level EBITDAaL Margin CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 85 77 ————————————————————————————————————————————— Management’s Discussion and Analysis Cineplex Inc. Management’s Discussion and Analysis NON-GAAP FINANCIAL MEASURES representation. NON-GAAP RATIO Non-GAAP financial measures are defined in 52-112 as a financial measure disclosed that (a) depicts the historical or expected future financial performance, financial position or cash flow of an entity, (b) with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity, (c) is not disclosed in the financial statements of the entity, and (d) is not a ratio, fraction, percentage or similar A non-GAAP ratio is defined by 52-112 as a financial measure disclosed that (a) is in the form of a ratio, fraction, percentage or similar representation, (b) has a non-GAAP financial measure as one or more of its components, and (c) is not disclosed in the financial statements. The below are non-GAAP financial measures or non-GAAP ratios that are reported by Cineplex. 17.1 EBITDA, ADJUSTED EBITDA AND ADJUSTED EBITDAaL Management defines EBITDA as earnings before interest income and expense, income taxes and depreciation and amortization expense. Adjusted EBITDA excludes the change in fair value of financial instrument, gain on disposal of assets, foreign exchange, the equity income (loss) of CDCP, the non-controlling interests’ share of adjusted EBITDA of TG-CPX Limited Partnership, and impairment, depreciation, amortization, interest and taxes of Cineplex’s other joint ventures and associates. Adjusted EBITDAaL modifies adjusted EBITDA to deduct current period cash rent paid or payable related to lease obligations. During the year, Cineplex agreed to a variety of arrangements with landlords to reduce or defer cash rent paid or payable as a result of the impact of COVID-19. Subsequent to the adoption of IFRS 16, Leases, by Cineplex effective January 1, 2019, the calculation of EBITDA no longer includes a charge for amounts paid or payable with respect to leased property and equipment. Given the majority of Cineplex’s businesses are carried on in leased premises, Cineplex introduced the measure of adjusted EBITDAaL which includes a deduction for cash rent paid/payable related to lease obligations. Cineplex’s management believes that adjusted EBITDAaL is an important supplemental measure of Cineplex’s profitability at an operational level and provides analysts and investors with comparability in evaluating and valuing Cineplex’s performance period over period. EBITDA, adjusted for various unusual items, is also used to define certain financial covenants in Cineplex’s Credit Facilities. Management calculates adjusted EBITDAaL margin by dividing adjusted EBITDAaL by total revenues. EBITDA, adjusted EBITDA and adjusted EBITDAaL are non-GAAP measures generally used as an indicator of financial performance and they should not be seen as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Cineplex’s EBITDA, adjusted EBITDA and adjusted EBITDAaL may differ from similar calculations as reported by other entities and accordingly may not be comparable to EBITDA, adjusted EBITDA or adjusted EBITDAaL as reported by other entities. Calculated as amusement revenues of P1AG less the total operating expenses of P1AG, which excludes foreign P1AG Adjusted EBITDAaL exchange. P1AG Adjusted EBITDAaL Margin Calculated as P1AG Adjusted EBITDAaL divided by total amusement revenues for P1AG for the period. Cineplex Inc. ————————————————————————————————————————————— Calculated as adjusted store level EBITDAaL divided by total revenues for LBE for the period. The following represents management’s calculation of EBITDA, adjusted EBITDA, and adjusted EBITDAaL (expressed in thousands of dollars): Reconciliation of reported net (loss) income to adjusted EBITDAaL Net (loss) income from continuing operations $ (248,722) $ (624,001) $ Depreciation and amortization - other Depreciation - right-of-use assets Interest expense - lease obligations Interest expense - other Interest income Current income tax expense (recovery) Deferred income tax recovery EBITDA from continuing operations (Gain) loss on disposal of assets Change in fair value of financial instruments CDCP equity (income) loss (i) Foreign exchange (gain) loss Impairment of long-lived assets, goodwill and investments Non-controlling interest adjusted EBITDA Depreciation and amortization - joint ventures and associates (ii) Taxes and interest of joint ventures and associates (ii) Year ended December 31, 2021 2020 113,042 102,247 58,590 65,138 (232) 3,339 — (28,283) (8,790) (146) (43) 3,717 — 25 45 124,846 128,393 61,483 49,085 (182) (73,495) (11,373) (13,101) — 7,279 57 294,863 5 73 202 2019 36,516 128,883 145,946 48,659 36,063 (252) 21,759 (9,990) 1,764 — (4,827) 1,065 — 24 99 77 $ 93,402 $ (345,244) $ 407,584 Adjusted EBITDA from continuing operations 59,927 $ (55,866) $ 405,786 Cash rent paid/payable related to lease obligations (iii) (144,222) (126,949) (175,240) Adjusted EBITDAaL (iv) (84,295) $ (182,815) $ 230,546 (i) CDCP equity loss (income) not included in adjusted EBITDA as CDCP is a limited-life financing vehicle that is funded by virtual print fees collected from distributors. (ii) Includes the joint ventures with the exception of CDCP (see (i) above). (iii) The cash rent paid or payable includes negotiated lease obligation savings of $29.7 million (2020 - $42.5 million) through December 31, 2021. The negotiated lease obligation savings represent forgiveness of lease payments. $ $ (iv) See Section 17, Non-GAAP and other financial measures. 17.2 ADJUSTED FREE CASH FLOW Free cash flow is a non-GAAP measure generally used by Canadian corporations as an indicator of financial performance and it should not be viewed as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Standardized free cash flow adjusts the amount of cash from operating activities to deduct capital expenditures net of proceeds on sale of assets in ordinary business operations. Standardized free cash flow is a non-GAAP measure recommended by the CICA in its 2008 interpretive release, Improved Communication with Non-GAAP Financial Measures: General Principles and Guidance for Reporting EBITDA and Free Cash Flow, and is designed to enhance comparability. Adjusted free cash flow is also a non-GAAP measure used by Cineplex to modify standardized free cash flow to exclude certain cash flow activities and to measure the amount available for activities such as repayment of debt, dividends to owners and investments in future growth through acquisitions. Beginning with the MD&A for the three months ending March 31, 20219, Adjusted free cash flow included repayments of lease obligations that represented the principal portion of rent expenses that were included in net income calculation prior to the adoption of accounting standard IFRS 16, Leases, by Cineplex effective January 1, 2019. Given that the materiality of the principal portion of the rent expenses and comparability of adjusted free cash flow disclosure for comparative periods, adjusted free cash flow also adjusts standard free cash flow to deduct principal amount of repayment of lease obligation. Cineplex presents standardized free cash flow and adjusted free cash flow per Share because they are key measures used by investors to value and assess Cineplex. Management of Cineplex defines adjusted free cash flow as CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 78 Adjusted Store Level EBITDAaL Metrics Cineplex Inc. Cineplex reviews and reports adjusted EBITDAaL at the location level for the LBE which is calculated as total LBE revenues from all locations less the total of operating expenses of LBE, which excludes pre-opening costs and Management's Discussion and Analysis overhead relating to the management of LBE. Cineplex Inc. Management’s Discussion and Analysis Adjusted Store Level EBITDAaL Margin ————————————————————————————————————————————— Calculated as adjusted store level EBITDAaL divided by total revenues for LBE for the period. The following represents management’s calculation of EBITDA, adjusted EBITDA, and adjusted EBITDAaL (expressed in thousands of dollars): CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 77 Reconciliation of reported net (loss) income to adjusted EBITDAaL Year ended December 31, Net (loss) income from continuing operations 2021 (248,722) $ 2020 (624,001) $ $ Depreciation and amortization - other Depreciation - right-of-use assets Interest expense - lease obligations Interest expense - other Interest income Current income tax expense (recovery) Deferred income tax recovery EBITDA from continuing operations (Gain) loss on disposal of assets Change in fair value of financial instruments CDCP equity (income) loss (i) Foreign exchange (gain) loss Impairment of long-lived assets, goodwill and investments Non-controlling interest adjusted EBITDA Depreciation and amortization - joint ventures and associates (ii) Taxes and interest of joint ventures and associates (ii) Adjusted EBITDA from continuing operations Cash rent paid/payable related to lease obligations (iii) Adjusted EBITDAaL (iv) 113,042 102,247 58,590 65,138 (232) 3,339 — 124,846 128,393 61,483 49,085 (182) (73,495) (11,373) 2019 36,516 128,883 145,946 48,659 36,063 (252) 21,759 (9,990) $ 93,402 $ (345,244) $ 407,584 (28,283) (8,790) (146) (43) 3,717 — 25 45 (13,101) — 7,279 57 294,863 5 73 202 1,764 — (4,827) 1,065 — 24 99 77 $ $ 59,927 $ (55,866) $ 405,786 (144,222) (126,949) (175,240) (84,295) $ (182,815) $ 230,546 (i) CDCP equity loss (income) not included in adjusted EBITDA as CDCP is a limited-life financing vehicle that is funded by virtual print fees collected from distributors. (ii) Includes the joint ventures with the exception of CDCP (see (i) above). (iii) The cash rent paid or payable includes negotiated lease obligation savings of $29.7 million (2020 - $42.5 million) through December 31, 2021. The negotiated lease obligation savings represent forgiveness of lease payments. (iv) See Section 17, Non-GAAP and other financial measures. 17.2 ADJUSTED FREE CASH FLOW Free cash flow is a non-GAAP measure generally used by Canadian corporations as an indicator of financial performance and it should not be viewed as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Standardized free cash flow adjusts the amount of cash from operating activities to deduct capital expenditures net of proceeds on sale of assets in ordinary business operations. Standardized free cash flow is a non-GAAP measure recommended by the CICA in its 2008 interpretive release, Improved Communication with Non-GAAP Financial Measures: General Principles and Guidance for Reporting EBITDA and Free Cash Flow, and is designed to enhance comparability. Adjusted free cash flow is also a non-GAAP measure used by Cineplex to modify standardized free cash flow to exclude certain cash flow activities and to measure the amount available for activities such as repayment of debt, dividends to owners and investments in future growth through acquisitions. Beginning with the MD&A for the three months ending March 31, 20219, Adjusted free cash flow included repayments of lease obligations that represented the principal portion of rent expenses that were included in net income calculation prior to the adoption of accounting standard IFRS 16, Leases, by Cineplex effective January 1, 2019. Given that the materiality of the principal portion of the rent expenses and comparability of adjusted free cash flow disclosure for comparative periods, adjusted free cash flow also adjusts standard free cash flow to deduct principal amount of repayment of lease obligation. Cineplex presents standardized free cash flow and adjusted free cash flow per Share because they are key measures used by investors to value and assess Cineplex. Management of Cineplex defines adjusted free cash flow as CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 86 CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 78 Cineplex Inc. Management’s Discussion and Analysis ————————————————————————————————————————————— Calculated as adjusted store level EBITDAaL divided by total revenues for LBE for the period. The following represents management’s calculation of EBITDA, adjusted EBITDA, and adjusted EBITDAaL (expressed in thousands of dollars): Reconciliation of reported net (loss) income to adjusted EBITDAaL Net (loss) income from continuing operations $ (248,722) $ (624,001) $ Depreciation and amortization - other Depreciation - right-of-use assets Interest expense - lease obligations Interest expense - other Interest income Current income tax expense (recovery) Deferred income tax recovery EBITDA from continuing operations (Gain) loss on disposal of assets Change in fair value of financial instruments CDCP equity (income) loss (i) Foreign exchange (gain) loss Impairment of long-lived assets, goodwill and investments Non-controlling interest adjusted EBITDA Depreciation and amortization - joint ventures and associates (ii) Taxes and interest of joint ventures and associates (ii) Year ended December 31, 2021 2020 113,042 102,247 58,590 65,138 (232) 3,339 — (28,283) (8,790) (146) (43) 3,717 — 25 45 124,846 128,393 61,483 49,085 (182) (73,495) (11,373) (13,101) — 7,279 57 294,863 5 73 202 2019 36,516 128,883 145,946 48,659 36,063 (252) 21,759 (9,990) 1,764 — (4,827) 1,065 — 24 99 77 $ 93,402 $ (345,244) $ 407,584 Adjusted EBITDA from continuing operations 59,927 $ (55,866) $ 405,786 Cash rent paid/payable related to lease obligations (iii) (144,222) (126,949) (175,240) Adjusted EBITDAaL (iv) (84,295) $ (182,815) $ 230,546 (i) CDCP equity loss (income) not included in adjusted EBITDA as CDCP is a limited-life financing vehicle that is funded by virtual print fees collected from distributors. (ii) Includes the joint ventures with the exception of CDCP (see (i) above). (iii) The cash rent paid or payable includes negotiated lease obligation savings of $29.7 million (2020 - $42.5 million) through December 31, 2021. The negotiated lease obligation savings represent forgiveness of lease payments. $ $ (iv) See Section 17, Non-GAAP and other financial measures. 17.2 ADJUSTED FREE CASH FLOW Free cash flow is a non-GAAP measure generally used by Canadian corporations as an indicator of financial performance and it should not be viewed as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Standardized free cash flow adjusts the amount of cash from operating activities to deduct capital expenditures net of proceeds on sale of assets in ordinary business operations. Standardized free cash flow is a non-GAAP measure recommended by the CICA in its 2008 interpretive release, Improved Communication with Non-GAAP Financial Measures: General Principles and Guidance for Reporting EBITDA and Free Cash Flow, and is designed to enhance comparability. Adjusted free cash flow is also a non-GAAP measure used by Cineplex to modify standardized free cash flow to exclude certain cash flow activities and to measure the amount available for activities such as repayment of debt, dividends to owners and investments in future growth through acquisitions. Beginning with the MD&A for the three months ending March 31, 20219, Adjusted free cash flow included repayments of lease obligations that represented the principal portion of rent expenses that were included in net income calculation prior to the adoption of accounting standard IFRS 16, Leases, by Cineplex effective January 1, Cineplex Inc. 2019. Given that the materiality of the principal portion of the rent expenses and comparability of adjusted free cash flow disclosure for comparative periods, adjusted free cash flow also adjusts standard free cash flow to deduct Management's Discussion and Analysis principal amount of repayment of lease obligation. Cineplex Inc. Management’s Discussion and Analysis Cineplex presents standardized free cash flow and adjusted free cash flow per Share because they are key measures ————————————————————————————————————————————— used by investors to value and assess Cineplex. Management of Cineplex defines adjusted free cash flow as standardized free cash flow adjusted for certain items, and considers adjusted free cash flow the amount available for distribution to Shareholders. Standardized free cash flow is defined by the CICA as cash from operating activities as reported in the GAAP financial statements, less total capital expenditures minus proceeds from the disposition of capital assets other than those of discontinued operations, as reported in the GAAP financial statements; and dividends, when stipulated, unless deducted in arriving at cash flows from operating activities. The standardized free cash flow calculation excludes common dividends and others that are declared at the Board’s discretion. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS 78 Management calculates adjusted free cash flow per Share as follows (expressed in thousands of dollars except Shares outstanding and per Share data): Reconciliation of reported cash (used in) provided by operating activities to adjusted free cash flow per share Year ended December 31 2021 2020 2019 Cash (used in) provided by operating activities $ 61,004 $ (106,314) $ Less: Total capital expenditures net of proceeds on sale of assets (20,295) (73,411) 321,665 (146,367) Standardized free cash flow 40,709 (179,725) 175,298 Add/(Less): Changes in operating assets and liabilities (i) Changes in operating assets and liabilities of joint ventures and associates (i) Repayments of lease obligations - principal Growth capital expenditures and other (ii) Share of income of joint ventures and associates, net of non-cash depreciation Non-controlling interests Net cash received from CDCP (iii) Adjusted free cash flow Average number of Shares outstanding Adjusted free cash flow per Share Dividends declared (117,438) (1,050) (88,259) 13,358 (832) — 1,995 43,178 (4,469) (91,946) 68,032 (855) 5 3,910 (151,517) $ (161,870) $ (8,727) 535 (128,252) 114,665 (482) 24 15,394 168,455 63,339,239 63,333,238 63,333,238 (2.392) $ — $ (2.556) $ 0.150 $ 2.660 1.780 $ $ $ (i) Changes in operating assets and liabilities are not considered a source or use of adjusted free cash flow. Refer to Note 26 of Cineplex’s 2021 Consolidated Financial Statements for further details. (ii) Growth capital expenditures and other represent expenditures on Board approved projects, exclude maintenance capital expenditures and are net of proceeds on asset sales. The Revolving Facility (discussed above in Section 7.4 Credit Facilities) is available to Cineplex to fund Board approved projects. (iii) Excludes the share of income of CDCP, as CDCP is a limited-life financing vehicle funded by virtual print fees collected from distributors. Cash invested into CDCP, as well as distributions received from CDCP, are considered to be uses and sources of adjusted free cash flow. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 87 79 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Alternatively, the calculation of adjusted free cash flow using the income statement as a reference point would be as follows (expressed in thousands of dollars): Reconciliation of reported net (loss) income to adjusted free cash flow Year ended December 31, 2021 2020 2019 Net (loss) income from continuing operations $ (248,722) $ (624,001) $ 36,516 Adjust for: Depreciation and amortization - other Depreciation - right-of-use assets Change in fair value of financial instrument (Gain) loss on disposal of assets Non-cash interest (i) Non-cash foreign exchange Impairment of long-lived assets, goodwill and investments Share of loss (income) of CDCP (ii) Non-controlling interests Non-cash depreciation of joint ventures and associates Deferred income tax recovery Taxes and interest of joint ventures and associates Maintenance capital expenditures Repayments of lease obligations - principal Net cash received from CDCP (ii) Non-cash items: 113,042 102,247 (8,790) (28,283) 4,203 55 3,717 (146) — 24 — 45 (6,937) (88,259) 1,995 124,846 128,393 — (13,101) 22,789 342 294,863 7,279 5 73 (11,373) 202 (5,379) (91,946) 3,910 128,883 145,946 — 1,764 12,217 698 — (4,827) 24 99 (9,990) 77 (31,702) (128,252) 15,394 Non-cash Share-based compensation 4,292 1,228 1,608 Adjusted free cash flow $ (151,517) $ (161,870) $ 168,455 (i) Non-cash interest includes amortization of deferred financing costs on the long-term debt, accretion expense on the convertible debentures, and other non-cash interest expense items. (ii) Excludes the share of income of CDCP, as CDCP is a limited-life financing vehicle funded by virtual print fees collected from distributors. Cash invested into CDCP, as well as cash distributions received from CDCP, are considered to be uses and sources of adjusted free cash flow. 17.3 NET CASH BURN Management believes that net cash burn is an important non-GAAP measure that is used to analyze Cineplex’s cash used to maintain operating activities, make growth capital expenditures and principal repayments on its lease obligations. Net Cash Burn is calculated as net cash provided by (used in) operating activities adjusted for the timing differences of changes in operating assets and liabilities, less repayments of lease obligations - principal and net capital expenditures, adjusted for the the timing of lease payments and tax recoveries. Net cash burn 2021 Q4 Q3 Q2 Q1 Q4 2020 Q3 Q2 Net cash provided by (used in) operating activities Changes in operating assets and liabilities Repayments of lease obligations - principal Net capital expenditures Timing difference of lease abatements recognized as compared to cash payments Timing difference of cash tax recoveries as compared to current tax provision $ 27,480 $ 52,023 $ 17,133 $ (35,632) $ (61,041) $ (86,558) $ 18,095 1,405 (32,640) (62,622) (23,581) 67,257 34,894 (69,401) (25,525) (4,008) (24,191) (3,475) (19,086) (3,021) (19,457) (5,055) (32,323) (7,272) (24,811) (8,198) (933) (8,019) 1,965 1,153 (2,435) 1,830 12,672 18,868 (18,933) — — — 3,309 (53,946) 16,643 26,808 Total net cash burn Average monthly net cash burn $ $ 1,317 $ 439 $ (7,130) $ (2,377) $ (70,031) $ (23,344) $ (78,586) $ (26,195) $ (74,653) $ (24,884) $ (49,162) $ (16,387) $ (52,383) (17,461) CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 88 80 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— To comply with NI 52-112, effective this quarter, Cineplex revised its presentation of Net Cash Burn to reconcile from its closest GAAP figure, net cash provided by (used in) operating activities. Under the previous presentation beginning with Adjusted EBITDAaL, Net Cash Burn would be presented as follows: Net cash burn 2021 Q4 Q3 Q2 Q1 Q4 2020 Q3 Q2 Adjusted EBITDAaL $ 20,198 $ 10,762 $ (53,165) $ (62,090) $ (65,948) $ (46,725) $ (72,532) Cash interest expense excluding lease obligations Provision for income taxes Net capital expenditures Other adjustments to conform to current presentation (16,669) (15,983) (15,701) (13,429) (13,412) (11,317) — (4,008) — (3,475) — (3,021) — (5,055) 12,355 (7,272) 16,497 (8,198) (7,782) 34,440 (8,019) 1,796 1,566 1,856 1,988 (376) 581 1,510 Total net cash burn Average monthly net cash burn $ $ 1,317 $ 439 $ (7,130) $ (2,377) $ (70,031) $ (23,344) $ (78,586) $ (26,195) $ (74,653) $ (24,884) $ (49,162) $ (16,387) $ (52,383) (17,461) SUPPLEMENTARY FINANCIAL MEASURES Supplementary financial measures are financial measures that are not (a) presented in the financial statements and (b) is, or is intended to be, disclosed periodically to depict the historical or expected future financial performance, financial position or cash flow, that is not a non-GAAP financial measure or a non-GAAP ratio as defined in the instrument. The below are supplementary financial measures that Cineplex uses to depict its financial performance, financial position or cash flows. Earnings per Share Metrics Cineplex has presented basic and diluted earnings per share net of this item to provide a more comparable earnings per share metric between the current periods and prior year periods. In the non-GAAP and other financial measure, earnings is defined as net income or net loss attributable to Cineplex excluding the change in fair value of financial instruments. Per Patron Revenue Metrics Cineplex reviews per patron metrics as they relate to box office revenue and theatre food service revenue such as BPP, CPP, BPP excluding premium priced product, and concession margin per patron, as these are key measures used by investors to value and assess Cineplex’s performance, and are widely used in the theatre exhibition industry. Management of Cineplex defines these metrics as follows: Theatre attendance: Theatre attendance is calculated as the total number of paying patrons that frequent Cineplex’s theatres during the period. BPP: Calculated as total box office revenues divided by total paid theatre attendance for the period. BPP excluding premium priced product: Calculated as total box office revenues for the period, less box office revenues from 3D, 4DX, UltraAVX, VIP, ScreenX and IMAX product; divided by total paid theatre attendance for the period, less paid theatre attendance for 3D, 4DX, UltraAVX, VIP, ScreenX and IMAX product. CPP: Calculated as total theatre food service revenues divided by total paid theatre attendance for the period. Premium priced product: Defined as 3D, 4DX, UltraAVX, IMAX, ScreenX and VIP film product. Theatre concession margin per patron: Calculated as total theatre food service revenues less total theatre food service cost, divided by theatre attendance for the period. