UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
____________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 1, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission file number: 001-33296
_____________________________________________
(Exact name of registrant as specified in its charter)
______________________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (303 ) 792-3600
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each class) | (Trading symbol) | (Name of each exchange on which registered) | ||||||
______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 5, 2021, 81,056,362 shares of the registrant’s common stock (including unvested restricted shares), par value of $0.01 per share, were outstanding.
TABLE OF CONTENTS
| Page | ||||||||
PART I
Item 1. Financial Statements
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
(UNAUDITED)
| As of | |||||||||||
| July 1, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term marketable securities | |||||||||||
Receivables, net of allowance of $ | |||||||||||
| Other current assets and prepaid expenses | |||||||||||
| Total current assets | |||||||||||
| NON-CURRENT ASSETS: | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
Intangible assets, net of accumulated amortization of $ | |||||||||||
Deferred tax assets, net of valuation allowance of $ | |||||||||||
| Long-term marketable securities | |||||||||||
| Debt issuance costs, net | |||||||||||
| Other assets | |||||||||||
| Total non-current assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND EQUITY/(DEFICIT) | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Amounts due to founding members, net | $ | $ | |||||||||
Payable to founding members under tax receivable agreement (including payables to related parties of $ | |||||||||||
| Accrued expenses | |||||||||||
| Accrued payroll and related expenses | |||||||||||
| Accounts payable | |||||||||||
| Deferred revenue | |||||||||||
| Short-term debt | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| NON-CURRENT LIABILITIES: | |||||||||||
Long-term debt, net of debt issuance costs of $ | |||||||||||
Payable to founding members under tax receivable agreement (including payables to related parties of $ | |||||||||||
| Other liabilities | |||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 8) | |||||||||||
| EQUITY/(DEFICIT): | |||||||||||
| NCM, Inc. Stockholders’ Equity/(Deficit): | |||||||||||
Preferred stock, $ respectively | |||||||||||
Common stock, $ and outstanding, respectively | |||||||||||
| Additional paid in capital/(deficit) | ( | ( | |||||||||
| Retained earnings (distributions in excess of earnings) | ( | ( | |||||||||
| Total NCM, Inc. stockholders’ equity/(deficit) | ( | ( | |||||||||
| Noncontrolling interests | |||||||||||
| Total equity/(deficit) | ( | ( | |||||||||
| TOTAL LIABILITIES AND EQUITY/(DEFICIT) | $ | $ | |||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
1
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In millions, except share and per share data)
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
REVENUE (including revenue from related parties of $ | $ | $ | $ | $ | |||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Advertising operating costs | |||||||||||||||||||||||
| Network costs | |||||||||||||||||||||||
Theater access fees and revenue share to founding members (including fees to related parties of $ | |||||||||||||||||||||||
| Selling and marketing costs | |||||||||||||||||||||||
| Administrative and other costs | |||||||||||||||||||||||
| Impairment of long-lived assets | |||||||||||||||||||||||
| Depreciation expense | |||||||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| OPERATING LOSS | ( | ( | ( | ( | |||||||||||||||||||
| NON-OPERATING EXPENSES: | |||||||||||||||||||||||
| Interest on borrowings | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Loss on modification and retirement of debt, net | |||||||||||||||||||||||
| Loss (gain) on re-measurement of the payable to founding members under the tax receivable agreement | ( | ||||||||||||||||||||||
| Other non-operating expense | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | |||||||||||||||||||||
| CONSOLIDATED NET LOSS | ( | ( | ( | ( | |||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO NCM, INC. | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NCM, INC. | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| NET LOSS PER NCM, INC. COMMON SHARE: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
2
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (UNAUDITED)
| Six Months Ended | |||||||||||
| July 1, 2021 | June 25, 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Consolidated net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile consolidated net loss to net cash (used in) provided by operating activities: | |||||||||||
| Deferred income tax benefit | ( | ||||||||||
| Depreciation expense | |||||||||||
| Amortization of intangibles recorded for network theater screen leases | |||||||||||
| Non-cash share-based compensation | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Loss on modification and retirement of debt, net | |||||||||||
| Non-cash (gain) loss on re-measurement of the payable to founding members under the tax receivable agreement | ( | ||||||||||
| Other | ( | ||||||||||
Founding member integration and other encumbered theater payments (including payments from related parties of $ | |||||||||||
Payment to the founding members under tax receivable agreement (including payments to related parties of $ | ( | ||||||||||
| Other cash flows from operating activities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Receivables, net | |||||||||||
Accounts payable and accrued expenses (including payments to related parties of $ | ( | ||||||||||
| Amounts due to/from founding members, net | ( | ||||||||||
| Deferred revenue | |||||||||||
| Other, net | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of marketable securities | ( | ||||||||||
| Proceeds from sale and maturities of marketable securities | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of dividends | ( | ( | |||||||||
| Proceeds from revolving credit facility | |||||||||||
| Repayments of revolving credit facility | ( | ||||||||||
| Issuance of term loans | |||||||||||
| Repayment of term loan facility | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Distributions to founding members | ( | ||||||||||
| Repurchase of stock for restricted stock tax withholding | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| CHANGE IN CASH AND CASH EQUIVALENTS: | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
3
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
(UNAUDITED)
| Six Months Ended | |||||||||||
| July 1, 2021 | June 25, 2020 | ||||||||||
| Supplemental disclosure of non-cash financing and investing activity: | |||||||||||
| Purchase of an intangible asset with NCM LLC equity | $ | $ | |||||||||
| Purchase of subsidiary equity with NCM, Inc. equity | $ | $ | |||||||||
| Increase (decrease) in dividend equivalent accrual not requiring cash in the period | $ | $ | ( | ||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash (refunds) payments for income taxes | $ | ( | $ | ||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
4
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)
(In millions, except share and per share data)
(UNAUDITED)
| NCM, Inc. | |||||||||||||||||||||||||||||||||||