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 89 81 Cineplex Inc. Cineplex Inc. Management's Discussion and Analysis Management’s Discussion and Analysis ————————————————————————————————————————————— Same Theatre Analysis Cineplex reviews and reports same theatre metrics relating to box office revenues, theatre food service revenues, theatre rent expense and theatre payroll expense, as these measures are widely used in the theatre exhibition industry as well as other retail industries. Same theatre metrics are calculated by removing the results for all theatres that have been opened, acquired, closed or otherwise disposed of subsequent to the start of the prior year comparative period. For the three months ended December 31, 2021 the impact of 2 locations that have been opened or acquired and 6 locations that have been closed have been excluded, resulting in 152 theatres being included in the same theatre metrics. For the year ended December 31, 2021 the impact of the 2 locations that have been opened or acquired and the 7 locations that have been closed have been excluded, resulting in 151 theatres being included in the same theatre metrics. Cost of sales percentages Cineplex reviews and reports cost of sales percentages for its two largest revenue sources, box office revenues and food service revenues as these measures are widely used in the theatre exhibition industry. These measures are reported as film cost percentage and concession cost percentage, respectively, and are calculated as follows: Film cost percentage: Calculated as total film cost expense divided by total box office revenues for the period. Theatre concession cost percentage: Calculated as total theatre food service costs divided by total theatre food service revenues for the period. LBE food cost percentage: Calculated as total LBE food costs divided by total LBE food service revenues for the period. Lease-related cash saving Quantified savings negotiated with landlords as a result of the COVID-19 disclosures. CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT’S DISCUSSION & ANALYSIS CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 90 82 Cineplex Inc. Management's Discussion and Analysis Management’s Report to Shareholders Management is responsible for the preparation of the accompanying consolidated financial statements and all other information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, which involve management’s best estimates and judgments, based on available information. Management maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are authorized, assets are safeguarded, and financial records are reliable for preparing consolidated financial statements. The Board of Directors of Cineplex Inc. (the “Board” of the “Company”) is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board is assisted in exercising its responsibilities through the Audit Committee of the Board (the “Audit Committee”). The Audit Committee meets periodically with management and the independent auditor to satisfy itself that management’s responsibilities are properly discharged and to recommend approval of the consolidated financial statements to the Board. PricewaterhouseCoopers LLP serves as the Company’s auditor. PricewaterhouseCoopers LLP’s report on the accompanying consolidated financial statements follows. It outlines the extent of its examination as well as an opinion on the consolidated financial statements. Ellis Jacob Chief Executive Officer Toronto, Ontario February 10, 2022 Gord Nelson Chief Financial Officer CINEPLEX INC. 2021 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS 91 Independent auditor’s report To the Shareholders of Cineplex Inc. Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Cineplex Inc. and its subsidiaries (together, the Company) as at December 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Company’s consolidated financial statements comprise: ● ● ● ● ● ● the consolidated balance sheets as at December 31, 2021 and 2020; the consolidated statements of operations for the years then ended; the consolidated statements of comprehensive loss for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 92 Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Impairment assessment of goodwill, indefinite- lived intangible assets, property, equipment and leaseholds, right-of-use assets and definite lived intangible assets Refer to note 11 – Goodwill and impairment of long-lived assets and note 31 – Significant accounting policies, judgments and estimation uncertainty to the consolidated financial statements. As at December 31, 2021, the Company had $636 million of goodwill, $64 million of indefinite-lived intangible assets, $464 million of property, equipment and leaseholds (PPE), $769 million of right-of-use assets (ROU) and $18 million of definite lived intangible assets. Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if specific events or circumstances dictate that the carrying amount of the asset group may not be fully recoverable. PPE, ROU and definite lived intangible assets (collectively, long-lived assets) are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, for assets other than goodwill and indefinite-lived intangible assets, indicators are assessed considering whether an impairment loss previously recognized may no longer exist or may have decreased. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows relating to the relevant intangible asset (cash- generating units or CGUs). Our approach to addressing the matter included the following procedures, among others: ● Evaluated how management determined the recoverable amounts of goodwill and indefinite-lived intangible assets CGUs and a sample of long-lived assets CGUs, which included the following: (cid:31) Tested the appropriateness of the method used and the mathematical accuracy of the discounted cash flow models. (cid:31) Tested the reasonableness of the key assumptions used by management, including attendance and the related revenue growth rates, operating margins, variable and fixed cash flows and discount rates applied by management by comparing them to the budget, management’s strategic plans approved by the Board of Directors and available third party published economic data, industry forecasts and historical trends. (cid:31) Professionals with specialized skill and knowledge in the field of valuation assisted in testing the reasonableness of the discount rates applied by management based on available data of comparable companies. (cid:31) Tested the underlying data used in the discounted cash flow models. 93 Key audit matter How our audit addressed the key audit matter Tested the disclosures made in the consolidated financial statements, particularly with regard to the sensitivity of the key assumptions used. An impairment loss, if estimated, is recognized for the amount by which the CGU’s carrying value exceeds its recoverable amount. A reversal of impairment, if estimated, is recognized to a limit of increasing the carrying amount to the lower of the recoverable amount and the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized in prior periods. The recoverable amounts were determined based on the fair value less costs to sell method using discounted cash flow models. The key assumptions applied by management in estimating the recoverable amounts of the CGUs included attendance and the related revenue growth rates, operating margins, variable and fixed cash flows and discount rates. Shutdowns and restrictions in several provinces that materially affected operations represented a triggering event requiring impairment testing for long-lived assets, goodwill and indefinite-lived intangible assets at December 31, 2021. The impairment tests described above resulted in PPE and ROU impairment charges of $4 million. No impairment loss was required for goodwill, indefinite-lived intangible assets, or definite lived intangible assets. We considered this a key audit matter due to (i) the significance of the balances and (ii) the significant judgment made by management in determining the recoverable amounts of the goodwill and indefinite-lived intangible assets CGUs and certain long-lived assets CGUs, including the use of key assumptions. This has resulted in a high degree of subjectivity and audit effort in performing audit procedures to test the key assumptions used by management, which involved significant judgment by management. Professionals with specialized skill and knowledge in the field of valuation assisted us in performing our procedures. 94 Other information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and 95 are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. ● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 96 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Adam Boutros. Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario February 10, 2022 97 Cineplex Inc. Cineplex Inc. Consolidated Balance Sheets Consolidated Balance Sheets ————————————————————————————————————————————— (expressed in thousands of Canadian dollars) (expressed in thousands of Canadian dollars) Assets Current assets Cash and cash equivalents (note 3) Trade and other receivables (note 4) Income taxes receivable (note 8) Inventories (note 5) Prepaid expenses and other current assets Non-current assets Property, equipment and leaseholds (note 6) Right-of-use assets (note 7) Interests in joint ventures and associates (note 9) Intangible assets (note 10) Goodwill (note 11) Derivative financial instrument (note 16) COVID-19 business impacts, risks and liquidity (note 2) Commitments, guarantees and contingencies (note 27) December 31, December 31, 2021 2020 $ 26,938 $ 80,679 1,984 24,899 13,365 16,254 51,834 66,551 21,712 11,613 147,865 167,964 464,439 768,675 7,423 81,651 635,545 9,240 555,340 881,418 8,644 84,922 635,582 — $ 2,114,838 $ 2,333,870 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED BALANCE SHEETS CINEPLEX INC. 2021 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS 98 (1) Cineplex Inc. Cineplex Inc. Consolidated Balance Sheets...continued Consolidated Balance Sheets...continued ————————————————————————————————————————————— (expressed in thousands of Canadian dollars) (expressed in thousands of Canadian dollars) Liabilities Current liabilities Accounts payable and accrued liabilities (note 12) $ 157,950 $ 82,992 December 31, December 31, 2021 2020 Share-based compensation (note 13) Income taxes payable Deferred revenue and other (note 20) Lease obligations (note 15) Fair value of interest rate swap agreements (note 28) Non-current liabilities Share-based compensation (note 13) Long-term debt (note 16) Fair value of interest rate swap agreements (note 28) Lease obligations (note 15) Post-employment benefit obligations (note 17) Other liabilities (note 18) Total liabilities Shareholders’ (deficit) equity Share capital (note 19) Deficit Hedging reserves and other Contributed surplus Cumulative translation adjustment Total shareholders’ (deficit) equity Approved by the Board of Directors — 1,945 293,206 101,058 8,063 562,222 4,940 739,211 6,160 482 802 219,983 97,259 7,202 408,720 2,670 725,271 19,157 1,004,465 1,073,666 9,973 7,590 11,503 68,649 1,772,339 1,900,916 2,334,561 2,309,636 852,465 (1,151,394) (131) 80,027 (690) (219,723) 852,379 (903,394) (131) 75,882 (502) 24,234 $ 2,114,838 $ 2,333,870 Director Director The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED BALANCE SHEETS CINEPLEX INC. 2021 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS 99 (2) Cineplex Inc. Cineplex Inc. Consolidated Statements of Operations Consolidated Statements of Operations For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ———————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Revenues (note 20) Box office Food service Media Amusement Other Expenses Film cost Cost of food service Depreciation - right-of-use assets Depreciation and amortization - other assets Gain on disposal of assets (note 6) Other costs (note 21) Share of loss of joint ventures and associates (note 9) Interest expense - lease obligations (note 15) Interest expense - other Interest income Foreign exchange Change in fair value of financial instruments (note 16) Impairment of long-lived assets and goodwill (note 11) $ 2021 2020 236,320 $ 186,998 65,330 134,473 33,548 132,820 108,632 65,358 77,901 33,552 656,669 418,263 114,674 41,683 102,247 113,042 (28,283) 439,554 755 58,590 65,138 (232) (43) (8,790) 3,717 66,922 30,667 128,393 124,846 (13,101) 375,690 8,409 49,085 61,483 (182) 57 — 294,863 902,052 1,127,132 Loss from continuing operations before income taxes (245,383) (708,869) Provision for income taxes (note 8) Current Deferred Net loss from continuing operations Net loss from discontinued operations, net of taxes (note 30) Net loss Net loss from continuing operations attributable to: Owners of Cineplex Non-controlling interests Net loss from continuing operations Net loss attributable to: Owners of Cineplex Non-controlling interests Net loss Net loss per share attributable to owners of Cineplex - basic and diluted: Continuing operations (note 22) Discontinued operations (note 22) Total operations 3,339 — 3,339 (73,495) (11,373) (84,868) (248,722) $ (624,001) — (4,952) (248,722) $ (628,953) (248,722) $ — (623,996) (5) (248,722) $ (624,001) (248,722) $ — (628,948) (5) (248,722) $ (628,953) (3.93) $ — (3.93) $ (9.85) (0.08) (9.93) $ $ $ $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL REPORT CINEPLEX INC. CONSOLIDATED STATEMENTS OF OPERATIONS 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF OPERATIONS 100 (3) Cineplex Inc. Cineplex Inc. Consolidated Statements of Comprehensive Loss Consolidated Statements of Comprehensive Loss For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ———————————————————————————————————————————— (expressed in thousands of Canadian dollars) (expressed in thousands of Canadian dollars) 2021 2020 Net loss from continuing operations $ (248,722) $ (624,001) Other comprehensive income (loss) from continuing operations Items that will be reclassified subsequently to net income: Foreign currency translation adjustment Recognition of currency translation adjustment on disposition of discontinued operations (note 30) Items that will not be reclassified to net income: Actuarial income (loss) of post-employment benefit obligations Associated deferred income taxes expense Other comprehensive income (loss) from continuing operations Comprehensive loss from continuing operations Net loss from discontinued operations, net of taxes (note 30) Foreign currency translation adjustment from discontinued operations (188) — 722 — 534 378 (160) (495) 133 (144) (248,188) — — (624,145) (4,952) 7 Comprehensive loss $ (248,188) $ (629,090) Comprehensive loss from continuing operations attributable to: Owners of Cineplex Non-controlling interests Comprehensive loss attributable to: Owners of Cineplex Non-controlling interests $ $ $ $ (248,188) $ (624,140) — (5) (248,188) $ (624,145) (248,188) $ (629,085) — (5) (248,188) $ (629,090) The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS CINEPLEX INC. 2021 ANNUAL REPORT CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS 101 (4) Cineplex Inc. Cineplex Inc. Consolidated Statements of Changes in Equity Consolidated Statements of Changes in Equity For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ———————————————————————————————————————————— (expressed in thousands of Canadian dollars) (expressed in thousands of Canadian dollars) Share capital Contributed surplus Hedging reserves and other Cumulative translation adjustment Non- controlling interests Deficit Total January 1, 2021 $ 852,379 $ 75,882 $ (131) $ (502) $ (903,394) $ — $ 24,234 Net loss Other comprehensive income (loss) (page 4) Total comprehensive loss Share option expense PSU/RSU expense Settlement for cancelled options Issuance of shares on exercise of options — — — — — — 86 — — — 1,903 2,388 (60) (86) — — — — — — — — (248,722) (188) 722 (188) (248,000) — — — — — — — — — — — — — — — (248,722) 534 (248,188) 1,903 2,388 (60) — December 31, 2021 $ 852,465 $ 80,027 $ (131) $ (690) $ (1,151,394) $ — $ (219,723) January 1, 2020 $ 852,379 $ 4,052 $ (131) $ (887) $ (264,310) $ (109) $ 590,994 Net loss Other comprehensive loss (page 4) Total comprehensive loss Dividends declared Share option expense PSU/RSU expense Settlement for cancelled options Conversion to equity- settled option plan Conversion to equity- settled PSU/RSU plan Issuance of convertible debentures Non-controlling interests acquired — — — — — — — — — — — — — — — 1,152 76 (453) 3,944 311 66,800 — — — — — — — — — — — — — (628,948) (5) (628,953) 385 385 — — — — — — — — (522) — (137) (629,470) (9,500) — — — — — — (5) (629,090) — — — — — — — (9,500) 1,152 76 (453) 3,944 311 66,800 (114) 114 — December 31, 2020 $ 852,379 $ 75,882 $ (131) $ (502) $ (903,394) $ — $ 24,234 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY CINEPLEX INC. 2021 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 102 (5) Cineplex Inc. Cineplex Inc. Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars) (expressed in thousands of Canadian dollars) 2021 2020 Cash provided by (used in) Operating activities Net loss from continuing operations Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization - other assets Depreciation - right-of-use assets Unrealized foreign exchange Interest rate swap agreements - non-cash interest Accretion of convertible debentures and notes payable Other non-cash interest Gain on disposal of assets Deferred income taxes (note 8) Non-cash share-based compensation Change in fair value of financial instruments Impairment of long-lived assets, goodwill and investments (note 11) Net change in interests in joint ventures and associates Changes in operating assets and liabilities (note 26) Net cash provided by (used in) operating activities Investing activities Proceeds from disposal of assets, net (notes 6 and 7) Purchases of property, equipment and leaseholds Intangible assets additions Tenant inducements Net cash received from CDCP Net cash provided by investing activities Financing activities Dividends paid Repayments under credit facilities, net (note 16) Repayments of lease obligations - principal Issuance of convertible debentures, net (note 16) Issuance of notes payable, net (note 16) Financing fees Net cash (used in) provided by financing activities Effect of exchange rate differences on cash Increase (decrease) in cash and cash equivalents from continuing operations Cash flows used in discontinued operations (note 30) Cash and cash equivalents - Beginning of period Cash and cash equivalents - End of period Supplemental information Cash paid for interest - lease obligation Cash paid for interest - other Cash received for income taxes, net $ $ $ $ $ (248,722) $ (624,001) 113,042 102,247 55 (12,730) 15,973 960 (28,283) — 4,292 (8,790) 3,717 1,805 117,438 61,004 63,215 (23,627) (9,200) 8,068 1,995 40,451 — (246,000) (88,259) — 243,996 (863) (91,126) 355 10,684 — 16,254 26,938 $ 124,846 128,393 342 13,922 7,471 1,396 (13,101) (11,373) 1,228 — 294,863 12,878 (43,178) (106,314) 80,920 (73,411) (9,005) 24,296 3,910 26,710 (19,000) (119,000) (91,946) 303,063 — (1,500) 71,617 552 (7,435) (2,391) 26,080 16,254 56,708 $ 52,143 $ (62,329) $ 32,371 47,859 (16,297) The accompanying notes are an integral part of these consolidated financial statements. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF CASH FLOWS CINEPLEX INC. 2021 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS 103 (6) The accompanying notes are an integral part of these consolidated financial statements. Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 1. General information Cineplex Inc. (“Cineplex”) an Ontario, Canada corporation, is one of Canada’s largest entertainment organizations, with theatres and location-based entertainment venues in ten provinces. Cineplex also operates businesses in digital commerce, cinema media, digital place-based media and amusement solutions through its wholly owned subsidiaries, Cineplex Entertainment Limited Partnership (the “Partnership”), Famous Players Limited Partnership (“Famous Players”), Galaxy Entertainment Inc. (“GEI”), Cineplex Digital Media Inc. (“CDM”), and Player One Amusement Group Inc. (“P1AG”). Cineplex is headquartered at 1303 Yonge Street, Toronto, Ontario, M4T 2Y9. On December 15, 2019, Cineplex entered into an arrangement agreement (the “Arrangement Agreement”) with Cineworld Group, plc (“Cineworld”), pursuant to which an indirect wholly-owned subsidiary of Cineworld agreed to acquire all of the issued and outstanding common shares of Cineplex (“Shares”) for $34.00 per share in cash (the “Cineworld Transaction”). The Cineworld Transaction was to be implemented by way of a statutory plan of arrangement under the Business Corporation Act (Ontario). On June 12, 2020, Cineworld delivered a notice (the “Termination Notice”) to Cineplex purporting to terminate the Arrangement Agreement. In the Termination Notice, Cineworld alleged that Cineplex took certain actions that constituted breaches of Cineplex’s covenants under the Arrangement Agreement including failing to operate its business in the ordinary course. In addition, Cineworld alleged that a material adverse effect had occurred with respect to Cineplex. Cineworld’s repudiation of the Arrangement Agreement was acknowledged by Cineplex and the Cineworld Transaction did not proceed. Cineplex vigorously denied Cineworld’s allegations. On July 3, 2020, Cineplex announced that it had commenced an action in the Ontario Superior Court of Justice (the “Court”) against Cineworld and 1232743 B.C. Ltd. seeking damages arising from what Cineplex claimed was a wrongful repudiation of the Arrangement Agreement. The claim sought damages, including the approximately $2,180,000 that Cineworld would have paid upon the closing of the Cineworld Transaction for Cineplex’s securities, reduced by the value of the Cineplex securities retained by its security holders, as well as compensation for other losses including the loss to Cineplex of expected synergies, the failure of Cineworld to repay or refinance Cineplex’s approximately $664,000 in debt, and transaction expenses. Cineplex also advanced alternative claims for damages for the loss of benefits to its security holders, and to require Cineworld to disgorge the benefits it improperly received by wrongfully repudiating the Cineworld Transaction. On July 6, 2020, Cineworld announced that it would defend Cineplex’s claim, and on September 2, 2020, filed its Statement of Defence and Counterclaim in which it denied Cineplex’s claims and advanced a counterclaim seeking reimbursement of £32,000 for costs incurred with respect to the transaction and an unspecified amount for punitive damages. Cineplex responded to Cineworld’s defence and counterclaim on September 15, 2020, denying all claims levied by Cineworld. A trial of the action commenced before the Court on September 13, 2021 and continued until November 4, 2021. On December 14, 2021, the Court released its decision in the action (the “Decision”). The Court held that Cineplex did not breach any of its covenants in the Arrangement Agreement, and that Cineworld had no basis for terminating the Arrangement Agreement. The Court held that Cineworld breached the Arrangement Agreement and repudiated the transaction to acquire Cineplex, which actions precluded Cineplex from seeking specific performance and entitled Cineplex to monetary damages. The Court awarded damages for breach of contract to Cineplex in the amount of $1,240,000 on account of lost synergies, and $5,500 for transaction costs, exclusive of pre-judgment interest. The Court also held that Cineplex’s shareholders did not have any rights under the Arrangement Agreement to enforce the agreement or sue Cineworld for any breach. The Court also denied Cineworld’s counterclaim against Cineplex. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 104 (7) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) On January 12, 2022, Cineworld filed a Notice of Appeal with the Court of Appeal for Ontario and on January 27, 2022, Cineplex filed its Notice of Cross Appeal. Due to uncertainties inherent in appeals, it is not possible for Cineplex to predict the timing or final outcome of the appeal of the Decision announced by Cineworld. Further, even if Cineworld’s appeal is not successful, Cineworld may not have the ability to pay the full amount of any damages or costs awarded by the Court. Therefore no amount has been accrued as a receivable. The Board of Directors approved these consolidated financial statements on February 10, 2022. 