| Additional Paid in Capital (Deficit) | Retained Earnings (Distribution in Excess of Earnings) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance—March 26, 2020 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Distributions to founding members | — | — | — | — | |||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | — | — | — | ( | |||||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation issued | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—June 25, 2020 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balance—April 1, 2021 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | ( | — | — | — | ( | ||||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation issued | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—July 1, 2021 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
| NCM, Inc. | |||||||||||||||||||||||||||||||||||
| Additional Paid in Capital (Deficit) | Retained Earnings (Distribution in Excess of Earnings) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance—December 26, 2019 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Cumulative-effect adjustment for adoption of ASU 2016-13, net of tax | — | — | — | ||||||||||||||||||||||||||||||||
| Distributions to founding members | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||
| NCM LLC equity issued for purchase of intangible asset | — | — | — | ||||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | ( | — | — | ( | — | ||||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation issued | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—June 25, 2020 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balance—December 31, 2020 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| NCM LLC equity issued for purchase of intangible asset | — | — | — | ||||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | ( | — | — | — | ( | ||||||||||||||||||||||||||||||
| Issuance of shares | — | — | — | ||||||||||||||||||||||||||||||||
| NCM LLC common membership unit redemption | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation issued | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—July 1, 2021 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
5
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
Description of Business
National CineMedia, Inc. (“NCM, Inc.”) was incorporated in Delaware as a holding company with the sole purpose of becoming a member and sole manager of National CineMedia, LLC (“NCM LLC”), a limited liability company. NCM LLC is currently owned by NCM, Inc., Regal Cinemas, Inc. and Regal CineMedia Corporation, wholly owned subsidiaries of Cineworld Group plc and Regal Entertainment Group (“Regal”) and Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc. (“Cinemark”). The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity. On March 23, 2021 American Multi-Cinema, Inc., a wholly owned subsidiary of AMC Entertainment, Inc. (“AMC”) redeemed 1,390,567 membership units, which were issued to AMC in accordance with the terms of the common unit adjustment agreement with the founding members, in exchange for shares of NCM, Inc. common stock, reducing AMC’s ownership to 0.0 % as of July 1, 2021. AMC, Regal, Cinemark and their affiliates are referred to in this document as “founding members”.
The Company operates the largest cinema advertising network reaching movie audiences in the U.S., allowing NCM LLC to sell advertising under long-term exhibitor service agreements (“ESAs”) with the founding members and certain third-party network affiliates, under long-term network affiliate agreements. As previously disclosed, the COVID-19 pandemic has had a significant impact on the world and the Company’s business beginning in March 2020 as the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. These governmental restrictions resulted in the closure of most of the theaters within the Company’s network for approximately six months and thus the Company generated no in-theater advertising revenue during that time. When theaters began to reopen late in the third quarter of 2020, in-theater advertising revenue continued to be adversely impacted as attendance at the reopened theaters was significantly less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases. These and subsequent developments are referred to as the “COVID-19 Pandemic.” Beginning in 2021, multiple COVID-19 vaccines were approved and have been widely administered throughout the United States. As a result, during the second quarter of 2021, government restrictions lessened allowing theaters in key larger markets to fully reopen over the course of the second quarter of 2021. As of July 1, 2021, approximately 97.0
On September 17, 2019, NCM LLC entered into amendments to the ESAs with Cinemark and Regal (collectively, the “2019 ESA Amendments”). The 2019 ESA Amendments extended the contract life of the ESAs with Cinemark and Regal by four years resulting in a weighted average remaining term of the ESAs with the founding members (based upon pre-COVID-19 attendance levels) of approximately 18.2 years as of July 1, 2021. The network affiliate agreements expire at various dates between August 2021 and December 2037. The weighted average remaining term of the ESAs and the network affiliate agreements together is 15.9 years as of July 1, 2021 (based upon pre-COVID-19 attendance levels).
As of July 1, 2021, NCM LLC had 166,427,095 common membership units outstanding, of which 80,238,751 (48.2 %) were owned by NCM, Inc., 43,026,794 (25.9 %) were owned by Regal and 43,161,550 (25.9 %) were owned by Cinemark and 0 (0.0 %) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one -for-one basis.
Basis of Presentation
The Company has prepared the unaudited Condensed Consolidated Financial Statements and related notes of NCM, Inc. in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. The balance sheet as of December 31, 2020 is derived from the audited financial statements of NCM, Inc. Therefore, the unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K filed for the fiscal year ended December 31, 2020.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies
The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 31, 2020 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.
Concentration of Credit Risk and Significant Customers—The risk of credit loss related to the Company's trade receivables and unbilled receivables balances is accounted for through the allowance for doubtful accounts, a contra asset account which reduces the net receivables balance. The allowance for doubtful accounts balance is determined by pooling the Company's receivables with similar risk characteristics, specifically by type of customer (national or local/ regional) and then age of receivable, and applying historical write off percentages to these pools in order to determine the amount of expected credit losses as of the balance sheet date. National receivables are with large advertising agencies with strong reputations in the advertising industry and clients with stable financial positions and good credit ratings, represent larger receivables balances per customer and have significantly lower historical and expected credit loss patterns. Local and regional receivables are with smaller companies sometimes with less credit history and represent smaller receivable balances per customer and higher historical and expected credit loss patterns. The Company has smaller contracts with many local clients that are not individually significant. The Company also considers current economic conditions and trends to determine whether adjustments to historical loss rates are necessary. The Company also reserves for specific receivable balances that it expects to write off based on known concerns regarding the financial health of the customer. Receivables are written off when management determines amounts are uncollectible.
The Company had no agencies through which the Company sourced advertising revenue that accounted for more than 10 % of the Company’s gross outstanding receivable balance as of July 1, 2021. The Company had one agency through which the Company sourced advertising revenue that accounted for 10.1 % of the Company's gross outstanding receivable balance as of December 31, 2020. During the three months ended July 1, 2021 and June 25, 2020, the Company had one 14.1 % and 18.0 % of the Company's revenue, respectively. During the six months ended July 1, 2021 and June 25, 2020, the Company had one customer that account for 11.3 % and no customers that accounted for more than 10 % of revenue, respectively.
Long-lived Assets—The Company assesses impairment of long-lived assets pursuant to ASC 360 – Property, Plant and Equipment. This includes determining whether certain triggering events have occurred that could affect the value of an asset. The Company recorded losses of $0.0 million, $1.7 million, $0.0 million and $1.7 million related to the write-off of certain internally developed software during the three months ended July 1, 2021 and June 25, 2020 and the six months ended July 1, 2021 and June 25, 2020, respectively.
7
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidation—NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810, Consolidation. The following table presents the changes in NCM, Inc.’s equity resulting from net income attributable to NCM, Inc. and transfers to or from noncontrolling interests (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
| Net loss attributable to NCM, Inc. | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| NCM LLC equity issued for purchase of intangible asset | |||||||||||||||||||||||
| Income tax and other impacts of subsidiary ownership changes | ( | ||||||||||||||||||||||
| NCM LLC common membership unit redemption | — | — | ( | — | |||||||||||||||||||
| Issuance of shares to founding members | — | — | — | ||||||||||||||||||||
| Change from net loss income attributable to NCM, Inc. and transfers from noncontrolling interests | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Recently Adopted Accounting Pronouncements
During the first quarter of 2021, the Company adopted Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes the following exceptions for the Company to analyze in a given period: the exception to the incremental approach for intraperiod tax allocation; the exception to accounting for basis differences when there are ownership changes in foreign investments; and the exception in interim periods income tax accounting for year-to-date losses that exceed anticipated losses. The Company’s adoption of ASU 2019-12 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (“ASU 2020-04”), which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and ASU 2020-04 on the Company’s unaudited Condensed Consolidated Financial Statements.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Consolidated Financial Statements or notes thereto.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS AND ACCOUNTS RECEIVABLE
Revenue Recognition
The Company derives revenue principally from the sale of advertising to national, regional and local businesses in Noovie®, the Company’s cinema advertising and entertainment pre-show. The Company also sells advertising through the LEN, a series of strategically placed screens located in movie theater lobbies, as well as other forms of advertising and
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
promotions in theater lobbies. In addition, the Company sells online and mobile advertising, including through Noovie Audience Accelerator, through NCM's digital gaming products including Noovie Trivia, Noovie ARcade, Name That Movie and Noovie Shuffle, which can be played on the mobile apps or at Noovie.com and through partnerships with certain internet platforms. Further the Company sells advertising in a variety of complementary out of home venues, including restaurants, retail locations, convenience stores, college campuses and office and residential buildings. The Company also has a long-term agreement to exhibit the advertising of the founding members’ beverage suppliers.
The Company makes contractual guarantees to deliver a specified number of impressions to view the customers’ advertising. If the contracted number of impressions are not delivered, the Company will run additional advertising to deliver the contracted impressions at a later date. The deferred portion of the revenue associated with undelivered impressions is referred to as a make-good provision. The Company defers the revenue associated with the make-good until the advertising airs to the audience specified in the advertising contract. The make-good provision is recorded within accrued expenses in the unaudited Condensed Consolidated Balance Sheet. As of July 1, 2021 and December 31, 2020, the Company had a make-good provision of $3.1 million and $7.1 million, respectively.
The Company does not have any contracts with customers with terms in excess of one year that are noncancellable as of July 1, 2021. Agreements with a duration less than one year are not included within this disclosure as the Company elected to use the practical expedient in ASC 606-10-50-14 for those contracts. In addition, the Company’s other contracts longer than one year that are cancellable are not included within this disclosure.
Disaggregation of Revenue
The Company disaggregates revenue based upon the type of customer: national and regional, local and beverage concessionaire. This method of disaggregation is in alignment with how revenue is reviewed by management and discussed with and historically disclosed to investors.
The following table summarizes revenue from contracts with customers for the three and six months ended July 1, 2021 and June 25, 2020 (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
| National and regional advertising revenue | $ | $ | $ | $ | |||||||||||||||||||
| Local advertising revenue | |||||||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Deferred Revenue and Unbilled Accounts Receivable
The changes in deferred revenue for the six months ended July 1, 2021 were as follows (in millions):
| Six Months Ended | |||||
| July 1, 2021 | |||||
| Balance at beginning of period | $ | ( | |||
| New contract liabilities | ( | ||||
| Performance obligations satisfied | |||||
| Balance at end of period | $ | ( | |||
As of July 1, 2021 and December 31, 2020, the Company had $3.5 million and $2.5 million in unbilled accounts receivable, respectively.
Allowance for Doubtful Accounts
The allowance for doubtful accounts balance is determined separately for each pool of the Company's receivables with similar risk characteristics. The Company has determined that two pools, national customers and local/ regional customers, is appropriate. The changes within the allowance for doubtful accounts balances for the six months ended July 1, 2021 were as follows (in millions):
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Six Months Ended | |||||||||||
| July 1, 2021 | |||||||||||
| Allowance for National Customer Receivables | Allowance for Local/ Regional Customer Receivables | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Provision for bad debt | ( | ||||||||||
| Write-offs, net | ( | ||||||||||
| Balance at end of period | $ | $ | |||||||||
3. LOSS PER SHARE
Basic loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of potentially dilutive common stock options, restricted stock and restricted stock units using the treasury stock method. The components of basic and diluted loss per NCM, Inc. share are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
| Net loss attributable to NCM, Inc. (in millions) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Add: Dilutive effect of stock options, restricted stock and exchangeable membership units | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Loss per NCM, Inc. share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The effect of 86,084,305 , 84,531,328 , 85,307,817 and 83,252,384 weighted average exchangeable NCM LLC common units held by the founding members for the three months ended July 1, 2021 and June 25, 2020 and six months ended July 1, 2021 and June 25, 2020, respectively, have been excluded from the calculation of diluted weighted average shares and loss per NCM, Inc. share as they were anti-dilutive. NCM LLC common units do not participate in dividends paid on NCM, Inc.’s common stock. In addition, there were 4,376,000 , 3,777,240 , 4,376,000 and 3,777,240 , stock options and non-vested (restricted) shares for the three months ended July 1, 2021 and June 25, 2020 and six months ended July 1, 2021 and June 25, 2020, respectively, excluded from the calculation as they were anti-dilutive. The Company’s non-vested (restricted) shares do not meet the definition of a participating security as the dividends will not be paid if the shares do not vest.