2. COVID-19 business impacts, risks and liquidity In early 2020, the outbreak of COVID-19 was confirmed in multiple countries throughout the world and on March 11, 2020, it was declared a global pandemic by the World Health Organization (“WHO”). In response, Cineplex immediately introduced enhanced cleaning protocols and reduced theatre capacities to promote social distancing. By mid-March 2020, each of Canada’s provinces and territories had declared a state of emergency resulting in, among other things, the mandated closure of non-essential businesses, restrictions on public gatherings and quarantining of people who may have been exposed to the virus. On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE venues across Canada, as well as substantially all route locations operated by P1AG. On August 21, 2020, Cineplex reopened its entire circuit of theatres and LBE venues, however, theatre operations and LBE venues were continuously impacted by additional government mandated restrictions and closures over the next several quarters. As of July 17, 2021, Cineplex had reopened its entire circuit of theatres subject to capacity restrictions in some cases, after months of extended closure periods. The reopening included Cineplex’s then 161 theatre locations, encompassing 1,656 screens across Canada including 18 VIP Cinemas locations. As restrictions were temporarily eased in markets in which Cineplex operated, Cineplex also reopened its LBE venues across Canada as well as route locations operated by P1AG. All theatres, LBE venues and P1AG route locations continue to operate with enhanced safety and cleaning measures to ensure the safety of Cineplex’s employees and customers. Effective December 18, 2021, due to the rise of the Omicron variant, capacity restrictions were reinstated in Ontario, Cineplex’s largest market, limiting indoor capacity to 50% along with prohibiting the consumption of concessions in theatres. Theatres in Quebec were also mandated to temporarily close effective December 20, 2021. Subsequent to December 31, 2021, social gathering restrictions were further modified or reinstituted in several key markets in which Cineplex operates, resulting in theatre closures and prohibiting indoor dining in Ontario. Cineplex was also required to temporarily close or reduce capacity in other provinces. Effective January 29, 2022, January 31, 2022 and February 7, 2022 theatres in New Brunswick, Ontario and Quebec were permitted to reopen at reduced capacity levels, respectively Cineplex is continuously monitoring operating restrictions and adjusts operating capacities in accordance with government directives. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 105 (8) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) To mitigate the negative impact of COVID-19 and support its long-term stability, Cineplex has undertaken a variety of measures including: Liquidity measures: • • • • • • • • • June 2020: entered into the First Credit Agreement Amendment with The Bank of Nova Scotia as administrative agent to Cineplex’s seventh amended and restated credit agreement (as amended, the “Credit Facilities”) providing certain financial covenant relief in light of the COVID-19 pandemic and its impact on Cineplex’s business (note 16, Long-term debt); July 2020: issued convertible unsecured subordinated debentures (the “Debentures”) for net proceeds of $303,000, (note 16, Long-term debt) November 2020: entered into the Second Credit Agreement Amendment providing further financial covenant relief (note 16, Long-term debt); December 2020: entered into an agreement to enhance and expand the SCENE loyalty program receiving $60,000 with respect to the reorganization; January 2021: completed the sale and leaseback of Cineplex’s head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto, Ontario for gross proceeds of $57,000, (note 16, Long-term debt); January 2021: filed tax returns for the 2020 taxation year claiming a $62,624 recovery of income taxes paid in prior periods (all of which has been received as of December 31, 2021); February 2021: entered into the Third Credit Agreement Amendment providing further financial covenant relief (note 16, Long-term debt); February 2021: issued 7.50% senior secured second lien notes due February 26, 2026 (the “Notes Payable”) for net proceeds of $243,266, (note 16, Long-term debt); and December 2021: entered into the Fourth Credit Agreement Amendment providing further financial covenant relief (note 16, Long-term debt). Cost reduction and subsidy measures: • • • • • • • • • • • temporary layoffs of all part-time and full-time hourly employees as well as a number of full-time employees who chose a temporary layoff rather than a salary reduction during the second quarter of 2020 and additional temporary layoffs of part-time employees beginning in December 2021 further expanding in the first quarter of 2022; reduced full-time employee salaries by agreement with such employees during the second and third quarters of 2020; suspended or deferred current capital spending, reviewing all capital projects to consider either deferral or cancellation; reduced non-essential discretionary operational expenditures (such as spending on marketing, travel and entertainment); implemented a more stringent review and approval process for all outgoing procurement and payment requests; continued negotiations with landlords for cash payments in exchange for the sale of contractual rights or negotiating rent relief, including abatements, reductions and deferral; worked with major suppliers and other business partners to modify the timing and quantum of certain contractual payments; reviewed and applied for government subsidy programs where available, including municipal and provincial property tax and energy rebates or subsidies; applied for the ongoing Canada Emergency Wage Subsidy (“CEWS”), which was launched by the Government of Canada, providing a variable subsidy for employee wages incurred from March 2020 to October 23, 2021; applied for the ongoing Canada Emergency Rent Subsidy (“CERS”), which was launched by the Government of Canada as a result of government mandated lockdowns, providing a variable subsidy for rent and other occupancy-related costs incurred from September 27, 2020 through October 23, 2021; applied for Canada’s Tourism and Hospitality Recovery Program (“THRP”) which provides wage and rent subsidies for businesses that have faced revenue losses, with a subsidy rate of up to 75%; CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 106 (9) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) • • continued evaluation of Cineplex’s eligibility under other relief programs; and continued the suspension of dividends. Since the closure of its theatres and LBE venues in March 2020, Cineplex diligently prepared for their safe reopening, carefully re-examining all of its buildings and processes and implementing an industry-leading program with end-to-end health and safety protocols. In June 2021, Cineplex introduced its VenueSafe program, which encompasses all of Cineplex’s health and safety protocols, in accordance with Canada’s public health guidelines. Canada’s vaccination rate has made tremendous progress during the year with a high percentage of the eligible population receiving at least one dose of a COVID-19 vaccine and an increasing number having received two or three doses. With increasing concerns over more transmissible variants, including the highly transmissible new Omicron variant, the Canadian government has accelerated the rollout of COVID-19 vaccine booster doses providing extra protection against COVID-19 and its variants. In order to control the spread of COVID-19, the majority of provinces across Canada require proof of vaccination as part of the reopening plans in select settings including those that operate indoors with close proximity of patrons. Although the lifting of some restrictions on theatre and LBE businesses commenced near the end of the second quarter of 2021 continuing into the third quarter, growing concerns over the high transmissivity of the Omicron variant causing a significant rise in COVID-19 cases in December 2021, has resulted in the reinstatement of numerous government imposed restrictions and lockdown measures. Government-imposed restrictions reinstituted in December 2021 in Ontario, New Brunswick, Nova Scotia, Prince Edward Island and British Columbia, reduced capacity limits to 50% and in certain provinces limited food sales and temporarily closed theatres in Quebec. Additional government-imposed restrictions subsequent to December 31, 2021 resulted in temporary theatre closures and prohibited indoor dining in Ontario, Newfoundland and New Brunswick. Effective January 29, 2022, January 31, 2022 and February 7, 2022 theatres in New Brunswick, Ontario and Quebec were permitted to reopen at reduced capacity levels, respectively With the uncertainty of further government-imposed restrictions and the potential long-term effect that the pandemic may have on Cineplex’s businesses, COVID-19 may continue to have a prolonged material negative impact on Cineplex’s operations and return to profitability. The capacity restrictions materially impacted Cineplex’s ability to benefit from highly anticipated film releases released during the holiday season. Despite mandatory capacity restrictions that continue to be enforced where and as applicable, Cineplex recognized a significant increase in revenues during the fourth quarter, the highest since the pandemic was declared in early 2020. Cineplex will continue to monitor capacity restrictions and will adjust operating levels in accordance with government directives. Management continues to pursue all viable options to maintain adequate liquidity to fund operations for the currently anticipated duration of the pandemic. This includes but is not limited to asset sales such as Cineplex’s head office buildings in Toronto which was completed during the first quarter, the issuance of Notes Payable (note 16, Long-term debt) and amendments to its existing Credit Facilities (note 16, Long-term debt). As at December 31, 2021, Cineplex had a cash balance of $26,938 and $270,702 available under its Revolving Facility subject to the liquidity covenants set forth in the Credit Facilities as amended (note 16, Long-term debt). Combined with the continued focus on reducing costs and capital expenditures, management believes that it has adequate liquidity to fund operations for the currently anticipated duration of the pandemic in the regions in which Cineplex operates. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 107 (10) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 3. Cash and cash equivalents Cash and cash equivalents comprise the following: Cash at bank and on hand, net of outstanding cheques $ 26,938 $ 16,254 2021 2020 4. Trade and other receivables Trade and other receivables comprise the following: Trade receivables Other receivables 5. Inventories Inventories comprise the following: Food service inventories Gaming inventories Other inventories, including work-in-progress 2021 53,326 $ 27,353 80,679 $ 2020 29,188 22,646 51,834 2021 7,815 $ 9,673 7,411 24,899 $ 2020 3,023 12,088 6,601 21,712 $ $ $ $ CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 108 (11) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 6. Property, Equipment, and Leaseholds Property, equipment and leaseholds consist of: Buildings and leasehold improvements Land Equipment Construction- in-progress Total At January 1, 2021 Cost $ 19,382 $ 804,439 $ $ 837,073 $ $ $ 51,669 $ 1,712,563 Accumulated depreciation — (520,436) (636,787) — (1,157,223) Net book value $ 19,382 $ 284,003 $ $ 200,286 $ $ $ 51,669 $ 555,340 Year ended December 31, 2021 Opening net book value Additions, net of transfers Reclassification to interests in joint ventures and associates Disposals Impairment (note 11) Foreign exchange rate changes Depreciation for the year Closing net book value At December 31, 2021 Cost Accumulated amortization Net book value At January 1, 2020 Cost — — — — — $ 19,382 $ 284,003 $ $ 200,286 $ $ $ 51,669 $ 555,340 38,859 33,184 (45,554) 26,489 (10,196) (1,666) — (943) (7) (25) (1,430) — (253) (41,225) (61,052) — (593) — — — (25) (13,885) (943) (260) (102,277) $ $ $ 9,186 $ 279,021 $ $ 170,710 $ $ 5,522 $ 464,439 $ ` 9,186 $ 831,551 $ $ 850,433 $ 5,522 $ 1,696,692 — (552,530) (679,723) — (1,232,253) 9,186 $ 279,021 $ 170,710 0 $ 0 5,522 $ 464,439 $ 19,372 $ 823,965 $ $ 841,572 $ $ $ 45,324 $ 1,730,233 Accumulated depreciation — (480,554) (586,881) — (1,067,435) Net book value $ 19,372 $ 343,411 $ $ 254,691 $ $ $ 45,324 $ 662,798 Year ended December 31, 2020 Opening net book value Additions, net of transfers Reclassification to assets held for sale Disposals Impairment (note 11) Foreign exchange rate changes Depreciation for the year $ 19,372 $ 343,411 $ $ 254,691 $ $ $ 45,324 $ 662,798 10 — — — — — 19,152 1 (481) (34,117) (7) (43,956) 17,499 723 (2,118) (881) (237) (69,391) 0 200,286 $ 3 11,664 — (1,125) (4,194) — — 48,325 724 (3,724) (39,192) (244) (113,347) 51,669 $ 555,340 Closing net book value $ 19,382 $ 284,003 $ $ In January 2021, Cineplex completed the sale and leaseback of its head office buildings located in Toronto, Ontario for $57,000 gross proceeds, recognizing a gain of $30,061 on the derecognition of $11,870 of assets. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 109 (12) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 7. Right-of-use-assets Right-of-use assets consists of: At December 31, 2021 Cost Accumulated depreciation Net book value Year ended December 31, 2021 Balance - December 31, 2020 Modifications, net of additions Reclassification to interests in joint ventures and associates Foreign exchange rate changes Depreciation for the period Impairment (note 11) Closing net book value At December 31, 2020 Cost Accumulated depreciation Net book value Year ended December 31, 2020 Balance - December 31, 2019 Modifications, net of additions Disposals Foreign exchange rate changes Depreciation for the period Impairment (note 11) Closing net book value Property Equipment Total $ 1,112,361 $ 25,057 $ 1,137,418 (355,164) (13,579) (368,743) $ 757,197 $ 11,478 $ 768,675 $ 871,741 $ (13,776) 9,677 $ 6,318 881,418 (7,458) (225) (39) (97,730) (2,774) — — (225) (39) (4,517) (102,247) — (2,774) $ 757,197 $ 11,478 $ 768,675 Property Equipment Total $ 1,132,613 $ 19,843 $ 1,152,456 (260,872) (10,166) (271,038) $ 871,741 $ 9,677 $ 881,418 $ 1,218,054 $ 14,795 $ 1,232,849 (144,078) (7,151) 39 (123,277) (71,846) (4) — 2 (5,116) — (144,082) (7,151) 41 (128,393) (71,846) $ 871,741 $ 9,677 $ 881,418 COVID-19 resulted in closures of substantially all leased properties and the suspension of the use of most equipment for periods in both 2020 and 2021 (note 2, COVID-19 business impacts, risks and liquidity). Beginning in the third quarter of 2020, Cineplex agreed to a variety of arrangements with landlords to reduce or defer payments. The effect of those abatements, reductions and/or deferrals reduced both lease obligations and right-of-use assets by approximately $35,834 and $129,085 for the years ended December 31, 2021 and 2020, respectively. In 2021, Cineplex disposed of certain protective rights on leased properties in exchange for $6,436 cash proceeds (2020 - $21,000), reducing right-of-use assets. In 2020, Cineplex recognized a gain of $13,780 on the derecognition of $7,220 of right-of-use assets. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 110 (13) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 8. Deferred income taxes Based on substantively enacted corporate tax rates, expected timing of reversals and expected taxable income allocation to various tax jurisdictions, deferred income taxes are as follows: Deferred income tax assets Property, equipment and leaseholds and deferred tenant inducements - difference between net carrying value and undepreciated capital cost $ Accounting provisions not currently deductible Deferred revenue Interest rate swap agreements Income tax credits available Operating losses available for carry-forward and carry-back 2021 2020 11,653 $ 93,663 15,929 3,614 3,789 81,844 12,494 83,900 16,243 6,943 397 24,656 Total gross deferred income tax assets 210,492 144,633 Future deferred tax liabilities Intangible assets Goodwill Other Convertible debentures Total gross deferred income tax liabilities (9,854) (29,909) 5,614 (23,961) (58,110) Net deferred income tax recognized $ — $ (10,151) (27,841) 4,892 (24,464) (57,564) — At December 31, 2020 the recoverability of the net deferred income tax assets in the normal course of business was uncertain and accordingly the net deferred tax assets were derecognized. Cineplex will evaluate the likelihood of recoverability in the ordinary course of business at each balance sheet date, and will recognize net deferred tax assets when and if appropriate. The 2021 current tax expense represents Ontario corporate minimum tax paid on the filing of 2020 tax returns as a result of losses carried back to offset taxable income. The minimum tax paid is creditable against future Ontario corporate income tax payable. In 2021, Cineplex recovered income taxes paid in prior periods of $62,624 as a result of its tax returns filed for the 2020 taxation year. By Notice of Reassessment (“NOR”) dated January 22, 2019, the Canada Revenue Agency (“CRA”), disallowed the deduction of $26,600 of losses of AMC Ventures Inc. (“AMC”) that Cineplex had obtained on the acquisition of AMC in 2012. The disallowance of the losses, which offset taxable income generated in 2014, increased taxes and interest payable by approximately $8,600, 50% of which was required to be paid immediately (interest continues to accrue on the unpaid amount). Cineplex disagrees with the CRA’s position, and has commenced an appeal to the Tax Court of Canada in respect of the NOR. On June 28, 2021, Cineplex received a response from the Attorney General of Canada representing the CRA confirming its position with respect to the disallowance of the losses. The appeals process is continuing and Cineplex believes that it should prevail in defending its original filing position, although no assurance can be given in this regard as the appeal process proceeds. Cineplex’s combined statutory income tax rate at December 31, 2021 was 26.3% (2020 - 26.8%). CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 111 (14) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The provision for income taxes included in the consolidated statement of operations differs from the statutory income tax rate for the years ended December 31, 2021 and 2020 as follows: Income from continuing operations before income taxes Combined statutory income tax rates for the current year Income taxes (recoverable) payable at statutory rate Adjustments relating to prior periods Goodwill impairment - permanent differences Other permanent differences Derecognition of deferred income tax assets Provision for income taxes 2021 2020 $ (245,383) $ (708,869) 26.25 % 26.81 % (64,425) 872 — 1,757 65,135 3,339 $ (190,020) 4,244 19,447 (3,608) 85,069 (84,868) $ Adjustments relating to prior periods include differences between the prior year provision and the income tax returns as filed. Non-capital losses available for carry-forward expire as follows: 2027 2028 2029 2030 2032 2034 2035 2036 2037 2038 2040 2041 Indefinite $2,502 8,822 5,122 2,184 254 1,947 2,770 2,749 18,546 3,110 16,977 221,169 28,423 314,575 $ Losses denominated in US dollars are presented at the Canadian dollar equivalent using the December 31, 2021 exchange rate. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 112 (15) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 9. Interests in joint ventures and associates Cineplex participates in incorporated and unincorporated joint ventures with other parties and accounts for its interests using the equity method. Canadian Digital Cinemas Partnership, (“CDCP”), is a joint venture formed by Cineplex and Empire Theatres Limited to finance the implementation of digital projectors. Cineplex leases its digital projectors from CDCP. As part of the ongoing reorganization of Scene GP (“SCENE”) which began in December 2020, Cineplex and its loyalty partner launched Scene+ on December 13, 2021 and as a result, Cineplex began equity accounting for its 50% economic interest in Scene LP (“Scene+”), the operator of the Scene+ loyalty program. Cineplex’s share of Scene+’s loss from December 13, 2021 onwards is disclosed in the table below. Other joint ventures include a 50% interest in a theatre operation (2020 - 50%), and a 50% interest in YoYo’s Yogurt Cafe (“YoYo’s”) (2020 - 50%). The joint ventures and associates are headquartered in Canada and the United States. The net interest in joint ventures is summarized as follows as at December 31, 2021 and 2020: 2021 Ownership percentage Voting percentage Equity (Deficit) Economic interest Accounts (payable) receivable Net interest in joint ventures and associates Interest at beginning of year Interest recognized on equity accounting Investment Dividends or distributions Net change in receivable or payable Share of net income (loss) $ $ $ $ CDCP 78.2% 50% 8,622 $ 78.2% 6,742 $ (1,197) 5,545 $ 8,639 $ — — (1,955) (1,285) 146 Scene+ 33.3 % 50 % 4,001 50% 2,001 1 2,002 — (6,705) 9,500 — — (793) $ $ $ $ $ Other Total 17%-50% 17%-50% (3,232) $ 50% (1,616) $ 1,492 $ (124) $ 5 $ — — — (21) (108) 9,391 7,127 296 7,423 8,644 (6,705) 9,500 (1,955) (1,306) (755) Net interest in joint ventures and associates $ 5,545 $ 2,002 $ (124) $ 7,423 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 113 (16) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 2020 Ownership percentage Voting percentage Equity (Deficit) Economic interest Accounts receivable Net interest in joint ventures and associates Interest at beginning of year Investments Dividends or distributions Net change in receivable or payable Share of net loss Net interest in joint ventures $ $ $ $ CDCP 78.2 % 50 % 10,935 78.2 % 8,551 88 8,639 24,578 (3,910) — (4,750) (7,279) $ $ $ $ Other Total 17%-50% 17%-50% (2,977) $ 7,958 $ $ $ 17 % (506) 511 5 3,643 — (2,790) 282 (1,130) 8,045 599 8,644 28,221 (3,910) (2,790) (4,468) (8,409) $ 8,639 $ 5 $ 8,644 The summarized balance sheets including 100% of the assets, liabilities and equity of each of the joint ventures at December 31 each year are as follows: 2021 CDCP Scene+ Other Total Assets Cash and cash equivalents Trade and other receivables Prepaid expenses and other current assets Equipment Total assets Liabilities Accounts payable and accrued liabilities Deferred revenue $ $ $ Long-term debt Total liabilities Equity (Deficit) 1,423 $ 4,580 21 6,024 3,121 4,561 $ 11,535 — 16,096 2,663 9,145 $ 18,759 $ 14,381 $ — 14,381 377 14,758 365 $ 158 523 — 523 8,622 1 $ 34 25 60 — 60 $ 753 $ — 753 2,539 3,292 5,985 16,149 46 22,180 5,784 27,964 15,499 158 15,657 2,916 18,573 9,391 27,964 Total liabilities and equity $ 9,145 $ 18,759 $ 60 $ 4,001 (3,232) CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 114 (17) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 2020 Assets Cash and cash equivalents Trade and other receivables Inventories Prepaid expenses and other current assets Equipment Total assets Liabilities Accounts payable and accrued liabilities Deferred revenue Long-term debt Total liabilities Equity (Deficit) CDCP Other Total $ 623 $ 2,079 — 60 2,762 10,135 85 $ 183 31 25 324 9 $ $ 12,897 $ 333 $ 1,804 $ 158 1,962 — 1,962 10,935 641 $ — 641 2,669 3,310 (2,977) 708 2,262 31 85 3,086 10,144 13,230 2,445 158 2,603 2,669 5,272 7,958 13,230 Total liabilities and equity $ 12,897 $ 333 $ The summarized statements of comprehensive income (loss) including 100% of the revenue, expenses and income of each of the joint ventures for the years ending December 31 are as follows: 2021 Revenues Depreciation and amortization Interest expense Other expenses Total expenses CDCP Scene+ Other Total $ 10,728 $ 890 $ 1,422 $ 13,040 7,001 11 3,529 10,541 73 — 4,011 4,084 — — 1,348 1,348 7,074 11 8,888 15,973 Net income (loss) and comprehensive income (loss) $ 187 $ (3,194) $ 74 $ (2,933) 2020 Revenues Depreciation and amortization Interest income expense Other expenses Total expenses CDCP Other $ 6,484 $ 464 $ 9,458 23 6,312 15,793 — 92 1,187 1,279 Total 6,948 9,458 115 7,499 17,072 Net loss and comprehensive loss $ (9,309) $ (815) $ (10,124) CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 115 (18) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) SCENE In addition to the joint ventures which are equity accounted, Cineplex consolidates its 50% share of assets, liabilities, revenues and expenses of its joint operation, which includes SCENE, and up to December 12, 2021 Scene+. In the fourth quarter of 2020, Cineplex announced that it had entered into an agreement with its existing partner to enhance and expand the SCENE loyalty program. Cineplex received $60,000 in December 2020 from its existing partner with respect to the agreement to reorganize the program and reposition it for future growth. Cineplex continues to have joint control of the joint operation, and is entitled to and responsible for 50% of the economic benefits and obligations until specific non-financial milestones are met, resulting in the deferral of the recognition of the proceeds in other liabilities. As part of the reorganization, Scene+ was launched on December 13, 2021 resulting in Scene LP becoming the operator of Scene+. As a result of this phase in the reorganization, Cineplex will no longer consolidate 50% of the results of Scene+. Cineplex will continue to consolidate 50% of SCENE which subsequent to December 12, 2021 holds the deferred revenue obligation for SCENE points issued up to December 12, 2021. The summarized balance sheets of SCENE at December 31 are as follows (2020 figures include the combined balance sheets of SCENE and Scene+): Assets Cash and cash equivalents Trade and other receivables Prepaid expenses Intangible Assets Equipment Right-of-use assets Promissory notes receivable from partners Total assets Liabilities Accounts payable and accrued liabilities Deferred revenue Lease obligations Total liabilities Deficiency $ $ $ 2021 2020 9,957 $ 1,268 196 11,421 — — — 19,000 30,421 $ 9,798 $ 95,993 — 105,791 (75,370) 13,527 16,460 1,320 31,307 1,745 137 20 — 33,209 7,604 72,643 21 80,268 (47,059) $ 30,421 $ 33,209 The summarized combined results of operations of SCENE for the full year and Scene+ up to December 12, 2021 are as follows: Revenues Expenses Net loss 2021 42,778 $ 84,502 2020 36,686 52,130 (41,724) $ (15,444) $ $ Cineplex and the other partner of SCENE and Scene+ contribute capital as required to fund SCENE’s future redemption costs. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 116 (19) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 10. Intangible assets Intangible assets consist of the following: At January 1, 2021 Cost Accumulated amortization Net book value Year ended December 31, 2021 Opening net book value Additions Disposals Reclassification to interests in joint ventures and associates Foreign exchange rate changes Amortization for the year Closing net book value At December 31, 2021 Cost Accumulated amortization Net book value At January 1, 2020 Cost Accumulated amortization Net book value Year ended December 31, 2020 Opening net book value Additions Disposals Reclassification to assets held for sale Foreign exchange rate changes Amortization for the year Customer relationships Software and other Trademarks and trade names Total $ $ $ $ $ $ $ $ $ 32,755 $ $ 55,224 $ $ 63,599 $ $ 151,578 (28,936) (37,720) — (66,656) 3,819 $ $ 17,504 $ $ 63,599 $ $ 84,922 3,819 $ 17,504 $ $ 63,599 $ $ — — — (36) (1,763) 9,487 (1,348) (609) — (9,002) — — — — — 2,020 $ $ 16,032 $ $ 63,599 $ $ 84,922 $ 9,487 (1,348) (609) (36) (10,765) 81,651 ` 32,706 $ 60,502 $ $ 63,599 $ $ 156,807 $ (30,686) (44,470) — $ (75,156) 2,020 $ 16,032 $ $ 63,599 $ $ 81,651 $ 32,988 $ 47,152 $ $ 63,599 $ $ 143,739 $ (24,764) (30,608) — (55,372) 8,224 $ 16,544 $ $ 63,599 $ $ 88,367 $ 8,224 $ 16,544 $ $ 63,599 $ $ — — — (17) (4,388) 8,546 (514) (21) 60 (7,111) — — — — — 88,367 $ 8,546 (514) (21) 43 (11,499) Closing net book value $ 3,819 $ 17,504 $ $ 63,599 $ $ 84,922 $ CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 117 (20) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 11. Impairment of long-lived assets and goodwill Cineplex performs its annual test for impairment of goodwill and indefinite-lived intangible assets in the fourth quarter, in accordance with its policy described in note 31, Significant accounting policies, judgments and estimation uncertainty. Assessment of impairment for long-lived assets, including property, equipment, leaseholds, right-of-use assets, intangible assets and goodwill is performed more frequently as specific events or circumstances dictate triggering events and changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. In addition, for assets other than goodwill and indefinite-lived intangible assets, indicators are assessed considering whether an impairment loss previously recognized may no longer exist or may have decreased. In early 2020, in response to the outbreak of the COVID-19 pandemic as declared by the WHO, the government of Canada announced mandated closure of schools, public facilities and non-essential businesses. Consequently, effective March 16, 2020 and continuing throughout the remainder of the year, Cineplex had to either temporarily close its theatres and location-based entertainment venues or operate with strict capacity restrictions across its operations, resulting in material decreases in revenues, results of operations and cash flows and a material decrease in Cineplex’s market value due to a sharp decline in its share price. These represented triggering events at each balance sheet date in 2020. Increasing concerns over the new highly transmissible Omicron COVID-19 variant and increased daily COVID-19 case counts led to shutdowns and restrictions in several provinces that materially affected operations representing a triggering event requiring impairment testing for long-lived assets, indefinite-lived intangible assets and goodwill at December 31, 2021. During the fourth quarter of 2021, government imposed restrictions were reinstituted in Ontario, British Columbia, New Brunswick, Nova Scotia and Prince Edward Island, reducing capacity limits to 50% and requiring temporary theatre closures in Quebec. Further government-imposed restrictions were reinstated or modified subsequent to December 31, 2021 resulting in temporary theatre closures in Ontario, Newfoundland and New Brunswick. Based on the results of the impairment tests, Cineplex recognized non-cash impairment charges of $943 to property, equipment and leaseholds and $2,774 to right-of-use assets for the year ended December 31, 2021. If the discount rates were to increase by 2.0%, assuming a constant cash flow margin, or discounted cash flows were 13% less than estimated, there would not be any further material impairments to property, equipment and leaseholds, and right-of-use assets. Fair value less cost to sell is determined using Level 3 inputs such as attendance and the related revenue growth rates, variable and fixed cash flows, operating margins, and discount rates based on Cineplex’s internal budget. Cineplex projects revenue, operating margins and cash flows for a period of five years, and applies a perpetual long- term growth rate thereafter. In arriving at its forecasts, Cineplex considers past experience, economic trends such as inflation, as well as industry and market trends. Cineplex has considered the significant impact of COVID-19 on the business with the capacity restrictions and/or temporary theatre closures reinstated during and subsequent to December 2021. Estimates have been applied for the impact of temporary closures and for operations with capacity restrictions, for both Cineplex and customer locations for the first quarter of 2022. Subsequent to 2022, a range of estimates for growth in adjusted EBITDAaL from 1% to 6% has been applied across locations for the period 2023-2026 to reflect a staged reopening and other scenarios. Cineplex’s estimated adjusted EBITDAaL for 2022 contemplates the latest information provided by government, at the measurement date, related to the timing of the lifting of restrictions on locations and available information related to the release of film content, as well as observable evidence from other territories of consumer behaviour upon the reopening of theatres. Cineplex’s projected revenue and cash flows for 2022 assume business will be negatively impacted by the further government-imposed restrictions reinstituted or modified in Ontario, Quebec, British Columbia, Newfoundland and New Brunswick subsequent to December 31, 2021 For every quarter Cineplex stays closed, additional impairment charges could be required. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 118 (21) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Discount rates applied to the groups of goodwill cash-generating units (“CGUs”) represent Cineplex’s assessment of the risks specific to each group of CGUs regarding the time value of money and individual risks of the underlying assets. Cineplex used discount rates between 8.0% and 13.6% (2020 - between 11.0% and 16.7%), and no change to the perpetual growth rates between 0.5% and 1.0% (2020 - between 0.5% and 1.0%), which are consistent with the observed long-term average growth rates in the exhibition, amusement and leisure, and digital media industries. The determination of fair value less costs of disposal is sensitive to the growth rates, discount rates, and long-term growth rates used. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ, depending on economic conditions and other events. Accordingly, it is reasonably possible that future changes in assumptions may negatively impact future assessments of the recoverable amount for groups of CGUs. If the return to business continues to be delayed as a result of actions outside of the control of management, including but not limited to additional changes to the film slate release schedule, ongoing government restrictions impacting the re-opening of entertainment venues and delays in the vaccine roll out, management's estimates of operating results and further cash flows for the forecasted period may be negatively impacted. As a result, they may be insufficient to support the recoverability of goodwill and long lived assets in certain CGUs, thus requiring further impairment charges. Cineplex will continue to evaluate the recoverability of goodwill at the cash generating unit level on an annual basis during its fourth quarter and whenever events or changes in circumstances indicate there may be a potential impairment. Impairment of long-lived assets and goodwill for the year ended December 31, 2021 and 2020 were as follows: Impairment of property, equipment and leaseholds Impairment of right-of-use assets Impairment of investments Impairment of goodwill 2021 $ 943 $ 2,774 — — 2020 39,192 71,846 2,790 181,035 Impairment of long-lived assets and goodwill $ 3,717 $ 294,863 The following table discloses the change in goodwill for the years ended and December 31: Balance - Beginning of year Goodwill impairment Foreign exchange rate changes Balance - End of year 2021 2020 635,582 — (37) 816,790 (181,035) (173) $ 635,545 $ 635,582 For the purpose of impairment testing, goodwill has been allocated to CGUs or groups of CGUs. Total goodwill of the reporting segments are as follows: Exhibition Media Amusement and leisure $ 2021 413,915 $ 206,385 15,245 2020 413,915 206,385 15,282 $ 635,545 $ 635,582 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 119 (22) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) For goodwill, Cineplex concluded there were no non-cash impairment losses in the exhibition business within the Film Entertainment and Content segment. For one group of CGUs in the Film Entertainment and Content segment, if the discount rates were to increase by 2.0%, assuming a constant cash flow margin, or discounted cash flows were 13% less than estimated, the carrying amount of the group of CGUs would exceed the reasonable range for the recoverable amounts by $5,200. The goodwill for this group of CGUs represents 8% of the total carrying amount of goodwill. For all other CGUs, no reasonably possible change in assumption would cause the recoverable amount to fall below the carrying value. At the end of each future reporting period Cineplex will assess whether there are indications that the impairment loss recognised for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the Company will estimate the recoverable amount of that asset and may reverse previously recorded impairment losses. 12. Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of: Accounts payable - trade Film payables and accruals Accrued salaries and benefits Sales taxes payable Accrued occupancy costs Other payables and accrued liabilities 13. Share-based compensation Omnibus Incentive Plan (“Incentive Plan”) $ 2021 78,254 $ 27,244 24,442 5,275 4,272 18,463 $ 157,950 $ 2020 39,098 3,700 14,915 6,017 4,868 14,394 82,992 On November 12, 2020, the Board of Directors approved a new Omnibus Incentive Plan (the “Incentive Plan”). This plan supersedes the former incentive plans (collectively, the “Legacy Plan”) that included Options, Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”). All employees and consultants are eligible to participate in the Incentive Plan. The Incentive Plan consists of stock options, RSUs and PSUs. Awards of RSUs and PSUs granted during a service year will be subject to a service period as determined by management at the time of issuance. The aggregate number of Shares that may be issued under the Incentive Plan is 3,487,960 provided that no more than 1,904,538 Shares may be issued in aggregate pursuant to the settlement of RSUs and PSUs. Options that were issued under the Legacy Plan and are subsequently cancelled will be available to be issued under the Incentive Plan. The base Share equivalents granted as RSU and PSU awards attract compounding notional dividends at the same rate as outstanding Shares, which are notionally re-invested as additional base Share equivalents. PSU and RSU awards may be settled in Shares issued from treasury, cash, or a mix of Shares and cash, at Cineplex’s option at the time of settlement. Awards outstanding under prior plans shall remain in full force and effect under the prior plans according to their respective terms. Under the prior plans, the effects of changes in estimates of performance results are recognized in the year of change. As at December 31, 2021, 1,489,143 Shares are available to be issued under the Incentive Plan (2020 - 2,111,140). CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 120 (23) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Stock Options Stock options issued under the Incentive Plan will be administered by the Board of Directors which will establish the exercise price at the time each option is granted, which in all cases will not be less than the market price on the grant date. All of the options must be exercised over specified periods not to exceed ten years from the date granted. Options issued under the Incentive Plan may be exercised for cash or on a cashless basis, both of which result in the issuance of Shares from treasury. Options granted will be accounted for as equity-settled. Stock options have been granted as follows: Grant date Number of options granted Exercise price Number of employees granted options Vesting period Expiry February 14, 2012 474,000 27.33 February 12, 2013 385,834 33.49 February 14, 2014 440,519 40.45 February 18, 2015 446,004 49.14 February 12, 2016 501,270 47.86 February 21, 2017 544,922 51.25 February 27, 2018 559,703 33.59 February 20, 2019 709,092 25.05 August 17, 2020 725,758 8.25 April 12, 2021 281,503 12.87 May 10, 2021 177,998 12.41 42 42 54 59 76 80 74 78 76 71 22 One third on each successive anniversary of the grant date One third on each successive anniversary of the grant date One third on each successive anniversary of the grant date One fourth on each successive anniversary of the grant date One fourth on each successive anniversary of the grant date One fourth on each successive anniversary of the grant date One fourth on each successive anniversary of the grant date One fourth on each successive anniversary of the grant date One fourth on February 17, 2021, 2022, 2023 and 2024 One fourth on each successive anniversary of the grant date Fully vested on the first anniversary of the grant date February 13, 2022 February 11, 2023 February 14, 2024 February 18, 2025 February 12, 2026 February 21, 2027 February 27, 2028 February 20, 2029 August 17, 2030 April 12, 2031 May 10, 2031 The exercise price was equal to the market price of Cineplex shares or units at the grant date. Effective December 15, 2019, as a result of the terms of the Arrangement Agreement, options were considered cash- settled, and the fair value of the options outstanding in excess of their respective exercise price was recognized as a current share-based compensation liability, and changes in value were reflected in the statement of operations. Stock options impacted by the termination of the Arrangement Agreement were revalued and accounted for as equity- settled and any previously recognized share based compensation liability was reclassified to contributed surplus. The accelerated recognition of unvested options was reversed and is being recognized over their remaining vesting periods at the value determined at March 31, 2020. Forfeitures are estimated to be nominal, based on historical forfeiture rates. Cineplex recorded $1,903 of employee benefits expense with respect to the options during the year ended December 31, 2021 (2020 recovery - $1,203). The intrinsic value of vested share options at December 31, 2021 is $726 (2020 - $nil), based on the closing Share price of $13.49 per share (2020 - $9.27). In 2021, 165,146 (2020 - 1,307,301) stock options issued under the Legacy Plan were cancelled for total consideration of $60 ($2020 - $453) as part of a voluntary stock option cancellation program that was initiated in the fourth quarter of 2020. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 121 (24) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) A summary of option activities in 2021 and 2020 is as follows: 2021 2020 Weighted average remaining contractual life (years) Number of underlying shares Weighted average exercise price Number of underlying shares Weighted average exercise price Options outstanding, January 1 7.64 2,042,019 $ Granted Cancelled Forfeited Exercised 459,501 (188,303) (87,049) (27,363) 25.37 12.69 43.90 21.89 8.25 3,123,521 $ 38.62 725,758 (1,408,439) (398,821) — 8.25 44.70 29.64 — Options outstanding, December 31 7.44 2,198,805 $ 21.48 2,042,019 $ 25.37 At December 31, 2021 and 2020, options are vested and exercisable as follows: Options vested and exercisable at $8.25 Options vested and exercisable at $25.05 Options vested and exercisable at $33.59 Options vested and exercisable at $51.25 Options vested and exercisable at $47.86 Options vested and exercisable at $49.14 Options vested and exercisable at $40.45 Options vested and exercisable at $33.49 Options vested and exercisable at $27.33 Options vested and exercisable at $23.12 2021 135,393 266,236 302,496 45,828 51,812 49,723 43,391 23,144 2,563 — 2020 — 140,996 211,378 76,416 96,478 81,574 69,985 44,634 15,237 9,186 920,586 745,884 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 122 (25) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The fair values of options granted in 2021 and 2020 were determined using the Black-Scholes valuation model using the following significant inputs: Number of options granted Share price Exercise price Expected option life (years) Volatility Dividend yield Annual risk-free rate Fair value of options granted 2021 2020 459,501 725,758 $12.41 - $12.87 $ $12.41 - $12.87 $ 4.0 47 % — % 0.68%-0.72% 8.25 8.25 4.0 60 % — % 0.27 % $3.70 - $3.83 $ 3.15 Upon cashless exercises, the options exercised in excess of Shares issued are cancelled and returned to the pool available for future grants. At December 31, 2021, 532,760 options are available for grant (2020 - 1,900,606, of which a maximum of 1,200,000 were allocated to PSU/RSU availability in 2021). RSU and PSU awards 2021 LTIP awards granted in Q2 2021 2020 LTIP award granted in Q3 2020 2019 LTIP award granted in Q1 2019 RSU PSU Share equivalents granted 167,546 284,214 105,777 RSU Share equivalents granted PSU Share equivalents minimum payout PSU Share equivalents maximum payout 315,619 277,105 54,940 — — 7,788 335,092 568,428 211,553 Valuation of restricted stock units is based on Cineplex’s closing Share price on the grant date. On April 12, 2021, Cineplex issued 262,487 equity settled RSUs with a fair value of $12.87 per unit (total fair value of $3,378 on issuance), that will fully vest in November 2023, at the completion of the three year performance period. On May 10, 2021, Cineplex issued 53,132 cash settled RSUs with a fair value of $14.95 (total fair value of $794 on issuance) and will fully vest on May 10, 2023. The valuation was based on Cineplex’s Share price on the grant date and will fluctuate in value based on Cineplex’s Share price. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 123 (26) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) A summary of RSU activities during the years ended December 31, 2021 and 2020 is as follows: RSUs outstanding, January 1 Granted Notional dividends Settled Cancelled RSUs outstanding, December 31 2021 295,189 315,619 — (44,014) (30,420) 536,374 2020 93,835 277,105 415 (37,572) (38,594) 295,189 The RSUs associated with the 2019 LTIP were settled in 2021 for $586 cash. PSU On April 12, 2021, Cineplex issued 167,546 PSUs which will be equity-settled in November 2023, representing the completion of the three year performance period. Compensation expense is recorded based on the number of units expected to vest, the current market price of Cineplex’s Shares, and the application of a performance multiplier that ranges from a minimum of zero to a maximum of two. Performance multipliers are developed based on Total Shareholder Return percentile rank relative to a select peer group and composite group. Participants will receive one fully paid Share issued from treasury that can vary depending on the achievement of established performance targets. A summary of PSU activities during the years ended December 31, 2021 and 2020 is as follows: PSUs outstanding, January 1 Granted Notional dividends Settled Cancelled PSUs outstanding, December 31 2021 333,908 167,546 — (88,422) (1,774) 411,258 2020 183,323 284,214 1,624 (18,455) (116,798) 333,908 Incentive Plan costs are estimated at the grant date based on expected performance results then accrued and recognized on a graded basis over the vesting period. Forfeitures are estimated to be nominal. For the year ended December 31, 2021, Cineplex recognized compensation cost of $2,881 (2020 recovery - $6,858) under the Incentive Plan relating to RSU and PSU. At December 31, 2021, $207 (2020 - $384) was included in current share-based compensation liability and $2,776 in contributed surplus (2020 - $nil). The PSUs associated with the 2019 LTIP were settled in 2021 for $82 cash. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 124 (27) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Deferred equity units Members of the Board of Directors and certain officers of Cineplex may elect to defer a portion of their compensation in the form of deferred equity units. For the year ended December 31, 2021, Cineplex recognized compensation cost of $1,184 (2020 recovery - $8,246) associated with the deferred equity units. At December 31, 2021, $4,733 (2020 - $2,768) was included in share-based compensation liability. 14. Dividends payable Cineplex has declared the following dividends during the years: Record date January 2021 Amount per share 2020 Amount per share Amount Amount $ — $ — $ 9,500 $ 0.1500 The dividends are paid on the last business day of the following month. Dividends are at the discretion of the Board of Directors of Cineplex. Cineplex has not paid any dividends after the monthly dividend was paid on February 28, 2020 and does not expect to return to paying dividends as a result of Credit Facilities restrictions and the negative impact of the COVID-19 pandemic on liquidity. 15. Lease obligations The following table presents lease obligations for Cineplex for the year ended December 31, 2021 and 2020: Year ended December 31, 2021 Opening balance Modifications, net of additions Tenant inducement Lease payment Interest expense Reclassification to interests in joint ventures and associates Foreign exchange rate changes Closing lease obligations Less: current portion Property Equipment Total $ 1,160,849 $ 10,076 $ 1,170,925 7,340 7,595 (141,067) 58,235 (226) (52) 6,318 — (3,900) 355 — — 13,658 7,595 (144,967) 58,590 (226) (52) $ 1,092,674 $ 12,849 $ 1,105,523 97,236 3,822 101,058 Non-current portion of lease obligations $ 995,438 $ 9,027 $ 1,004,465 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 125 (28) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Year ended December 31, 2020 Opening balance Modifications. net of additions Tenant inducement Lease payment Interest expense Foreign exchange rate changes Closing lease obligations Less: current portion Property Equipment Total $ 1,352,541 $ 15,054 $ 1,367,595 (143,954) 22,587 (4) — (143,958) 22,587 (118,922) (5,394) (124,316) 48,664 (67) 420 — 49,084 (67) $ 1,160,849 $ 10,076 $ 1,170,925 92,869 4,390 97,259 Non-current portion of lease obligations $ 1,067,980 $ 5,686 $ 1,073,666 Current portion of lease obligations are net of estimated tenant inducements. The following table discloses the undiscounted cash flow for lease obligations as of December 31: Less than one year One to five years More than five years $ 2021 173,086 $ 637,415 610,456 2020 159,928 635,088 695,714 Total undiscounted lease obligations $ 1,420,957 $ 1,490,730 The following table provides the lease amounts recognized in the statement of operations for the periods ended December 31: Depreciation expense on right-of-use assets Interest expense on lease obligations Expense relating to variable lease payments not included in the measurement of the lease obligations (i) (i) Variable lease payments include realty taxes and insurance. 2021 102,247 $ 58,590 $ 2020 128,393 49,085 49,250 $ 52,993 $ $ $ Cineplex conducts a significant part of its operations in leased premises. Leased premises include leases for theatre locations, location-based entertainment venues, route operation locations, warehouses and offices. Cineplex also leases equipment for use in its theatre operations and offices. Leases for premises generally provide for minimum rentals and, in certain situations, percentage rentals based on sales volume or other identifiable targets; and may require the tenant to pay a portion of realty taxes and other property operating expenses. Property lease terms generally range from 15 to 20 years and contain various renewal options, generally, in intervals of five to ten years. Equipment lease terms generally range from one to five years and may contain renewal options. Cineplex records the landlord’s share of amusement revenue under venue revenue share (note 21, Other costs). This balance consists of all variable rental payments paid to landlords. Certain contracts may contain a lease under the definition in IFRS 16, however no obligation is recorded because the payment is variable. Venue revenue share also includes fixed payments where Cineplex has concluded the contract does not contain a lease under IFRS 16. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 126 (29) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Some of the property leases in which Cineplex is the lessee contain fixed lease payments and variable lease payments that are derived from sales or attendance generated from the leased properties. Variable payments related to these leases for the period ended December 31, 2021 were not material. 16. Long-term debt Long-term debt consists of the following as at December 31, 2021 and 2020: Credit Facilities Convertible Debentures Notes Payable Total Letters of credit reserved against Revolving Facility Revolving Facility available December 31, 2021 December 31, 2020 260,000 234,472 244,739 739,211 $ 10,966 $ 270,702 $ 506,000 219,271 — 725,271 10,234 153,766 $ $ $ Cineplex has bank facilities with a syndicate of lenders which includes a revolving facility (the “Revolving Facility”) and non-revolving credit facility (the “Term Facility”, and together with the Revolving Facility, the “Credit Facilities”) pursuant to a seventh amended and restated credit agreement between Cineplex, Cineplex Entertainment Limited Partnership, the guarantors from time to time party thereto, and a syndicate of lenders dated November 13, 2018 (as further amended from time to time, the “Credit Agreement”). The Term Facility was repaid in full in the first quarter of 2021 and is no longer available for future borrowing. The Credit Facilities bear interest at a floating rate based on the Canadian dollar prime rate, U.S. Base Rate, LIBOR or bankers’ acceptances rates plus, in each case, an applicable margin to those rates. The Revolving Facility matures in November 2023. Borrowings on the Revolving Facility can be made in either Canadian or US dollars. Cineplex’s Credit Facilities contain restrictive covenants that limit the discretion of Cineplex’s management with respect to certain business matters. These covenants place limits and restrictions on, among other things, the ability of Cineplex to create liens or other encumbrances, to pay dividends or make certain other payments, minimum liquidity covenants, anti-hoarding provisions, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. The Credit Facilities are secured by all of Cineplex’s assets. The Revolving Facility is drawn upon and repaid on a regular basis and as such is presented on a net basis in the Statement of Cash flows. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 127 (30) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) On June 29, 2020, Cineplex entered into the First Credit Agreement Amendment, following which, on November 12, 2020 Cineplex entered into the Second Credit Agreement Amendment, on February 8, 2021 Cineplex entered into the Third Credit Agreement Amendment and on December 30, 2021 Cineplex entered into the Fourth Credit Agreement Amendment. The amendments provided certain financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s businesses, while applying additional restrictive covenants and required repayments in certain circumstances. The following is a summary of the key terms of the Third Credit Agreement Amendment entered into on February 8, 2021 that are updated from the First and Second Credit Agreement Amendments (certain of which have been modified further by the Fourth Credit Agreement Amendment described below): • The following amendments to the Credit Facilities became effective upon the completion of the issuance of $250,000 Notes Payable during the first quarter of 2021: ▪ The suspension of financial covenant testing was extended until the fourth quarter of 2021. On resumption of financial covenant testing in the fourth quarter of 2021: • • • for the fourth quarter of 2021, testing will be based on an annualized calculation of Adjusted EBITDA (as further adjusted in accordance with the Credit Agreement definitions) based on the actual results for such quarter; for the quarter ending on March 31, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on actual results for the fourth quarter of 2021 and the first quarter of 2022 multiplied by 2; and for the quarter ending on June 30, 2022, testing will be based on an annualized calculation of Adjusted EBITDA for the fourth quarter of 2021, the first quarter of 2022 and the second of 2022 multiplied by 4/3. Thereafter, testing will be based on an annualized calculation of the cumulative Adjusted EBITDA on a trailing four fiscal quarter basis; The Total Leverage Ratio of 3.75x will apply when financial covenants are reinstated, and will be reduced until the third quarter of 2022 at which point it will reach a level of 3.00x; The liquidity covenant will continue and be amended and extended beginning in February 2021, through to and including December 2021, requiring available liquidity as defined on a monthly basis (November 1, 2020 through January 31, 2021 - $100,000; February 2021 - $75,000; March 2021 - $60,000; April 1, 2021 through December 31, 2021 - $100,000; The addition of a Senior Leverage Ratio to be based on annualized Adjusted EBITDA and set at 1.0x lower than the Total Leverage Ratio. Senior Leverage Ratio to be defined as (i) Total Debt (as defined in the Credit Agreement) less any Notes Payable to (ii) Adjusted EBITDA; Effective with the fourth quarter of 2021, additional growth capital expenditures will be subject to pro-forma Total Leverage covenant of 2.75x (both prior to and immediately after giving effect to any such growth capital expenditure) based on actual last 12 months’ EBITDA; and Distributions continue to be blocked during the extended financial covenant suspension period and only permitted when the Total Leverage ratio is less than 2.75x (both prior to and immediately after giving effect to any such distribution). ▪ ▪ ▪ ▪ ▪ ▪ On December 30, 2021, Cineplex entered into the Fourth Credit Agreement Amendment, which, among other things, extended the suspension of financial covenant testing until the second quarter of 2022 and liquidity covenant requirement until June 30, 2022. The following is a summary of the key terms of the Fourth Credit Agreement Amendment: • The suspension of financial covenant testing was extended until the second quarter of 2022. On resumption of financial covenant testing in the second quarter of 2022: CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 128 (31) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) • • • for the second quarter of 2022, testing will be based on an annualized calculation of Adjusted EBITDA (as further adjusted in accordance with the Credit Agreement definitions) based on the actual results for such quarter multiplied by 4; for the quarter ending on September 30, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on actual results for the second quarter of 2022 and the third quarter of 2022 multiplied by 2; and for the quarter ending on December 31, 2022, testing will be based on an annualized calculation of Adjusted EBITDA based on the actual results of the second quarter of 2022, the third quarter of 2022 and the fourth quarter of 2022 multiplied by 4/3. Thereafter, testing will be based on an annualized calculation of the cumulative Adjusted EBITDA on a trailing four fiscal quarter basis; The Total Leverage Ratio of 3.75x will apply when financial covenants are reinstated, and will be reduced quarterly by 0.25x until the first quarter of 2023 at which point it will reach a level of 3.00x; The liquidity covenant will continue and be amended requiring available liquidity (as defined) to be maintained at all times at no less than $100,000; The Senior Leverage Ratio to be based on annualized Adjusted EBITDA and set at 1.0x lower than the Total Leverage Ratio. Senior Leverage Ratio is defined as (i) Total Debt (as defined in the Credit Agreement) less any Notes Payable to (ii) Adjusted EBITDA; and From and after April 1, 2022, a fixed charge coverage ratio of greater than 1.25x will apply. ▪ ▪ ▪ ▪ ▪ During the first quarter of 2021, Cineplex completed a sale-leaseback transaction for its head office buildings located at 1303 Yonge Street and 1257 Yonge Street, Toronto Ontario for gross proceeds of $57,000, recognizing a gain of $30,061. Net proceeds from the sale, in addition to net proceeds from the issuance of the Notes Payable (discussed below) were used to repay the Credit Facilities, a portion of which was permanent. As a result, Cineplex permanently repaid the remaining $50,000 balance of its outstanding Term Facility. This summary of the Credit Agreement is qualified in its entirety by reference to the provisions of the Credit Agreement which contains a complete statement of those terms and conditions. The Credit Agreement and each of the First, Second, Third and Fourth Credit Agreement Amendment were filed on SEDAR with the dates of filing on June 30, 2020, November 13, 2020, February 8, 2021 and January 4, 2022, respectively, for each of Credit Agreement Amendments. Following the Fourth Credit Agreement Amendment, including mandatory repayments, the Credit Facilities consist of the following: a) a five-year, $541,668 senior secured Revolving Facility; $260,000 that has been drawn; $10,966 reserved and $270,702 remaining available balance. At December 31, 2021, Cineplex was subject to a margin of 3.00% (2020 - 3.00%) on the prime rate and 4.00% (2020 - 4.00%) on the bankers’ acceptance rate, plus a 0.25% (2020 - 0.25%) per annum fee for letters of credit issued on the Revolving Facility. The average interest rate on borrowings under the Credit Facilities was 6.90% for the year ended December 31, 2021 (2020 - 4.87%). Cineplex pays a commitment fee on the daily unadvanced portion of the Revolving Facility, which will vary based on certain financial ratios and was 1.00% at December 31, 2021 (2020 - 1.00%). Cineplex entered into interest rate swap agreements where Cineplex agreed to pay fixed rates per annum, plus an applicable margin and receive a floating rate of interest equal to the three-month Canadian deposit offering rate set quarterly in advance, with net settlements quarterly. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 129 (32) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The following table outlines Cineplex’s current interest rate swap agreements as of December 31, 2021: Interest rate swap agreements Notional amount Inception date Effective date Maturity date Swap - 1 Swap - 2 Swap - 3 $200.0 million November 13, 2018 April 26, 2021 November 14, 2023 $100.0 million November 13, 2018 November 13, 2018 November 14, 2023 $150.0 million November 13, 2018 November 13, 2018 November 14, 2025 Fixed rate payable 2.945 % 2.830 % 2.898 % Cineplex ceased the use of hedge accounting for the interest rate swaps during the fourth quarter of 2019 as a result of the terms of the Arrangement Agreement. The interest rate swaps are measured at fair market value at each reporting period with changes in fair market value recorded in interest expense - other, in the consolidated statement of operations. Despite the termination of the Arrangement Agreement, the swaps can only be re-designated on a prospective basis for hedge accounting treatment. Based on the Credit Agreement in effect at December 31, 2021 Cineplex’s effective cost of borrowing on the $450,000 hedged borrowings was 6.904% (December 31, 2020 - $450,000 hedged borrowings - 5.754%). Convertible debentures Convertible debentures consist of the following: Face value of convertible debentures outstanding Unaccreted deferred financing fees and discount Convertible debentures December 31, 2021 December 31, 2020 $ $ 316,250 $ (81,778) 234,472 $ 316,250 (96,979) 219,271 On July 17, 2020, Cineplex issued $316,260 aggregate principal amount of convertible unsecured subordinated debentures, which mature on September 30, 2025 (the “Maturity Date”) and bear interest at a rate of 5.75% per annum, payable semi-annually in arrears on September 30 and March 31 in each year. The Debentures are not redeemable by Cineplex prior to September 30, 2023. On or after September 30, 2023 and prior to September 30, 2024, Cineplex may, at its option, redeem the Debentures in whole or in part from time to time provided that the volume weighted average trading price of the Shares on the Toronto Stock Exchange during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On or after September 30, 2024, the Debentures may be redeemed in whole or in part from time to time at the option of Cineplex at a price equal to their principal amount plus accrued and unpaid interest. Redemption may be in the form of cash or in the form of Shares, at the option of Cineplex. At the holder’s option, the Debentures may be converted into Shares at a conversion price of $10.94 per Share at any time prior to the close of business on the earlier of: (i) five business days prior to the Maturity Date, and (ii) if called for redemption, five business days immediately preceding the dated fixed for redemption of the Debentures, at a conversion price to be determined at the time of pricing. Holders who convert their Debentures into Shares will CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 130 (33) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) receive accrued and unpaid interest for the period from the date of the latest Interest Payment Date to the date of conversion. Conversion of outstanding Debentures will result in the issuance of Shares from treasury. The fair value of the liability component of the Debentures was assessed at inception based on an estimated market discount rate of 14.1% less the pro-rata portion of transaction costs, and will be accreted to the full face value over the term of the Debentures. During the year ended December 31, 2021, Cineplex recorded accretion and cash interest expense on the Debentures of $15,201 (2020 - $7,472) and $18,135 (2020 - $8,459), respectively, both of which are included as part of the interest expense in the consolidated statement of operations. As at December 31, 2021, Cineplex has $316,250 principal amount of Debentures outstanding. The residual value was allocated to the equity component less the pro-rata portion of transaction costs as prescribed by IFRS 9, Financial instruments and IAS 32, Financial instruments: Presentation. The foregoing is a summary of the key terms of the Debentures. This summary is qualified in its entirety by reference to the provisions of the Debentures trust indenture which contains a complete statement of those terms and conditions. The Debenture trust indenture was filed on SEDAR on July 15, 2020. Notes payable Notes Payable outstanding as of December 31, 2021 are as follows: Face value of Notes Payable Unaccreted deferred financing fees and discount Notes Payable 2021 250,000 (5,261) 244,739 $ $ On February 26, 2021, Cineplex completed the $250,000 Notes Payable offering. The Notes Payable mature on February 26, 2026 and bear interest at a rate of 7.50% per annum, payable semi-annually in arrears on January 31 and July 31 of each year, commencing July 31, 2021. The Notes Payable are subordinate to the security granted for the obligations under the Credit Facilities, and are subject to the terms of an intercreditor agreement with the agent under the Credit Facilities. During the year ended December 31, 2021, Cineplex recorded accretion and cash interest expense on the Notes Payable of $772 (2020 - $nil) and $15,822 (2020 - $nil) , respectively, both of which are included as part of interest expense in the consolidated statement of operations. As at December 31, 2021, Cineplex has $250,000 principal amount of Notes Payable outstanding. Cineplex’s derivative financial instrument on the Notes Payable relates to the early prepayment option that fluctuates in value based on market interest rates. The fair value of the embedded derivative was determined using an option pricing model with observable market inputs and are consistent with accepted methods for valuing financial instruments. Cineplex has estimated the fair value of this embedded derivative at $9,240 as at December 31, 2021 which is presented on the consolidated balance sheets as a derivative financial instrument. The foregoing is a summary of the key terms of the Notes Payable. This summary is qualified in its entirety by reference to the provisions of the Notes Payable trust indenture which contain a complete statement of those terms and conditions. The Notes Payable trust indenture was filed on SEDAR on February 26, 2021. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 131 (34) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 17. Post-employment benefit obligations Cineplex sponsors a defined benefit supplementary executive retirement plan (“DB SERP”). The DB SERP has a defined benefit obligation of $10,054 at December 31, 2021 (December 31, 2020 - $10,966), which is substantially unfunded. Annual benefits payable is $650 according to the retirement date of the sole beneficiary. The DB SERP does not have a material effect on the operations or cash flows of Cineplex. Cineplex also sponsors the Retirement Plan for Salaried Employees of Famous Players Limited Partnership, a defined benefit pension plan, and the Famous Players Retirement Excess Plan (collectively known as the “Famous Players Plans”). Effective October 23, 2005, Cineplex elected to freeze future accrual of defined benefits under the Famous Players Plans. The Famous Players Plans do not have a material effect on the operations, cash flows or financial position of Cineplex. Cineplex also provides a group registered retirement plan for the benefit of full-time employees. The net post-retirement benefit obligation for each of the plans is as follows: DB SERP obligation, net of assets Famous Players Plans obligations Net post-retirement benefit obligation Reconciliation of the net post-retirement benefit obligations Accrued benefit obligations Balance - Beginning of year Current service cost Interest cost Benefits paid Actuarial (gains) losses Balance - End of year Less: Fair value of plan assets Net post-retirement benefit obligation 2021 8,490 $ 1,483 2020 9,868 1,635 9,973 $ 11,503 2021 2020 12,601 $ — 296 (142) (1,218) 11,537 $ 1,564 $ 9,973 $ 11,582 485 371 (107) 270 12,601 1,098 11,503 $ $ $ $ $ $ CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 132 (35) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Significant assumptions Accrued benefit obligations at December 31 Discount rate - all plans Health care cost trend rates at December 31 Initial rate Ultimate rate Year ultimate rate reached Sensitivity analysis 2021 2020 2.70% - 2.90% 2.10% - 2.40% 5.72 % 4.00 % 2041 5.82 % 4.00 % 2041 The following table shows the impact of a 1% increase or decrease of the discount rate on the defined benefit obligation at the end of the year. Impact of 1% increase in the discount rate Impact of 1% decrease in the discount rate 18. Other liabilities Other liabilities consist of the following: Asset retirement obligations Licensing obligations - non-current Deferred consideration - AMC business acquisition Other, including provisions 2021 2020 (1,159) $ (1,340) 1,370 $ 1,529 2021 3,097 $ 1,051 3,134 308 7,590 $ 2020 2,984 2,120 3,134 60,411 68,649 $ $ $ $ In 2020, other liabilities included $60,000 proceeds for the reorganization of SCENE (note 9, Interests in joint ventures and associates). 19. Share capital Cineplex is authorized to issue an unlimited number of common shares and 10,000,000 preferred shares of which none are outstanding. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 133 (36) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Share capital balances at December 31, 2021 and 2020 and transactions during the periods are as follows: 2021 Number of common shares issued and outstanding Common shares Amount Total Balance - December 31, 2020 Issuance of shares on exercise of options 63,333,238 $ 852,379 $ 852,379 11,060 86 86 Balance - December 31, 2021 63,344,298 $ 852,465 $ 852,465 2020 Number of common shares issued and outstanding Common shares Amount Total Balance - December 31, 2020 63,333,238 $ 852,379 $ 852,379 20. Revenue The following tables disclose the changes in deferred revenue for the year ended December 31, 2021 and 2020: Gift cards SCENE loyalty program Advances and deposits Other Gift cards SCENE loyalty program Advances and deposits $ December 31, 2020 164,025 $ 36,109 19,849 — Additions Revenue Recognized 38,264 $ 33,241 7,410 60,000 32,909 $ 21,353 11,430 — December 31, 2021 169,380 47,997 15,829 60,000 $ 219,983 $ 138,915 $ 65,692 $ 293,206 December 31, 2019 184,755 $ 21,277 16,966 222,998 $ $ $ Additions Revenue Recognized 23,743 $ 33,173 20,854 77,770 $ 44,473 $ 18,341 17,971 80,785 $ December 31, 2020 164,025 36,109 19,849 219,983 In December 2020, Cineplex received $60,000 from its existing partner with respect to the agreement to reorganize the program and reposition it for future growth. Cineplex accounted for the $60,000 in other liabilities and reclassified it to deferred revenue as it is expected to be recognized in the next twelve months. The following tables provide the disaggregation of revenue into categories by nature for the years ended December 31, 2021 and 2020: CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 134 (37) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Box revenues Box office revenues Food service revenues Food service - theatres Food delivery - theatres Food service - location-based entertainment Food delivery - location-based entertainment Total food service revenues Media revenues Cinema media Digital place-based media Total media revenues Amusement revenues Amusement solutions excluding exhibition and LBE Amusement solutions - exhibition Amusement solutions - location based entertainment Total amusement revenues Other revenues Other revenues Year ended December 31, 2021 2020 $ 236,320 $ 132,820 Year ended December 31, 2020 2021 159,201 $ 13,052 14,613 132 186,998 $ 91,384 8,175 8,882 191 108,632 $ $ Year ended December 31, 2020 2021 $ $ 32,958 $ 32,372 65,330 $ 23,568 41,790 65,358 Year ended December 31, 2020 2021 $ $ 100,282 $ 4,943 29,248 134,473 $ 60,027 2,457 15,417 77,901 Year ended December 31, 2020 2021 $ 33,548 $ 33,552 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 135 (38) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 21. Other costs Employee wages, salaries and benefits Rent Realty and occupancy taxes and maintenance fees Utilities Purchased services Other inventories consumed, including amusement and digital place-based media Venue revenue share Repairs and maintenance Advertising and promotion Office and operating supplies Licenses and franchise fees Insurance Professional and consulting fees Telecommunications and data Bad debts Equipment rental Other costs Year ended December 31, 2021 2020 $ 150,251 $ (12,978) 56,286 21,717 39,964 106,942 (2,278) 67,381 23,870 37,185 60,502 29,051 24,233 13,636 6,526 15,337 6,353 17,175 5,160 172 1,359 4,810 40,256 15,577 25,271 11,353 6,122 15,028 5,691 10,560 5,195 1,735 61 5,741 $ 439,554 $ 375,690 Management continued to focus on cost cutting measures to mitigate the negative impact of COVID-19 on Cineplex’s business, in addition to applying for government subsidy programs where available. During the years ended December 31, 2021 and 2020, Cineplex recorded the following subsidies which have all been offset against their related costs: Subsidies Wage subsidy (CEWS and THRP) Rent subsidy (CERS and THRP) Realty tax subsidy Utility subsidy Total Year to Date 2021 2020 $56,059 13,643 11,963 4,826 $57,013 2,761 3,249 1,838 $ 86,491 $ 64,861 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 136 (39) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 22. Net loss per share Basic Basic earnings per share (“EPS”) is calculated by dividing the net loss by the weighted average number of shares outstanding during the period. Net loss attributable to owners of Cineplex - continuing operations Net loss attributable to owners of Cineplex Weighted average number of shares outstanding Basic EPS from continuing operations Basic EPS from discontinued operations Basic EPS 2021 2020 (248,722) $ (623,996) (248,722) $ (628,948) 63,339,239 63,333,238 (3.93) $ — (3.93) $ (9.85) (0.08) (9.93) $ $ $ $ Diluted Diluted EPS is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all dilutive potential shares. A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the outstanding shares for the period), based on the monetary value of the rights attached to the potentially dilutive shares. The number of shares calculated above is compared with the number of shares that would have been issued assuming exercise of conversions, exchanges or options. Anti-dilutive shares that have been excluded in the current period were 51,133 potential shares that would be issued under the treasury stock method and 5,051,493 potential shares that would have been issued under the if- converted method relating to Debenture units outstanding. The options and Debentures are anti-dilutive in 2021 and 2020, as applicable. Net loss attributable to owners of Cineplex - continuing operations Net loss attributable to owners of Cineplex Weighted average number of shares for diluted EPS Diluted EPS from continuing operations Diluted EPS from discontinued