4. INTANGIBLE ASSETS
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
management to make estimates and assumptions based on historical data and consideration of future market conditions. Given the uncertainty inherent in any projection, heightened by the possibility of unforeseen additional effects of the COVID-19 Pandemic, including potential adverse impacts to NCM LLC's founding members' and affiliates' financial liquidity, actual results may differ from the estimates and assumptions used, or conditions may change, which could result in impairment charges in the future.
Common Unit Adjustments—In accordance with NCM LLC’s Common Unit Adjustment Agreement with its founding members, on an annual basis NCM LLC determines the amount of common membership units to be issued to or returned by the founding members based on theater additions, new builds or dispositions during the previous year. In the event a founding member does not have sufficient common membership units to return, the adjustment is satisfied in cash in an amount calculated pursuant to NCM LLC’s Common Unit Adjustment Agreement. In addition, NCM LLC’s Common Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if its acquisition or disposition of theaters, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an attendance increase or decrease in excess of two percent of the annual total attendance at the prior adjustment date.
During the first quarter of 2021, NCM LLC issued 3,047,582 common membership units to two founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions, to NCM LLC’s network during the 2020 fiscal year and calculated a negative common membership unit adjustment for one founding member resulting in a receivable included within “Other assets and prepaid expenses” on the unaudited Consolidated Balance Sheet. The net impact as a result of the Common Unit Adjustment to the intangible asset was $4.8 million during the first quarter of 2021.
During the first quarter of 2020, NCM LLC issued 3,022,959 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2019 fiscal year and NCM LLC recorded a net intangible asset of $10.5 million during the first quarter of 2020 as a result of the Common Unit Adjustment.
Integration Payments and Other Encumbered Theater Payments—If an existing on-screen advertising agreement with an alternative provider is in place with respect to any acquired theaters (“encumbered theaters”), the founding members may elect to receive common membership units related to those encumbered theaters in connection with the Common Unit Adjustment. If the founding members make this election, then they are required to make payments on a quarterly basis in arrears in accordance with certain run-out provisions pursuant to the ESAs (“integration payments”). Because the Carmike Cinemas, Inc. (“Carmike”) theaters acquired by AMC are subject to an existing on-screen advertising agreement with an alternative provider, AMC will make integration payments to NCM LLC. The integration payments will continue until the earlier of (i) the date the theaters are transferred to NCM LLC’s network or (ii) the expiration of the ESA. Integration payments are calculated based upon the advertising cash flow that the Company would have generated if it had exclusive access to sell advertising in the theaters with pre-existing advertising agreements. The ESAs additionally entitle NCM LLC to payments related to the founding members’ on-screen advertising commitments under their beverage concessionaire agreements for encumbered theaters. These payments are also accounted for as a reduction to the intangible assets. During the three months ended July 1, 2021 and June 25, 2020 and six months ended July 1, 2021 and June 25, 2020, the Company recorded a reduction to net intangible assets of $0.2 million, $0.0 million, $0.2 million and $1.4 million, respectively, related to integration and other encumbered theater payments. No integrations payments were earned for the three months ended July 1, 2021 because the Company generated negative Adjusted Operating Income Before Depreciation and Amortization (“Adjusted OIBDA”) during this period. During the three months ended July 1, 2021 and June 25, 2020 and six months ended July 1, 2021 and June 25, 2020, AMC and Cinemark paid a total of $0.1 million, $1.2 million, $0.1 million and $9.7 million, respectively, in integration and other encumbered theater payments (as payments are made one quarter and one month in arrears, respectively). The payments received during the three months ended June 25, 2020 primarily relate to AMC's acquisition of theaters from Carmike. If common membership units are issued to a founding member for newly acquired theaters that are subject to an existing on-screen advertising agreement with an alternative provider, the amortization of the intangible asset commences after the existing agreement expires and NCM LLC can utilize the theaters for all of its services.
5. RELATED PARTY TRANSACTIONS
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Unit Adjustment and receive available cash distributions or allocation of earnings and losses in NCM LLC (as long as its ownership is greater than zero), TRA payments and theater access fees. Further, AMC will continue to pay beverage revenue, among other things. AMC's ownership percentage does not impact future integration payments and other encumbered theater payments owed to NCM LLC by AMC. As of July 1, 2021, AMC’s ownership was 0.0 %.
The material agreements with the founding members are as follows:
•ESAs. Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theaters (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the use of the digital content network (“DCN”) equipment required to deliver the on-screen advertising and other content included in the Noovie® pre-show, use of the LEN and rights to sell and display certain lobby promotions. Further, NCM LLC’s founding members have elected to purchase 30 seconds to 60 seconds of advertising, out of the 90 seconds allowed for under the ESA, in the Noovie pre-show to satisfy the founding members’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the founding members’ theaters, theater patrons, the network equipment required to display on-screen and LEN video advertising and the use of theaters for lobby promotions, the founding members receive a monthly theater access fee. In conjunction with the 2019 ESA Amendments, NCM LLC agreed to pay Cinemark and Regal incremental monthly theater access fees and, subject to NCM LLC's use of specified inventory, a revenue share in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film beginning November 1, 2019 and the underlying term of the ESAs were extended until 2041. The ESAs and 2019 ESA Amendments with Cinemark and Regal are considered leases with related parties under ASC 842.
•Common Unit Adjustment Agreement. The Common Unit Adjustment Agreement provides a mechanism for increasing or decreasing the membership units held by the founding members based on the acquisition or construction of new theaters or sale or closure of theaters that are operated by each founding member and included in NCM LLC’s network.
•Tax Receivable Agreement. The TRA provides for the effective payment by NCM, Inc. to the founding members of 90 % of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that is actually realized as a result of certain increases in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets resulting from the IPO and related transactions.
•Software License Agreement. At the date of the Company’s IPO, NCM LLC was granted a perpetual, royalty-free license from NCM LLC’s founding members to use certain proprietary software that existed at the time for the delivery of digital advertising and other content through the DCN to screens in the U.S. NCM LLC has made improvements to this software since the IPO date and NCM LLC owns those improvements, except for improvements that were developed jointly by NCM LLC and NCM LLC’s founding members, if any.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Included in the unaudited Condensed Consolidated Statements of Income: | July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
Beverage concessionaire revenue (included in advertising revenue) (1) | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Theater access fee and revenue share to founding members (2) | $ | $ | $ | $ | |||||||||||||||||||
Selling and marketing costs (3) | $ | $ | $ | $ | |||||||||||||||||||
Advertising operating costs (3) | $ | $ | $ | $ | |||||||||||||||||||
________________________________________
(1)For the three and six months ended July 1, 2021 and June 25, 2020, Cinemark and Regal purchased 60 seconds of on-screen advertising time from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a 30 seconds equivalent CPM rate specified by the ESA. No beverage revenue was generated for the period of time that the
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
theaters within NCM LLC's network were temporarily closed as there were no attendees upon which beverage revenue is generated and beverage revenue was limited for periods of reduced attendance due to the COVID-19 Pandemic.
(2)Comprised of payments per theater attendee, payments per digital screen with respect to the founding member theaters included in the Company’s network and payments for access to higher quality digital cinema equipment. Following the 2019 ESA Amendments this also includes payments to Cinemark and Regal for their share of the revenue from the sale of an additional single unit that is either 30 or 60 seconds of the Noovie pre-show in the trailer position directly prior to the “attached” trailers preceding the feature film (the “Platinum Spot”). There was no theater access fee or revenue share expense for the period of time that the theaters within NCM LLC's network were temporarily closed and reduced fees for periods of reduced attendance due to the COVID-19 Pandemic.
(3)Includes purchase of movie tickets, concession products, rental of theater space primarily for marketing to NCM LLC’s advertising clients and other payments made to the founding members in the ordinary course of business.
| As of | |||||||||||
| Included in the unaudited Condensed Consolidated Balance Sheets: | July 1, 2021 | December 31, 2020 | |||||||||
Common unit adjustments and ESA extension costs, net of amortization and integration payments (included in intangible assets) (1) | $ | $ | |||||||||
Current payable to founding members under tax receivable agreement (2) | $ | $ | |||||||||
Long-term payable to founding members under tax receivable agreement (2) | $ | $ | |||||||||
Other payables to founding members (3) | $ | $ | |||||||||
(1)Refer to Note 4—Intangible Assets for further information on common unit adjustments and integration payments. This balance includes common unit adjustments issued to all of the founding members (including AMC) as the Company's intangible balance is considered one asset inclusive of all common unit adjustment activity.
(2)The Company paid Cinemark and Regal $0.2 million and $0.4 million during 2021 and $3.2 million and $5.8 million during 2020, respectively, in payments pursuant to the TRA which were for the 2019 tax year.
(3)Includes other payments made to the founding members in the ordinary course of business.
Pursuant to the terms of the NCM LLC Operating Agreement in place since the completion of the Company’s IPO, NCM LLC is required to make mandatory distributions on a proportionate basis to its members of available cash, as defined in the NCM LLC Operating Agreement, on a quarterly basis in arrears. Mandatory distributions of available cash for the three and six months ended July 1, 2021 and June 25, 2020 were as follows (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
| Cinemark | $ | $ | $ | $ | |||||||||||||||||||
| Regal | |||||||||||||||||||||||
| Total distributions to related parties | |||||||||||||||||||||||
| NCM, Inc. | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Due to the temporary closure of the theaters within NCM LLC's network during a portion of the three and six months ended July 1, 2021, the mandatory distributions of available cash by NCM LLC to its related party founding members and NCM, Inc. for the three months ended July 1, 2021 were calculated as negative $39.2 million (including negative $10.2 million for Cinemark, negative $10.1 million for Regal and negative $18.9 million for NCM, Inc.). Therefore, there will be no payment made for the second quarter of 2021. The mandatory distributions of available cash by NCM LLC for the six months ended July 1, 2021 were calculated as negative $70.1 million (including negative $18.2 million for Cinemark, negative $18.1 million for Regal and negative $33.8 million for NCM, Inc.). Under the terms of the NCM LLC Operating Agreement, these negative amounts will be netted against future positive available cash distributions after the extended covenant waiver holiday, contingent upon the Company's compliance with the covenants outlined within the Credit Agreement Second Amendment defined within Note 6—Borrowings and in accordance with the NCM LLC Operating Agreement.