operations Diluted EPS 2021 2020 (248,722) $ (623,996) (248,722) $ (628,948) 63,339,239 63,333,238 (3.93) $ (9.85) — (3.93) $ (0.08) (9.93) $ $ $ $ CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 137 (40) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 23. Operating segments Cineplex has four reportable segments; Film Entertainment and Content, Media, Amusement and Leisure and Location-Based Entertainment. The reportable segments are business units offering differing products and services and managed separately due to their distinct natures. These four reportable segments have been determined by Cineplex’s chief operating decision makers. The Film Entertainment and Content reporting segment does not charge an access fee to the Media reporting segment. All other inter-segment transactions are eliminated in the Corporate and other category, which includes all corporate general and administrative costs not directly associated with a segment. Cineplex reports the total of its segments which is considered an other financial measure in accordance with National Instrument 52-112 Non-GAAP and Other Financial Measures. The total segments measure includes a non-GAAP measure, adjusted EBITDAaL and is described below. Film Entertainment and Content The Film Entertainment and Content reporting segment includes all direct and ancillary revenues from theatre attendance, including box office and food service revenues and the associated costs to provide those products and services. Also included in the Film Entertainment and Content segment are in-theatre amusement, theatre rentals and digital commerce rental and sales and associated costs. Media The Media reporting segment is comprised of the aggregation of two operating segments, cinema media and digital place-based media businesses. Cinema media consists of all in-theatre advertising revenues and costs, including pre- show, showtime and lobby advertising. Digital place-based media is comprised of revenues and costs associated with the design, installation and operations of digital signage networks, along with advertising on certain networks. Aggregation of these operating segments is based on the segments having similar economic characteristics. Amusement and Leisure The Amusement and Leisure reporting segment includes the amusement solutions operating segment. Amusement solutions is comprised of revenues and costs associated with operating and distributing amusement, gaming and vending equipment. Previously reported periods included results for eSports in the Amusement and Leisure segment. Location-Based Entertainment Location-based entertainment is comprised of the social entertainment destinations featuring gaming, entertainment and dining. These entertainment options are complemented with an upscale casual dining environment, featuring an open kitchen and contemporary menu, as well as a larger bar with a wide range of digital monitors and a large screen for watching sporting and other major events. In accordance with IFRS 8, Operating Segments, Cineplex discloses information about its reportable segments based upon the measures used by management in assessing the performance of those reportable segments. Cineplex uses adjusted EBITDAaL to measure the performance of its reportable segments. Management defines EBITDA as earnings before interest income and expense, income taxes and depreciation and amortization expense. Adjusted EBITDA excludes the change in fair value of financial instrument, gain on disposal of assets, foreign exchange, the equity income (loss) of CDCP, the non-controlling interests’ share of adjusted EBITDA of TG-CPX Limited Partnership, and impairment, depreciation, amortization, interest and taxes of Cineplex’s other joint ventures and associates. Adjusted EBITDAaL modifies adjusted EBITDA to deduct current period cash rent paid or payable related to lease obligations. During the year, Cineplex agreed to a variety of arrangements with landlords to reduce or defer cash rent paid or payable as a result of the impact of COVID-19. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 138 (41) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Cineplex’s management believes that adjusted EBITDAaL is an important supplemental measure of Cineplex’s profitability at an operational level and provides analysts and investors with comparability in evaluating and valuing Cineplex’s performance period over period. EBITDA, adjusted for various unusual items, is also used to define certain financial covenants in Cineplex’s Credit Facilities. Cineplex’s cash management and other treasury functions are centralized; interest expense not related to the lease obligations and interest income are not allocated to segments. Income taxes are accounted for by entity, and cannot be attributable to individual segments. Cineplex does not report balance sheet information by segment because that information is not used to evaluate performance or allocate resources between segments. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 139 (42) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The following tables disclose the results of the Film Entertainment and Content, Media, Amusement and Leisure and Location-Based Entertainment segments for the year ended December 31, 2021 and 2020: Year ended December 31, 2021 Major product and service lines Box office Food service Media Amusement Other Total revenues Film Entertainment and Content (i) $ 236,320 $ 172,253 — 4,943 33,258 Amusement and Leisure Location- Based Entertainment Media (i) Corporate and other (iii) Consolidated $ — — 64,852 — — — — — 100,282 — $ — $ — $ 14,745 478 29,248 290 — — — — 236,320 186,998 65,330 134,473 33,548 $ 446,774 $ 64,852 $ 100,282 $ 44,761 $ — $ 656,669 Primary geographical markets Canada $ 446,774 $ 55,381 $ 25,387 $ 44,761 $ United States and other countries — 9,471 74,895 — Total revenues $ 446,774 $ 64,852 $ 100,282 $ 44,761 $ Timing of revenue recognition Transferred at a point in time $ 446,774 $ 12,458 $ 100,282 $ 44,761 $ Transferred over time Total revenues Adjusted EBITDAaL — 446,774 (64,769) $ $ $ $ 52,394 64,852 27,588 — 100,282 8,709 $ $ $ $ Difference between the sum of depreciation of right-of-use assets and interest expense related to the lease obligations as compared to the cash rent paid or payable related to lease obligations with respect to the current period. Other adjustments (ii) Depreciation and amortization - other assets Interest expense - other Interest income Provision for income taxes Impairment of long-lived assets and goodwill Net loss Other operating segment disclosures — $ 572,303 — 84,366 — $ 656,669 — $ 604,275 — 52,394 — $ 656,669 — 44,761 $ 5,778 $ (61,601) $ (84,295) 16,617 (37,194) 113,042 65,138 (232) 3,339 3,717 $ (248,722) Depreciation - right-of-use assets $ 91,960 Depreciation and amortization - other assets $ Interest expense - lease obligations Impairment of long-lived assets and goodwill Goodwill balance $ $ $ 69,140 51,778 3,717 413,915 $ $ $ $ $ 2,803 4,674 367 — 206,385 $ $ $ $ $ 3,154 23,372 519 — 15,245 $ $ $ $ $ 3,747 $ 15,856 $ 5,207 $ 583 $ 102,247 — $ 113,042 719 $ 58,590 — $ — $ — $ — $ 3,717 635,545 CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 140 (43) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Year ended December 31, 2020 Major product and service lines Box office Food service Media Amusement Other Film Entertainment and Content (i) $ 132,820 $ 99,559 — 2,457 33,112 Amusement and Leisure Location- Based Entertainment Media (i) Corporate and other (iii) Consolidated — $ — 64,758 — — — $ — $ — $ 132,820 — — 60,027 — 9,073 600 15,417 440 — — — — 108,632 65,358 77,901 33,552 Total revenues $ 267,948 $ 64,758 $ 60,027 $ 25,530 $ — $ 418,263 Primary geographical markets Canada United States and other countries Total revenues Timing of revenue recognition Transferred at a point in time Transferred over time Total revenues Adjusted EBITDAaL $ $ $ $ $ 267,948 $ 50,387 $ 18,259 $ 25,530 $ — $ 362,124 — 14,371 41,768 — — 56,139 267,948 $ 64,758 $ 60,027 $ 25,530 $ — $ 418,263 267,948 $ 17,624 $ 60,027 $ 24,930 $ — $ 370,529 — 47,134 — 600 — 47,734 267,948 $ 64,758 $ 60,027 $ 25,530 $ — $ 418,263 (145,855) $ 21,775 $ (10,805) $ (8,160) $ (39,770) $ (182,815) Difference between the sum of depreciation of right-of-use assets and interest expense related to the lease obligations as compared to the cash rent paid or payable related to lease obligations with respect to the current period. Other adjustments (ii) Depreciation and amortization - other assets Interest expense - other Interest income Income taxes recovery Impairment of long-lived assets and goodwill Net loss from continuing operations Net loss from discontinued operations (note 30) Net loss Other operating segment disclosures 50,535 (5,491) 124,846 61,483 (182) (84,868) 294,863 (624,001) (4,952) (628,953) $ $ Depreciation - right-of-use assets $ 114,798 $ 3,360 $ 4,469 $ 5,065 $ 701 $ 128,393 Depreciation and amortization - other assets $ 72,319 $ 10,318 $ 28,053 $ 14,156 $ Interest expense - lease obligations Impairment of long-lived assets and goodwill Goodwill balance $ $ $ 44,153 $ 457 $ 617 $ 3,833 $ 262,645 $ — $ — $ 32,218 $ 413,915 $ 206,385 $ 15,282 $ — $ — $ 25 $ — $ — $ 124,846 49,085 294,863 635,582 (i) The Film Entertainment and Content reporting segment does not charge an access fee to the Media reporting segment for in-theatre advertising. (ii) Other adjustments include change in fair value of financial instruments, gain on disposal of assets, CDCP equity income (loss), foreign exchange, non-controlling interest adjusted EBITDA, depreciation and amortization for joint ventures and taxes and interest - joint ventures. (iii) Corporate and other represents the cost of centralized corporate overhead that is not allocated to the other operating segments and includes the change in fair value of financial instruments. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 141 (44) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 24. Barter transactions Cineplex occasionally enters into barter arrangements with other parties to exchange goods or services. During the year ended December 31, 2021, Cineplex provided advertising and media services to third parties and recognized advertising revenues of $941 (2020 - $144). Cineplex received sponsorship and advertising services in exchange, recording marketing expenses of $1,311 (2020 - $345). The exchanges were measured at the estimated fair value of the services provided by Cineplex, by reference to similar services provided by Cineplex for monetary consideration to arm’s-length third parties other than those with whom the transactions were entered into. 25. Related party transactions Cineplex may have transactions in the normal course of business with entities whose management, directors or trustees are also directors of Cineplex. Any such transactions are in the normal course of operations and are measured at market-based exchange amounts. Unless otherwise noted, these transactions are not considered related party transactions for financial statement purposes. The Chief Executive Officer of Riocan Real Estate Investment Trust (“Riocan”) served as a Board member until May 5, 2020. Prior to his departure, Cineplex incurred theatre expenditures for theatres under lease commitments with Riocan in the amount of $20,217 during the prior year period. No material related party transactions were recorded during the year ended December 31, 2021. Joint ventures Cineplex leased digital projection systems from CDCP in the amount of $2,308 for the year ended December 31, 2021 (2020 - $1,178). Cineplex performs certain management and film booking services for the joint ventures in which it is either a joint venturer or an associate. During the year ended December 31, 2021, Cineplex earned revenue of $402 for these services (2020 - $571). Cineplex incurred marketing expenses related to Scene+ point issuances from Scene LP in the amount of $2,125 for the year ended December 31, 2021. Compensation of key management Compensation recognized in employee benefits for key management, who are defined as the Named Executive Officers, included: Salaries and short-term employee benefits Post-employment benefits Share-based payments 2021 4,051 $ 73 2,487 6,611 $ 2020 2,155 1,037 (5,492) (2,300) $ $ CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 142 (45) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 26. Changes in operating assets and liabilities The following summarizes the changes in operating assets and liabilities: Trade and other receivables Inventories Prepaid expenses and other current assets Accounts payable and accrued liabilities Income taxes receivable Deferred revenue Post-employment benefit obligations Share-based compensation Other liabilities $ 2021 (30,962) $ (1,998) (2,912) 76,097 65,705 13,416 (806) 881 (1,983) $ 117,438 $ 2020 115,122 10,222 2,737 (87,968) (56,825) (2,990) 330 (20,681) (3,125) (43,178) Property, equipment and leasehold purchases are included in accounts payable and accrued liabilities as at December 31, 2021, in the amount of $6,830 (2020 - $4,717). 27. Commitments, guarantees and contingencies Commitments As of December 31, 2021, Cineplex has aggregate capital commitments as follows: Capital commitments for operating locations to be completed or renovated during 2022 - 2025 (i) Letters of credit $ $ 71,164 10,966 (i) The amounts are $2,893 for 2022, $38,665 for 2023, $29,606 for 2024, and nil for 2025. Guarantees During 2005 and 2006, Cineplex entered into agreements with third parties to divest a total of 36 theatres, 30 of which were leased properties. Cineplex is guarantor under the leases for the remainder of the lease terms for certain theatres that it has sold in the event that the purchaser of the theatres does not fulfill its obligations under the respective lease; nine or fewer of those theatres are still operated by a third party lease under which Cineplex arguably could be responsible as a guarantor. Cineplex has assessed the fair value of the lease guarantees and determined that the fair value of these guarantees at December 31, 2021 is nominal. As such, no additional amounts have been provided in the consolidated financial statements for these guarantees. Should the purchasers of the theatres fail to fulfill their lease commitment obligations, Cineplex could face a substantial financial burden, which could be mitigated by Cineplex operating any theatres under default. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 143 (46) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Other Cineplex’s litigation with Cineworld including the damages awarded to Cineplex is discussed in detail in note 1 to the financial statements. Cineplex or a subsidiary of Cineplex is a defendant in various claims and lawsuits arising in the ordinary course of business. From time to time, Cineplex is involved in disputes with landlords, contractors, suppliers, former employees and other third parties. It is the opinion of management that any liability to Cineplex, which may arise as a result of these matters, will not have a material adverse effect on Cineplex’s operating results, financial position or cash flows. 28. Financial instruments Fair value of financial instruments The carrying value and fair value of Cineplex’s financial instruments at December 31, 2021 and 2020 are as follows: Convertible debentures Notes payable Bank debt Other liabilities - equipment liabilities Interest rate swap agreements, net Deferred consideration - AMC Embedded derivative on notes payable Input level Carrying value 1 2 2 2 2 2 2 301,272 244,739 260,000 3,045 14,223 3,134 9,240 2021 Fair value 417,450 265,975 260,000 3,045 14,223 3,134 9,240 Carrying value 286,071 — 506,000 4,168 26,359 3,134 — 2020 Fair value 344,713 — 506,000 4,168 26,359 3,134 — Cash and cash equivalents, trade and other receivables, accounts payable and accrued liabilities and dividends payable are reflected in the consolidated financial statements at carrying values that approximate fair values because of the short-term maturities of these financial instruments. At the time of entering into the Fourth Credit Amendment Agreement, there was no further change to the interest margins charged by the Bank on Cineplex’s outstanding debt from that implemented under the First, Second and Third Credit Amendment Agreements. The bank debt is considered a Level 2 fair value measurement. The carrying value of the bank debt reflects the fair value, as the debt bears floating interest at market rates. The equipment liabilities are recorded at amortized cost, as derived from expected cash outflows and Cineplex’s estimated incremental borrowing rate, 5.2%. The equipment liabilities are included in accounts payable and accrued liabilities (current portion) and in other liabilities on the balance sheet. The purpose of the interest rate swap agreements is to act as a cash flow hedge of the floating interest rate payable on Cineplex’s first $450,000 of borrowings. Cineplex ceased hedge accounting for the interest rate swaps during the fourth quarter of 2019. The interest rate swap is measured at fair market value at each reporting period with changes in fair market value recognized in the consolidated statement of operations. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 144 (47) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The deferred consideration for AMC (an undiscounted amount of $3,134 based on estimated non-capital losses arising from the 2012 acquisition of AMC Ventures Inc.) is recorded at fair value and included in other liabilities (note 18, Other liabilities). There was no change in fair value of $3,134 for the year ended December 31, 2021. The convertible debentures are publicly traded on the TSX, and are recorded at amortized cost (note 16, Long-term debt). The notes payable are publicly traded and are recorded at amortized cost based on Cineplex’s expected cash outflows and reflects a monthly effective interest rate of 0.67% (note 16, Long-term debt). The fair market value of the embedded derivative on notes payable was determined using an option pricing model with observable market inputs consistent with accepted methods for valuing financial instruments (note 16, Long- term debt). In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical financial assets or financial liabilities that Cineplex has the ability to access. Fair values determined by Level 2 inputs use inputs other than the quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial assets or financial liabilities. Cineplex uses market interest rates and yield curves that are observable at commonly quoted intervals in the valuation of its interest rate swap agreements. The derivative positions are valued using models developed internally by the respective counterparty that uses as its basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. Cineplex considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Level 3 inputs are unobservable inputs for the financial asset or financial liability, and include situations where there is little, if any, market activity for the financial asset or financial liability. Cineplex’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the financial asset or financial liability. Credit risk Credit risk is the risk of financial loss to Cineplex if a customer or counterparty to a financial instrument fails to meet its contractual obligation. Management believes the credit risk on cash and cash equivalents is low because the counterparties are banks with high credit ratings. Accounts receivable include trade and other receivables. Trade receivables are amounts billed to customers for the sales of goods and services, and represent the maximum exposure to credit risk of those financial assets, exclusive of the allowance for doubtful accounts. Normal credit terms for amounts due from customers call for payment within 30 to 45 days. Other receivables include amounts due from suppliers and landlords and other miscellaneous amounts. Cineplex’s credit risk is primarily related to its trade receivables, as other receivables generally are recoverable through ongoing business relationships with the counterparties. Cineplex grants credit to customers in the normal course of business. Cineplex typically does not require collateral or other security from customers; however, credit evaluations are performed prior to the initial granting of credit when warranted and periodically thereafter. Cineplex records a reserve for estimated uncollectible amounts, which CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 145 (48) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) management believes reduces credit risk. See note 31, Significant accounting policies, judgments and estimation uncertainty, for Cineplex’s policy on impairment of financial assets. The following schedule reflects the balance and age of trade receivables at December 31, 2021 and 2020: Trade receivables carrying value Percentage past due Percentage outstanding more than 120 days 2021 2020 $ 53,326 $ 29,188 30 % 12 % 57 % 27 % The following schedule reflects the changes in the allowance for trade receivables during the years ended December 31, 2021 and 2020: Expected credit loss for trade receivables - Beginning of year Additional allowance recorded Amounts written off Expected credit loss for trade receivables - End of year 2021 1,191 $ 197 (158) 1,230 $ 2020 516 1,244 (569) 1,191 $ $ Due to Cineplex’s diversified client base, management believes Cineplex does not have a significant concentration of credit risk. Liquidity risk Liquidity risk is the risk that Cineplex will encounter difficulty in meeting obligations associated with its financial liabilities. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 146 (49) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) The table below reflects the contractual maturity of Cineplex’s undiscounted cash flows for its financial liabilities and interest rate swap agreements: 2021 Payments due by period Contractual obligations Total Within 1 year 2 - 3 years 4 - 5 years After 5 years Accounts payable and accrued liabilities Interest rate swap agreements Long-term debt Interest on long-term debt Equipment obligations Deferred consideration - AMC Convertible debentures Convertible debentures interest Notes payable Notes payable interest $ 157,950 $ 157,950 $ — $ — $ 14,223 260,000 33,539 3,045 3,134 316,250 68,154 250,000 78,083 8,063 — 17,950 1,963 — — 18,184 — 18,750 5,081 260,000 15,589 829 3,134 — 36,369 — 37,552 1,079 — — 160 — 316,250 13,601 250,000 21,781 Total contractual obligations $ 1,184,378 $ 222,860 $ 358,554 $ 602,871 $ — — — — 93 — — — — — 93 2020 Payments due by period Contractual obligations Total Within 1 year 2 - 3 years 4 - 5 years After 5 years Accounts payable and accrued liabilities Interest rate swap agreements Long-term debt Interest on long-term debt Equipment obligations Deferred consideration - AMC Convertible debentures Convertible debentures interest $ 82,992 $ 82,992 $ — $ — $ 26,359 506,000 70,618 4,168 3,134 316,250 86,388 7,201 — 24,642 1,975 — — 18,184 15,449 506,000 45,976 2,018 3,134 — 36,369 3,709 — — 150 — 316,250 31,835 Total contractual obligations $ 1,095,909 $ 134,994 $ 608,946 $ 351,944 $ — — — — 25 — — — 25 Existing lease commitments are disclosed in note 15, Lease obligations. Cineplex also has significant new theatre and other capital commitments (note 27, Commitments, guarantees and contingencies), as well as contingent obligations in the form of letters of credit, guarantees and the Incentive Plan for options, RSUs, and PSUs. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 147 (50) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) New capital commitments not funded through cash flows from operations will be funded through Cineplex's Revolving Facility. Management believes that Cineplex's cash flows from operations and the Revolving Facility will be adequate to support all of its financial liabilities. Currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of the changes in foreign currency exchange rates. The majority of Cineplex’s revenues and expenses are in Canadian dollars, with the remainder denominated in US dollars. Approximately 12.8% of Cineplex’s revenues are derived from sales to customers in the United States, which are naturally hedged by the Cineplex’s US-based operating costs. Management considers currency risk to be low and does not hedge its currency risk. An assumed increase of 10% in exchange rates at December 31, 2021 would have increased other comprehensive income by $2,773 and decreased net income by $814. An assumed decrease of 10% in exchange rates at December 31, 2021 would have decreased other comprehensive income by $2,656 and increased net income by $814. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cineplex is exposed to interest rate risk on its long-term debt, which bears interest at floating rates. Interest expense on the long-term debt is adjusted to include the payments made or received under the interest rate swap agreements. The interest rate swap agreements are recognized in the consolidated balance sheets at their estimated fair value. During the year ended December 31, 2021, Cineplex recorded non-cash interest expense of $12,730 relating its interest rate swaps (2020 - interest expense of $13,922). CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 148 (51) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) There was no impact on OCI in the current and prior period resulting from a 1% change in interest rates on Cineplex’s long-term debt and interest rate swap agreements. The following table shows Cineplex’s exposure to interest rate risk and the pre-tax effects on net income for the years ended December 31, 2021 and 2020 of a 1% change in interest rates management believes is reasonably possible: 2021 Pre-tax effects on net income and OCI - increase (decrease) 1% decrease in interest rates 1% increase in interest rates Carrying value of financial liability Net income Net income Long-term debt Interest rate swap agreements - net $ 260,000 $ 14,223 $ 2,911 $ (9,772) (6,861) $ (2,911) 9,461 6,550 2020 Pre-tax effects on net income and OCI - increase (decrease) 1% decrease in interest rates 1% increase in interest rates Carrying value of financial liability Net income Net income Long-term debt Interest rate swap agreements - net $ 506,000 $ 26,360 $ 5,836 (12,192) $ (6,356) $ (5,836) 11,692 5,856 The carrying value of the interest rate swaps liability was $14,223 at December 31, 2021. If interest rates changed plus or minus 1% from existing estimates throughout the contract period, the carrying value would decrease to $4,762 or increase to $23,995, primarily affecting interest expense. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 149 (52) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 29. Capital disclosures Cineplex’s objectives when managing capital are to: a) maintain financial flexibility to preserve its ability to meet financial obligations and growth objectives, including future investments; b) deploy capital to provide an appropriate investment return to its shareholders; and c) maintain a capital structure that allows multiple financing options, should a financing need arise. Cineplex defines its capital as follows: a) equity; b) long-term debt, convertible debentures, notes payable and finance lease obligations, including the current portion; c) fair value of equipment liabilities, including the current portion; and d) cash and cash equivalents. It is Cineplex’s policy to distribute annually to shareholders available cash from operations after cash required for maintenance capital expenditures, working capital and other reserves at the discretion of the Board of Directors. Distributions will be limited and only permitted when the Total Leverage ratio is less than 2.75 to 1 as required under Credit Facility, both prior to and immediately after giving effect to any such distribution. Distributions are not allowed during the financial covenant suspension period. During the year ended December 31, 2021, Cineplex entered into a Fourth Credit Agreement Amendment with The Bank of Nova Scotia, as administrative agent, and the lenders from time to time named therein. The credit agreement amendments provided Cineplex with financial covenant relief in light of the COVID-19 pandemic and its effects on Cineplex’s business. As a result, financial covenant testing has been temporarily suspended until the second quarter of 2022. On the reinstatement of financial covenant testing, the Total Leverage Ratio may not exceed 3.75 to 1, and will be reduced over the course of 2022 each quarter until it is at 3 to 1 for the first quarter of 2023. The addition of a Senior Leverage Ratio set at 1.0x lower than the Total Leverage Ratio was included as part of the third amendment to the credit agreement. Growth capital expenditures will be permitted subject to a pro forma Total Leverage covenant of 2.75 to 1, both prior to and immediately after giving effect to any such growth capital expenditures. The basis for Cineplex’s capital structure is dependent on Cineplex’s expected growth and changes in the business and regulatory environments. To maintain or adjust its capital structure, Cineplex may purchase shares for holding or cancellation, issue new shares, raise debt or refinance existing debt with different characteristics. Objectives and strategies are reviewed periodically by management. During 2021, Cineplex completed the offering of Notes Payable for $250,000 aggregate principal amount and repaid its Term Facility in full. In 2020 and 2021, Cineplex’s capital composition, objectives or strategies all changed in response to the substantial business challenges of COVID-19. 30. Assets held for sale and discontinued operations During the quarter ended September 30, 2019, Cineplex initiated a review process of WorldGaming Network LP’s (“WGN”) online esports business, engaging a third party adviser to identify a strategic equity partner. On June 29, 2020, Cineplex sold all of its interest in WGN for a nominal amount. A nominal gain was recognized on the disposition and was included in net loss from discontinued operations. No further operations have been classified as a discontinued operation and all amounts presented in the annual consolidated financial statements are from continuing operations. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 150 (53) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) 31. Significant accounting policies, judgments and estimation uncertainty Significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements are described below. Basis of preparation and measurement Cineplex prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). The preparation of consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying Cineplex’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated financial statements are disclosed later in this note. These consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments and available-for-sale investments. Reportable operating segments Cineplex is comprised of four reportable operating segments, Film Entertainment and Content, Media, Amusement and Leisure, and Location-Based Entertainment. The reportable segments are business units offering differing products and services. Details of Cineplex’s four reportable operating segments are provided in (note 23, Operating segments). Consolidation Subsidiaries are all entities over which Cineplex has control. Cineplex controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Cineplex. They are deconsolidated from the date that control ceases. Cineplex applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by Cineplex. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Cineplex recognises any non-controlling interest in the acquiree at fair value of the recognised amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 151 (54) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Any contingent consideration to be transferred by Cineplex is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IFRS 9 in profit or loss. Contingent consideration that is classified as equity is not re- measured, and its subsequent settlement is accounted for within equity. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of operations. Inter-company transactions, balances and unrealised gains and losses on transactions between Cineplex entities are eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with Cineplex’s accounting policies. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Associates are all entities over which Cineplex has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. Cineplex’s investment in associates includes goodwill identified on acquisition. Cineplex determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, Cineplex calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the statement of operations. Profits and losses resulting from upstream and downstream transactions between Cineplex and its associate are recognised in the group’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by Cineplex. Dilution gains and losses arising in investments in associates are recognised in the consolidated statement of operations. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 152 (55) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Investments in joint ventures and associates Investments in joint arrangements are classified either as joint operations and proportionately consolidated or as joint ventures or associates and equity-accounted, depending on the contractual rights and obligations of each investor. Under the equity method of accounting, interests in joint ventures and associates are initially recognised at cost and adjusted thereafter to recognise Cineplex’s share of the post-acquisition profits or losses and movements in OCI. When Cineplex’s share of losses in a joint venture or an associate equals or exceeds its interests in that joint venture or associate (which includes any long-term interests that, in substance, form part of Cineplex’s net investment in the joint ventures), Cineplex does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture or associate. Unrealised gains on transactions between Cineplex and its joint ventures and associates are eliminated to the extent of Cineplex’s interest in the joint ventures and associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by Cineplex. Cineplex assesses at each year-end whether there is any objective evidence that its interests in joint ventures and associates are impaired. In determining the value-in-use of an investment, Cineplex estimates its share of the present value of the estimated cash flows expected to be generated by the joint venture or associate, including the cash flows from the operations of the joint venture or associate and the proceeds on the ultimate disposal of the investment, or the present value of the estimated future cash flows expected to arise from dividends to be received from the joint venture or associate and its ultimate disposal. If impaired, the carrying value of Cineplex’s share of the underlying assets of joint ventures or associates is written down to its estimated recoverable amount (being the higher of fair value less costs of disposal and value in use) and charged to the consolidated statements of operations. Cineplex has interests in a jointly controlled entity and accounts for its share of assets and liabilities, revenue and expenses of the joint operation. Cineplex conducts a portion of its business through Scene GP, a joint operation whereby the joint operation participants are bound by contractual agreements establishing joint control. Joint control exists when unanimous consent of the joint operation participants is required regarding strategic, financial and operating policies of the joint operation. Cineplex’s share of results from Scene GP has been recognized in Cineplex’s consolidated financial statements. Inter-company transactions between Cineplex and Scene GP are eliminated to the extent of Cineplex’s interest. As part of the ongoing reorganization of Scene GP which began in December 2020, Cineplex and its loyalty partner launched Scene+ on December 13, 2021 and as a result, Cineplex began equity accounting for its 50% economic interest in Scene LP, the operator of the Scene+ loyalty program. Foreign currency translation Functional and presentation currency Cineplex determines its subsidiaries’ functional currency by reviewing the currency of the primary economic environment in which each entity operates (the “functional currency”). The functional currency of three subsidiaries of P1AG is the United States dollar. The functional currency of all other entities of the Cineplex group is the Canadian dollar. The consolidated financial statements are presented in Canadian dollars. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 153 (56) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at fiscal year-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated statements of operations. Subsidiaries The results and balance sheet of the subsidiaries that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates, and • all resulting exchange differences are recognised in other comprehensive income. Goodwill recognized on the acquisition of a subsidiary are treated as assets and liabilities of the subsidiary and translated at the closing rate. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash equivalents are readily converted into known amounts of cash, and are subject to an insignificant risk of changes in value. Financial instruments Financial assets and financial liabilities are recognized when Cineplex becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and Cineplex has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the contractual obligations are discharged, canceled or expire. Regular purchases and sales of financial assets are recognized on the trade-date, the date on which Cineplex commits to purchase or sell the asset. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the financial asset and settle the financial liability simultaneously. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 154 (57) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) IFRS 9 contains three classification categories for financial assets and liabilities measured at amortized cost, fair value through profit or loss (“FVPL”) and fair value through other comprehensive income (“FVOCI”). At initial recognition, Cineplex classifies its financial instruments in the following categories depending on the purpose for which the financial instruments were acquired: i. Financial assets and financial liabilities at FVPL: The only instruments held by Cineplex classified in this category are certain equipment purchase liabilities, and the deferred consideration payable for business combinations. Derivatives are included in this category unless they are designated as hedges. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statements of operations. Gains and losses arising from changes in fair value are presented in the consolidated statements of operations. Financial assets and financial liabilities at fair value through profit or loss are classified as current, except for the portion expected to be realized or paid beyond 12 months of the consolidated balance sheet date, which is classified as non-current. Financial assets and liabilities at FVPL are presented within changes in operating assets and liabilities in the consolidated statements of cash flows. ii. Financial assets and liabilities at amortized cost: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cineplex’s loans and receivables comprise trade receivables and cash and cash equivalents, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method, less a provision for impairment. Financial liabilities at amortized cost include trade payables, dividends and distributions payable, bank indebtedness and long-term debt and the non-derivative component of convertible debentures. Trade payables are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective interest method. Bank indebtedness and long-term debt, and the non- derivative component of convertible debentures are recognized initially at fair value, net of any transaction costs incurred and, subsequently, at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities. Equity investments are required to be measured fair value with all changes recognized at FVPL. At initial recognition, Cineplex can make an irrevocable election to classify the instruments at FVOCI, with all subsequent changes in fair value being recognized in OCI. Cineplex has not classified any equity instruments at FVOCI. iii. Financial instruments at FVOCI: Cineplex ceased the use of hedge accounting for its interest rate swap agreements during the fourth quarter of 2019 as a result of the terms of the Arrangement Agreement. The interest rate swap are measured at fair market value at each reporting period with changes in fair market value recognized in the consolidated statement of operations. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 155 (58) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Impairment of financial assets At each reporting date, Cineplex assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, Cineplex recognizes an impairment loss. IFRS 9 uses forward-looking Expected Credit Loss (“ECL”), Cineplex applies the impairment model to financial asset measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets. Under IFRS 9, loss allowances will be measured on either of the following bases: i. ii. 12-month ECLs which are ECLs that result from possible default events within 12 months after the reporting date; and lifetime ECLs which are ECLs that result from all possible default events over the expected life of a financial instruments. Cineplex applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. Impairment losses on financial assets carried at amortized cost or FVOCI are reversed in subsequent years if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Inventories Inventories consist of food service inventories, gaming inventories and other inventories, including work in progress. Food service inventories, gaming equipment purchased for re-sale, merchandise that is used as redemption prizes and work-in progress inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Net realizable value is the estimated selling price less applicable selling expenses. Gaming inventories includes gaming equipment purchased for re-sale or transferred from property, equipment and leaseholds and merchandise that is used as redemption prizes for certain games. Gaming equipment also includes equipment that has been transferred from property, equipment and leaseholds to inventory when it is no longer in route operations and it will be sold or auctioned to third parties at the discretion of management. Gaming equipment is transferred to inventory at its net book value and stated at the lower of the net book value or net realizable value. Net realizable value is the estimated selling price less applicable selling expenses. Other inventories include consumable supplies and work-in-progress being assembled for sale or installation by CDM. Impairment of non-financial assets Property, equipment and leaseholds and intangible assets subject to amortization are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows relating to the relevant intangible asset (“cash-generating units” or “CGUs”). Cineplex considers each theatre a CGU. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being the present value of the CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 156 (59) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) expected future cash flows of the relevant asset or CGU). An impairment loss if estimated is recognized for the amount by which the CGU’s carrying value exceeds its recoverable amount. Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. Goodwill acquired through a business combination is allocated to each CGU or group of CGUs that is expected to benefit from the related business combination. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Cineplex groups theatre CGUs based on geographical regions of financial management responsibility in testing goodwill for impairments. Cineplex groups CGUs based on trade name in testing indefinite-lived trade names for impairment. A reversal of impairment, if estimated, is recognized to a limit of increasing the carrying amount to the lower of the recoverable amount and the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized in prior periods. Property, equipment and leaseholds Property, equipment and leaseholds are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying value or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Cineplex and the cost can be measured reliably. The carrying value of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of operations during the year in which they are incurred. The major categories of property, equipment and leaseholds are depreciated on a straight-line basis as follows: Buildings Equipment Leasehold improvements 30 - 40 years 3 - 10 years term of lease but not in excess of the useful lives For owned buildings constructed on leased property, the useful lives do not exceed the terms of the land leases. Cineplex allocates the amount initially recognized in respect of an item of property, equipment and leaseholds to its significant parts and depreciates separately each such part. Residual values, method of depreciation and useful lives of the assets are reviewed at least annually or whenever events or circumstances suggest a change that may otherwise indicate an impairment exists and adjusted if appropriate. Construction-in-progress is depreciated from the date the asset is ready for productive use. Gains and losses on disposals of property, equipment and leaseholds are determined by comparing the proceeds with the carrying value of the asset and are included as part of other gain or loss on the sale of assets in the consolidated statements of operations. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 157 (60) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of Cineplex’s share of the net identifiable assets of the acquired business at the date of acquisition. Identifiable intangible assets Intangible assets include trademarks, trade names, leases, software and customer relationships acquired by Cineplex. As Cineplex intends to use certain of the trademarks and trade names of the Partnership and GEI for the foreseeable future, the useful lives of those trademarks and trade names are indefinite and no amortization is recorded. Other trade names are expected to be substantially discontinued and are amortized over their expected useful lives (note 10, Intangible assets). Management tests indefinite-lived intangible assets for impairment at least annually, and considers at least annually or whenever events or circumstances indicate that the life of an indefinite-lived intangible asset may be finite. The advertising contracts have limited lives and are amortized over their useful lives, estimated to be between five to nine years. The estimated fair value of lease contract assets is amortized on a straight-line basis over the remaining term of the lease into amortization expense. The major categories of intangible assets are amortized on a straight-line basis as follows: Internally generated software Customer relationships Trade names Leases 3 - 5 years 5 - 10 years not amortized Cineplex conducts a significant part of its operations in leased premises. In assessing whether a contract is, or contains a lease, Cineplex applies the definition of a lease and related guidance set out in IFRS 16 for all lease contracts entered into or modified. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under the provisions of IFRS 16, substantially all of Cineplex’s leases are recorded as lease obligations and right-of-use assets. Lease payments included in the measurement of the lease obligation are comprised of the following: Fixed lease payments, including in-substance fixed payments; i. ii. Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; iii. Amounts expected to be payable under a residual value guarantee; iv. The exercise price of purchase options that Cineplex is reasonably certain to exercise, lease payments in an option renewal period if Cineplex is reasonably certain to exercise the extension option, and penalties for early termination of the lease unless Cineplex is reasonably certain not to terminate early; and v. Less any lease incentives receivable. Variable payments for leases that do not depend on an index or rate are not included in the measurement of the lease liability. The variable payments are recognized as an expense in the period in which they are incurred and are included in the consolidated statement of operations. Cineplex accounts for any lease and associated non-lease components separately, as opposed to a single arrangement, which is permitted under IFRS 16. Cineplex records non-lease components such as common area CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 158 (61) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) maintenance as an expense in the period in which they are incurred and are included in the consolidated statement of operations. Interest on the lease obligations is calculated using the effective interest method with rent payments reducing the liability. The lease obligation is remeasured whenever a lease contract is modified and the lease modification is not accounted for as a separate lease, or there is a change in the assessment of the exercise of an extension option. The lease obligation is remeasured by discounting the revised lease payments using a revised discount rate resulting in a corresponding adjustment to the right-of-use asset or is recorded in gain or loss if the carrying amount of the right- of-use asset has been reduced to zero or the modification results in a reduction in the scope of the lease. The right-of-use assets are depreciated on a straight-line basis from the date of commencement to the earlier of the end of the useful life of the asset or the end of the lease term. Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36, Impairment of Assets which replaces the previous requirement to recognize a provision for onerous lease contracts under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Borrowing costs Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognized as interest expense in the consolidated statements of operations in the year in which they are incurred. Employee benefits Cineplex is the sponsor of a number of employee benefit plans. These plans include a defined benefit pension plan, additional unfunded defined benefit obligations for former Famous Players employees, and a group registered retirement savings plan. i. Post-employment benefit obligations For defined benefit plans, the level of benefit provided is based on the length of service and annual earnings of the person entitled. The cost of defined benefit plans is determined using the projected unit credit method. The related benefit liability recognized in the consolidated balance sheets is the present value of the defined benefit obligation at the consolidated balance sheet dates less the fair value of plan assets. The cost of the group registered retirement savings plan is charged to expense as the contributions become payable. Actuarial valuations for defined benefit plans are carried out periodically and considered at each annual consolidated balance sheet date. The discount rate applied in arriving at the present value of the benefit liability represents yields on high-quality corporate bonds that are denominated in Canadian dollars, the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related benefit liability. The net defined benefit liability (asset) is recognized on the balance sheet without any deferral of actuarial gains and losses. Past service costs are recognized in net income when incurred. Post-employment CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 159 (62) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) benefits expense includes the net interest on the net defined benefit liability (asset) calculated using a discount rate based on market yields on high quality bonds. Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net interest component) and any change in the asset ceiling are recognized in other comprehensive income without recycling to the consolidated statements of operations. Employee benefits are classified as long-term employee benefits if payments are not expected to be made within the next 12 months. ii. Share-based compensation - options Cineplex grants stock options to certain employees. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Until December 16, 2019 the options were considered equity-settled, and fair value of each tranche was measured at the date of grant using the Black-Scholes option pricing model. Compensation expense was based on the number of awards expected to vest and was recognized over the tranche’s vesting period, included as employee benefits expense in other costs. On December 16, 2019 as a result of the terms of the Arrangement Agreement, the options were considered cash-settled, and the fair value of the excess of outstanding options in excess of the exercise price was recognized as a current share-based compensation liability, and changes in value were reflected in the statement of operations. Stock options impacted by the termination of the Arrangement Agreement were revalued and accounted for as equity-settled and any previously recognized share based compensation liability was reclassified to contributed surplus. The accelerated recognition of unvested options was reversed and is being recognized over their remaining vesting periods at the value determined at March 31, 2020. Forfeitures are estimated to be nominal, based on historical forfeiture rates. iii. Share-based compensation - other plans Cineplex has a number of other cash-settled share-based compensation plans. The obligation for these plans is recorded at fair value on a percentage vested basis. Changes in the obligation are reflected in employee benefits in other costs in the consolidated statements of operations. Cineplex also issues RSUs and PSUs that will be equity settled and will fully vest at the completion of the performance period determined by management at the time of issuance. Provisions Provisions for asset retirement obligations, theatre shutdowns and legal claims, where applicable, are recognized when Cineplex has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. Cineplex performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts. Provisions are included in other liabilities on the consolidated balance sheets. Income taxes Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of operations, except to the extent that they relate to items recognized directly in equity or in OCI, in which case, the income taxes are also recognized directly in equity or in OCI. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 160 (63) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Current income taxes are the expected taxes payable on the taxable income for the year, using income tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to income taxes payable in respect of previous years. In general, deferred income taxes are recognized in respect of temporary differences arising between the income tax bases of assets and liabilities and their carrying values in the consolidated financial statements. Deferred income taxes are determined on a non-discounted basis using income tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are expected to apply when the deferred income tax asset or liability is settled. Deferred income tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income taxes are provided on temporary differences arising on investments in subsidiaries and joint ventures, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by Cineplex and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are presented as non-current. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity. Dividends Dividends on common shares are recognized in the consolidated financial statements in the year in which the dividends are approved by the Board of Directors of Cineplex. Revenue Film Entertainment and Content Cineplex generates box office revenues from the sale of admission tickets for theatrical releases purchased by customers in theatres, online at Cineplex.com or through the Cineplex mobile app. Revenue is recognized at the time the obligation is satisfied which is when the movie for which the ticket purchased has played. Amounts collected on advanced tickets sales are recorded as deferred revenue and recognized when the movie has played. Cineplex also generates revenues from the sale of food service which is comprised of food and beverage sales. Food service revenue is recognized when control of the food service has transferred, being at the point the customer purchases the food service at the theatres. Payment of the transaction price is due immediately at the point the customer purchases the concessions. Until December 12, 2021, when retail transactions include the issuance of SCENE points, Cineplex recorded deferred revenue based on the relative stand-alone selling price of the points issued. The deferred revenue associated with the points redeemed is recognized as revenue when points are redeemed by customers or in accordance with Cineplex’s accounting policy for breakage. Beginning December 13, 2021, as a result of the the launch of Scene+, Scene+ points issued in association with Cineplex revenue transactions are accounted for as marketing expense. Cineplex sells gift cards directly to individual customers and vouchers to both wholesale resellers and directly to individual customers. The transaction price received from the sales of gift cards and vouchers is due at the time of sale and is recorded as deferred revenue. Revenues from gift cards and vouchers are recognized either on redemption CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 161 (64) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) or in accordance with Cineplex's accounting policy for breakage. Breakage income is included in other revenues and represents the estimated value of gift cards and vouchers that are not expected to be redeemed by customers. It is estimated based on historical redemption patterns. The sale of a voucher creates a future obligation from Cineplex to provide an admission ticket or a combination of admission ticket(s) and concessions. The transaction price of the voucher is allocated between box office and concessions based on a relative stand-alone selling price basis. Media The media segment principally generates revenue from providing advertising services, sales of digital hardware for digital signage networks, installation of digital hardware, digital software services subscriptions, software maintenance and support services, creative services, printing services and warranties. Products and services may be sold separately or in bundled packages. For bundled packages, Cineplex determines whether individual products and services are distinct (if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it). The consideration is allocated between separate products and service in a bundle based on their relative stand-alone selling prices. Advertising Media Media revenues consist primarily of advertising revenues generated from customers who advertise their products and services through Cineplex’s media offerings which include onscreen, online, magazine, and digital out of home. Revenue for advertising is recognized over time as services are delivered. The transaction price allocated to these services is recognized as the media runs from the start to the end dates specified in the contracts with the customer. The transaction price allocated to the distinct services to be provided is based on the stand-alone selling prices of the distinct services. Amounts collected on advanced media sales are recorded as deferred revenue and recognized over the period that the media is presented. Each contract with a customer is also evaluated to determine whether Cineplex is the principal or agent in the transaction. For transactions which Cineplex is the principal, revenues are recorded on a gross basis and for transactions where Cineplex is the agent, revenues are recorded on a net basis. Installation and Digital Hardware for digital signage network Cineplex sells digital hardware, installation and other professional services for digital signage networks. The installation and other professional services that Cineplex provides are not a significant integration service, does not customize or modify the hardware and can be performed by another party. The installation and other professional services are therefore accounted for as a separate performance obligation and the transaction price is allocated to each performance obligation based on the stand-alone selling prices. Revenue for installation and other professional services are recognized upon completion of the installation of the digital hardware at the individual site being installed for the customer. If contracts include the purchase of hardware, revenue for the hardware is recognized at the point in time when hardware is delivered to the customer. Delivery occurs when the hardware has been shipped to the customer’s specific location, the legal title has passed and the customer has accepted the hardware. Digital software services subscription Cineplex sells software service subscriptions to customers which provides the functionality for the digital signage network, the customer portal, the content management tool and media player software at the customer’s location. Cineplex also sells maintenance and support services for the software service subscriptions. Software service subscription and maintenance and support services are considered to represent a single performance obligation and revenue is recognized over time over the life of the contract. For software service subscriptions, customers have CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 162 (65) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) payment options of either equal monthly payments over the term of the contract or a single lump sum payment at the inception of the contract. Amounts collected as advanced payments are recorded as deferred revenue and recognized equally over the term of the contract unless the contract contains a renewal option with an embedded material right which provides the customer a material right (such as a free or discounted good or service) and gives rise to a separate performance obligation. If an embedded material right exists, revenue is recognized on a straight-line basis over the term of the contract including the renewal period. Contracts are evaluated to determine whether renewal options provide the customer with an embedded material right and whether a significant financing arrangement exists. For maintenance and support services, the transaction price is paid monthly in equal payments over the term of the contract as service is provided. Creative Services Cineplex provides creative services producing content to be run on customer’s digital display networks. For creative services, revenue is recognized at a point in time when the project is completed and the customer has accepted the final product. Creative services are based on an hourly rate and the transaction price recognized as revenue is the amount to which Cineplex has a right to invoice based on the amount of hours required to complete the project. Payment of the transaction price is due at completion of the project. Amusement and Leisure The amusement and leisure segment principally generates revenue from route operations, the sale of amusement gaming and vending equipment and from the sale of food services and entertainment at location based entertainment venues. Cineplex operates amusement, gaming and vending equipment at family entertainment centres (“FECs”) and non- FECs which is referred to as route operations. The transaction price is the set price that the customer playing the game is required to pay and revenue is recognized upon the customer playing the game. As it relates to gaming revenues, the most significant judgment is determining whether Cineplex is the principal or agent in the route operations. Cineplex is considered to be the principal in its route operations as it owns all of the equipment hosted at sites, is responsible for the maintenance of the equipment, and has control over which equipment will be on site. Revenues from route operations are recorded at the gross amount with the portion shared with the location hosting the equipment recorded in other costs as venue revenue share. Cineplex also sells rechargeable cards to be used for gameplay. IFRS 15 requires unused cash values on the rechargeable cards to be deferred. Revenue from the rechargeable cards is recognized upon redemption or in accordance with Cineplex’s policy for breakage based on historical redemption patterns. For the sale of equipment to customers, revenue is recognized when control of the goods has transferred and title has passed, being when the goods have been delivered to the customer’s specific location. Food and beverage sales at location-based entertainment venues are recognized when control of the goods has transferred, being at the point the customer purchases and receives the goods. Payment of the transaction price is due at the point the customer purchases food and/or beverages. Income per share Basic EPS is calculated by dividing the net income for the year attributable to equity owners of Cineplex by the weighted average number of common shares outstanding during the year. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 163 (66) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options and similar instruments is computed using the treasury stock method. Cineplex’s potentially dilutive common shares include stock options granted to employees and the conversion feature of the convertible debentures. Film rental costs Film rental costs are recorded based on the terms of the respective film licence agreements. In some cases, the final film cost is dependent on the ultimate duration of the film’s play and, until this is known, management uses its best estimate of the final settlement of these film costs. Film costs and the related film costs payable are adjusted to the final film settlement in the year Cineplex settles with the distributors. Actual settlement of these film costs could differ from those estimates. Consideration received from vendors Cineplex receives rebates from certain vendors with respect to the purchase of concession goods. In addition, Cineplex receives payments from vendors for advertising undertaken by the theatres on behalf of the vendors. Cineplex recognizes rebates earned for purchases of each vendor’s product as a reduction of concession costs and recognizes payments received for services delivered to the vendor as media or other revenue. Significant accounting judgments and estimation uncertainties Critical accounting estimates and judgments Cineplex makes estimates and assumptions concerning the future that may not equal actual results. The following are the estimates and judgments applied by management that most significantly impact Cineplex’s consolidated financial statements. These estimates and judgments have a significant risk of causing a material adjustment to the carrying values of assets and liabilities within the next financial year. a) Goodwill and recoverable amount of long lived assets Recoverable amount Cineplex tests at least annually whether goodwill suffered any impairment. Assessment of impairment for long-lived assets, including property, equipment, leaseholds, right-of-use assets, intangible assets and goodwill is performed more frequently as specific events or circumstances dictate triggering events and changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. Management makes key assumptions and estimates in determining the recoverable amount of its long lived assets and groups of CGUs’ goodwill, including attendance and the related revenue growth rates, variable and fixed cash flows, operating margins and discount rates (note 11, Impairment of long-lived assets and goodwill). b) Financial instruments Fair value of over-the-counter derivatives Cineplex’s over-the-counter derivatives include interest rate swaps used to economically hedge exposure to variable cash flows associated with interest payments on Cineplex’s borrowings. Management estimates the fair values of these derivatives as the present value of expected future cash flows to be received or paid, based on available market data, which includes market yields and counterparty credit spreads. Cineplex also has a prepayment option on the Notes Payable. The fair market value of CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 164 (67) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) prepayment option on Notes Payable was determined using an option pricing model with observable market inputs consistent with accepted methods for valuing financial instruments. c) Revenue recognition Gift cards Management estimates the value of gift cards that are not expected to be redeemed by customers, based on the terms of the gift cards and historical redemption patterns, including industry data. The estimates are reviewed annually, or when evidence indicates the existing estimate is not valid. SCENE The timing and number of points redeemed by Scene+ members affects the timing and amount of both revenue and cost of redemptions recognized by Cineplex. If the number of points actually redeemed by members is lower than Cineplex’s estimate of points expected to be redeemed, the estimate of average revenue per point will be prospectively revised, and net income would be higher over time. d) Income taxes The timing of reversal of timing differences and the expected income allocation to various tax jurisdictions within Canada affect the effective income tax rate used to compute the deferred income tax asset. Management will assess the recoverability of deferred tax assets as economic conditions improve. As described in note 2, COVID-19 business impacts, risks and liquidity, there are material uncertainties relating to the recoverability of losses incurred in the current year. Accordingly, no deferred tax assets were recognized in the current period. Management estimates the reversals and income allocation based on historical and budgeted operating results and income tax laws existing at the consolidated balance sheet dates. In addition, management occasionally estimates the current or future deductibility of certain expenditures, affecting current or deferred income tax balances and expenses. e) Fair value of identifiable assets acquired and liabilities assumed in business combinations Significant judgment is required in the identifying tangible and intangible assets and liabilities of the acquired businesses, as well as determining their fair values. f) Share-based compensation Management is required to make certain assumptions and to estimate future financial performance to estimate the fair value of share-based awards at each consolidated balance sheet date. Significant estimates and assumptions relating to the option plan are disclosed in note 13, Share-based compensation. The LTIP and Incentive Plan requires management to estimate future non-GAAP earnings measures, future revenue growth relative to specified industry peers, and total shareholder return, both absolutely and relative to specified industry peers. Future non-GAAP earnings are estimated based on current projections, updated at least annually, taking into account actual performance since the grant of the award. Future revenue growth relative to peers is based on historical performance and current projections, updated at least annually for actual performance since the grant of the award by Cineplex and its peers. Total shareholder return for Cineplex and its peers is updated at each consolidated balance sheet date based on financial models, taking into account financial market observable inputs. g) Lease terms CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 165 (68) Cineplex Inc. Cineplex Inc. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 ————————————————————————————————————————————— (expressed in thousands of Canadian dollars, except per share amounts) (expressed in thousands of Canadian dollars, except per share amounts) Some leases of property contain extension options exercisable by Cineplex up to one year before the end of the non-cancellable contract period. Where practicable, Cineplex seeks to include extension options in new leases to provide operational flexibility. In determining the lease term, Cineplex considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. Accounting standards applied or adopted in the current year Cloud Computing Arrangements In April 2021, the International Financial Reporting Interpretations Committee (IFRIC) finalized their decision with respect to configuration and customization costs in a cloud computing arrangement, particularly surrounding the recognition of an expense or an intangible asset. Cineplex has evaluated the impact regarding the changes surrounding the configuration or customization costs in a cloud computing arrangement and has determined that there is no material effect on its consolidated financial statements. In January 2020, the International Accounting Standards Board issued Classification of Liabilities as Current or Non-current, which amended IAS 1 Presentation of Financial statements. The amendments clarified how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. Cineplex has not applied the accounting pronouncement issued. In May 2021, the International Accounting Standards Board issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which amended IAS 12 Income Taxes. The amendments require companies to recognize deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Earlier application is permitted. Cineplex has not applied the accounting pronouncement issued. CINEPLEX INC. 2021 ANNUAL FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CINEPLEX INC. 2021 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 166 (69) Cineplex Inc. Investor Information Cineplex Inc. Investor Information _____________________________________________________________________________________________ BOARD OF DIRECTORS INVESTOR RELATIONS Jordan Banks (4) Corporate Director Toronto, ON Robert Bruce (5) Executive Chair and Founding Partner Mobile Klinik Toronto, ON Joan Dea (4) Corporate Director Ross, CA Janice Fukakusa (3) Corporate Director Toronto, ON Donna Hayes (5) Corporate Director Toronto, ON Ellis Jacob, C.M. President and Chief Executive Officer Cineplex Inc. Toronto, ON Sarabjit (Sabi) Marwah (4) Corporate Director Toronto, ON Nadir Mohamed (2) Corporate Director Toronto, ON Phyllis Yaffe (1) (4) Corporate Director Toronto, ON Gord Nelson Chief Financial Officer Cineplex Inc. Mahsa Rejali Executive Director, Corporate Development & Investor Relations Cineplex Inc. Email: investorrelations@cineplex.com Address: Cineplex Inc. 1303 Yonge Street Toronto, ON M4T 2Y9 STOCK EXCHANGE LISTING The Toronto Stock Exchange CGX AUDITORS PricewaterhouseCoopers LLP Toronto, ON TRANSFER AGENT TSX Trust Company Toronto, ON 416-682-3860 800-387-0825 Email: shareholderinquiries@tmx.com www.tsxtrust.com ANNUAL MEETING Wednesday May 25, 2022 9:00AM EDT Scotiabank Theatre Toronto 259 Richmond St. West Toronto, ON (1) Chair of the Board of Directors of Cineplex Inc. (2) Chair of the Compensation, Nominating and Corporate Governance Committee (3) Chair of the Audit Committee (4) Member of the Compensation, Nominating and Corporate Governance Committee (5) Member of the Audit Committee CINEPLEX INC. 2021 ANNUAL REPORT INVESTOR INFORMATION 167  

Continue reading text version or see original annual report in PDF format above