Amounts due to related party founding members, net, as of July 1, 2021 were comprised of the following (in millions):
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Cinemark | Regal | Total | |||||||||||||||
| Theater access fees and revenue share, net of beverage revenues and other encumbered theater payments | $ | $ | $ | ||||||||||||||
| Total amounts due to founding members, net | $ | $ | $ | ||||||||||||||
| Cinemark | Regal | Total | |||||||||||||||
| Theater access fees and revenue share, net of beverage revenues and other encumbered theater payments | $ | $ | $ | ||||||||||||||
| Integration payments due from founding members | ( | ( | ( | ||||||||||||||
| Total amounts due to founding members, net | $ | $ | $ | ||||||||||||||
6. BORROWINGS
The following table summarizes NCM LLC’s total outstanding debt as of July 1, 2021 and December 31, 2020 and the significant terms of its borrowing arrangements (in millions):
| Outstanding Balance as of | ||||||||||||||||||||||||||
| Borrowings | July 1, 2021 | December 31, 2020 | Maturity Date | Interest Rate | ||||||||||||||||||||||
| Revolving credit facility | $ | $ | June 20, 2023 | (1) | ||||||||||||||||||||||
| Term loans - first tranche | June 20, 2025 | (1) | ||||||||||||||||||||||||
| Term loans - second tranche | December 20, 2024 | (1) | ||||||||||||||||||||||||
| Senior unsecured notes due 2026 | August 15, 2026 | |||||||||||||||||||||||||
| Senior secured notes due 2028 | April 15, 2028 | |||||||||||||||||||||||||
| Total borrowings | ||||||||||||||||||||||||||
| Less: debt issuance costs and debt discounts related to term loans and senior notes | ( | ( | ||||||||||||||||||||||||
| Total borrowings, net | ||||||||||||||||||||||||||
Less: current portion of debt | ( | ( | ||||||||||||||||||||||||
| Carrying value of long-term debt | $ | $ | ||||||||||||||||||||||||
___________________________________________________
(1)The interest rates on the revolving credit facility and term loans are described below.
Senior Secured Credit Facility—NCM LLC’s credit agreement (the “Credit Agreement”) consists of a term loan facility and a revolving credit facility. As of July 1, 2021, NCM LLC’s senior secured credit facility consisted of a $175.0 million revolving credit facility, a $261.9 million term loan (first tranche) and a $49.9 million term loan (second tranche). The obligations under the senior secured credit facility are secured by a lien on substantially all of the assets of NCM LLC.
On March 8, 2021, NCM LLC entered into an amendment to its Credit Agreement (“Credit Agreement Second Amendment”). Among other things, the Credit Agreement Second Amendment provides for certain modifications to the
14
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
negative covenants, with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception, additional waivers and term changes outlined below and grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders. In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC incurred a second tranche of the term loans in an aggregate principal amount of $50.0 million, the net proceeds of $43.0 million will be used for general corporate purposes. Upon execution of the Credit Agreement Second Amendment, the Company recorded $2.3 million as a discount, $3.9 million as debt issuance costs and $0.8 million within “Loss on modification and retirement of debt, net”.
Revolving Credit Facility—The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. During March 2020, NCM LLC drew down an additional $110.0 million on the revolving credit facility to fund operations during the period of expected disrupted cash flows due to the temporary closure of the theaters within NCM LLC's network to address the COVID-19 Pandemic. As of July 1, 2021, NCM LLC’s total availability under the $175.0 million revolving credit facility was $5.6 million, net of $167.0 million outstanding and $2.4 million in letters of credit. The unused line fee is 0.50 % per annum which is consistent with the previous facility. Following the Credit Agreement Second Amendment effective March 8, 2021, the applicable margin for the LIBOR index increased from a range of 1.75 % to 2.25 % to a range of 2.75 % to 3.25 % and the applicable margin for the base rate increased from a range of 0.75 % to 1.25 % to a range of 1.75 % to 2.25 %. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC (the ratio of secured funded debt less unrestricted cash and cash equivalents of up to $100.0 million, divided by Adjusted EBITDA for debt purposes, defined as NCM LLC's net income before depreciation and amortization expense adjusted to also exclude non-cash share based compensation costs for NCM LLC plus integration payments received). The weighted-average interest rate on the revolving credit facility as of July 1, 2021 was 4.50 %.
Term Loans—First Tranche—The interest rate on the initial tranche of term loans was originally a rate chosen at NCM LLC’s option of either the LIBOR index plus 3.00 % or the base rate plus 2.00 %. Following the Credit Agreement Second Amendment effective March 8, 2021, the rate is either the LIBOR index plus 4.00 % or the base rate plus 3.00 %. The interest rate on the term loans as of July 1, 2021 was 5.00 %. The term loans amortize at a rate equal to 1.00 % annually, to be paid in equal quarterly installments. As of July 1, 2021, NCM LLC has paid principal of $8.1 million, reducing the outstanding balance to $261.9 million.
Term Loans—Second Tranche—The interest rate on the second tranche of term loans is the LIBOR index plus 8.00 %. The interest rate on the term loans as of July 1, 2021 was 9.00 %. The term loans amortize at a rate equal to 1.00 % annually, to be paid in equal quarterly installments.
The senior secured credit facility contains a number of covenants and various financial ratio requirements including, (i) a consolidated net total leverage ratio covenant of 6.25 times for each quarterly period and (ii) with respect to the revolving credit facility, maintaining a consolidated net senior secured leverage ratio of equal to or less than 4.50 times on a quarterly basis for each quarterly period in which a balance is outstanding on the revolving credit facility. Following the Credit Agreement Second Amendment, the Company has a waiver of non-compliance with the consolidated Net Total Leverage and Consolidated Net Senior Secured Leverage financial covenants through the quarter ending June 30, 2022 (“Extended Covenant Waiver Holiday”) and the Consolidated Net Total Leverage Ratio and Consolidated Net Senior Secured Leverage Ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022. Under the Credit Agreement, for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the third quarter of 2022, NCM LLC must maintain a minimum liquidity balance of $55.0 million consisting of a combination of unrestricted cash on hand and availability under NCM LLC's revolving credit facility. NCM LLC is permitted to make quarterly dividend payments and other restricted payments with its available cash as long as NCM LLC’s consolidated net senior secured leverage ratio (after giving effect to any such payment) is below 5.50 times and no default or event of default has occurred and continues to occur under the senior secured credit facility. Pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less. As of July 1, 2021, NCM LLC was in compliance with the requirements of the Credit Agreement Second Amendment described above and the noncompliance with the financial covenants was automatically waived.
15
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Due to the future market uncertainties discussed within Note 1 - The Company and in order to provide additional liquidity while revenue levels build and accounts receivable balances are collected, the Board of Directors of NCM, Inc. and required NCM LLC founding members approved the material terms of a $20.0 million unsecured revolving loan agreement between NCM Inc. and NCM LLC. Borrowings by NCM LLC will be available from October 1, 2021 through March 31, 2022. The final definitive loan agreement will be approved by the Audit Committee of NCM, Inc. and is expected to be completed in the third quarter of 2021. Once entered into, this revolving loan facility will provide NCM LLC with short-term working capital loans as NCM LLC rebuilds its advertising revenue base and collects related accounts receivable and will provide additional cushion with respect to the NCM LLC debt covenants.
Senior Unsecured Notes due 2026—On August 19, 2016, NCM LLC completed a private placement of $250.0 million in aggregate principal amount of 5.750 % Senior Unsecured Notes (the “Notes due 2026”) for which the registered exchange offering was completed on November 8, 2016. The Notes due 2026 pay interest semi-annually in arrears on February 15 and August 15 of each year, which commenced on February 15, 2017. The Notes due 2026 were issued at 100 % of the face amount thereof and are the senior unsecured obligations of NCM LLC. NCM LLC repurchased and canceled a total of $20.0 million of the Notes due 2026 during 2019 and 2018, respectively, reducing the principal amount to $230.0 million as of July 1, 2021.
Senior Secured Notes due 2028—On October 8, 2019, NCM LLC completed a private offering of $400.0 million aggregate principal amount of 5.875 % Senior Secured Notes due 2028 (the “Notes due 2028”) to eligible purchasers. The Notes due 2028 will mature on April 15, 2028. Interest on the Notes due 2028 accrues at a rate of 5.875 % per annum and is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020. The Notes due 2028 were issued at 100 % of the face amount thereof and share in the same collateral that secures NCM LLC's obligations under the senior secured credit facility.
7. INCOME TAXES
8. COMMITMENTS AND CONTINGENCIES
Legal Actions—The Company is subject to claims and legal actions in the ordinary course of business. The Company believes such claims will not have a material effect individually or in the aggregate on its financial position, results of operations or cash flows.
Operating Commitments - Facilities—The Company has entered into operating lease agreements for its corporate headquarters and other regional offices. The Company has right-of-use (“ROU”) assets of $19.7 million and short-term and long-term lease liabilities of $2.0 million and $21.6 million, respectively, on the balance sheet as of July 1, 2021 for all material leases with terms longer than twelve months. These balances are included within “Other assets”, “Other current liabilities” and “Other liabilities”, respectively, on the unaudited Condensed Consolidated Balance Sheets. As of July 1, 2021, the Company had a weighted average remaining lease term of 8.6 years on these leases. When measuring the ROU assets and lease liabilities recorded, the Company utilized its incremental borrowing rate in order to determine the present value of the lease payments as the leases do not provide an implicit rate. The Company used the rate of interest that it would have paid to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. As of July 1, 2021, the Company’s weighted average annual discount rate used to establish the ROU assets and lease liabilities was 7.35 %.
During the three and six months ended July 1, 2021 and June 25, 2020, the Company recognized the following components of total lease cost (in millions). These costs are presented within “Selling and marketing costs” and “Administrative and other costs” within the unaudited Condensed Consolidated Statements of Income depending upon the nature of the use of the facility.
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | July 1, 2021 | June 25, 2020 | ||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
The Company made total lease payments of $1.1 million, $0.9 million, $2.0 million and $1.8 million during the three months ended July 1, 2021 and June 25, 2020 and six months ended July 1, 2021 and June 25, 2020, respectively. These payments are included within cash flows from operating activities within the unaudited Condensed Consolidated Statement of Cash Flows.
Operating Commitments - ESAs and Affiliate Agreements—The Company has entered into long-term ESAs with the founding members and multi-year agreements with certain network affiliates, or third-party theater circuits. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. The Company recognizes intangible assets upon issuance of membership units to the founding members in accordance with NCM LLC’s Common Unit Adjustment Agreement and upfront cash payments to the affiliates for the contractual rights to provide the Company’s services within their theaters as further discussed within Note 4 - Intangible Assets. These ESAs and network affiliate agreements are considered leases under ASC 842 once the asset is identified and the period of control is determined upon the scheduling of the showtimes by the exhibitors, typically one week prior to the showtime. As such, the leases are considered short-term in nature, specifically less than one month. Within ASC 842, leases with terms of less than one month are exempt from the majority of the accounting and disclosure requirements, including disclosure of short-term lease expense. No ROU assets or lease liabilities were recognized for these agreements and no change to the balance sheet presentation of the intangible assets was necessary. However, the amortization of these intangible assets is considered lease expense and is presented within “Amortization of intangibles recorded for network theater screen leases” within the unaudited Condensed Consolidated Statement of Income.
In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron, a fixed payment per digital screen (connected to the DCN) and a fee for access to higher quality digital cinema equipment. The payment per theater patron increases by 8 % every five years , with this next increase occurring in fiscal year 2022, and the payment per digital screen and for digital cinema equipment increases annually by 5 %. The theater access fee paid in the aggregate to all founding members cannot be less than 12 % of NCM LLC’s aggregate advertising revenue (as defined in the ESA), or it will be adjusted upward to reach this minimum payment. As of July 1, 2021 and December 31, 2020, the Company had no
Following the 2019 ESA Amendments, Cinemark and Regal receive an additional monthly theater access fee that began on November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron: (i) beginning at $0.025 per patron on November 1, 2019, (ii) $0.0375 per patron beginning on November 1, 2020, (iii) $0.05 per patron beginning on November 1, 2021, (iv) $0.052 per patron beginning on November 1, 2022 and (v) increase 8 % every five years beginning November 1, 2027. Additionally, following the 2019 ESA Amendments, beginning on November 1, 2019, NCM LLC is entitled to display the Platinum Spot, an additional single unit that is either 30 or 60 seconds of the Noovie® pre-show in the trailer position directly prior to the “attached” trailers preceding the feature film. The “attached” trailers are those provided by studios to Cinemark and Regal that are with the feature film, which is at least one trailer, but sometimes two or more trailers. In consideration for the utilization of the theaters for the Platinum Spots, Cinemark and Regal are entitled to receive 25 % of all revenue generated for the actual display of Platinum Spots in their applicable theaters, subject to a specified minimum. If NCM LLC runs advertising in more than one concurrent advertisers’ Platinum Spot for any portion of the network over a period of time, then NCM LLC will be required to satisfy a minimum average CPM for that period of time. The Company did not owe the founding members any theater access fees or any Platinum Spot revenue share when the theaters were not displaying the Company's pre-show or when the Company did not have access to the theaters. As such, the Company did not owe these fees for the period of time the founding members' theaters were temporarily closed due to the COVID-19 Pandemic and future fees will be reduced if attendance remains lower than historical levels. The digital screen fee is calculated based upon average screens in use during each month. No digital screen fees were incurred for the period of time the founding member's theaters were temporarily closed due to the COVID-19 Pandemic and future fees may be reduced for months where screens are in use for only part of the month.
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Non-Recurring Measurements—Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These assets include long-lived assets, intangible assets, other investments, notes receivable and borrowings.
Long-Lived Assets, Intangible Assets and Other Investments—The Company regularly reviews long-lived assets (primarily property, plant and equipment), intangible assets and investments accounted for under the cost or equity method for impairment whenever certain qualitative factors, events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.
Other investments consisted of the following (in millions):
| As of | |||||||||||
| July 1, 2021 | December 31, 2020 | ||||||||||
Investment in AC JV, LLC (1) | $ | $ | |||||||||
| Other investments | |||||||||||
| Total | $ | $ | |||||||||
_______________________________________
(1)Refer to Note 5—Related Party Transactions. This investment is accounted for utilizing the equity method.
As of July 1, 2021, no observable price changes or impairments have been recorded as a result of the Company’s qualitative assessment of identified events or changes in the circumstances of the remaining investments. The investment in AC JV, LLC was initially valued using comparative market multiples. The other investments were recorded based upon the fair
18
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
value of the services provided in exchange for the investment. As the inputs to the determination of fair value are based upon non-identical assets and use significant unobservable inputs, they have been classified as Level 3 in the fair value hierarchy.
Borrowings—The carrying amount of the revolving credit facility is considered a reasonable estimate of fair value due to its floating-rate terms. The estimated fair values of the Company’s financial instruments where carrying values do not approximate fair value were as follows (in millions):
| As of July 1, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| Carrying Value | Fair Value (1) | Carrying Value | Fair Value (1) | ||||||||||||||||||||
| Term loans - first tranche | $ | $ | $ | $ | |||||||||||||||||||
| Term loans - second tranche | — | — | |||||||||||||||||||||
| Notes due 2026 | |||||||||||||||||||||||
| Notes due 2028 | |||||||||||||||||||||||
____________________________________________
(1)If the Company were to measure the borrowings in the above table at fair value on the balance sheet they would be classified as Level 2 based upon the inputs utilized.
Recurring Measurements—The fair values of the Company’s assets and liabilities measured on a recurring basis pursuant to ASC 820-10, Fair Value Measurements and Disclosures are as follows (in millions):
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Fair Value as of July 1, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| ASSETS: | |||||||||||||||||||||||
Cash equivalents (1) | $ | $ | $ | $ | |||||||||||||||||||
Short-term marketable securities (2) | |||||||||||||||||||||||
Long-term marketable securities (2) | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Fair Value as of December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| ASSETS: | |||||||||||||||||||||||
Cash equivalents (1) | $ | $ | $ | $ | |||||||||||||||||||
Short-term marketable securities (2) | |||||||||||||||||||||||
Long-term marketable securities (2) | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
___________________________________________
(1)Cash Equivalents—The Company’s cash equivalents are carried at estimated fair value following the Company's election of the fair value option. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market for these accounts and commercial paper with original maturities of three months or less, which are classified as Level 2 and are valued as described below.
(2)Short-Term and Long-Term Marketable Securities—The carrying amount and fair value of the marketable securities are equivalent since the Company accounts for these instruments at fair value. The Company’s government agency bonds, commercial paper and certificates of deposit are valued using third party broker quotes. The value of the Company’s government agency bonds is derived from quoted market information. The inputs in the valuation are classified as Level 1 if there is an active market for these securities; however, if an active market does not exist, the inputs are recorded at a lower level in the fair value hierarchy. The value of commercial paper and certificates of deposit is derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amortized cost basis, aggregate fair value and maturities of the marketable securities the Company held as of July 1, 2021 and December 31, 2020 were as follows:
| As of July 1, 2021 | |||||||||||||||||
| Amortized Cost Basis (in millions) | Aggregate Fair Value (in millions) | Maturities (1) (in years) | |||||||||||||||
| MARKETABLE SECURITIES: | |||||||||||||||||
| Short-term certificates of deposit | $ | $ | |||||||||||||||
| Total short-term marketable securities | |||||||||||||||||
| Long-term certificates of deposit | |||||||||||||||||
| Total long-term marketable securities | |||||||||||||||||
| Total marketable securities | $ | $ | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||
| Amortized Cost Basis (in millions) | Aggregate Fair Value (in millions) | Maturities (1) (in years) | |||||||||||||||
| MARKETABLE SECURITIES: | |||||||||||||||||
| Short-term certificates of deposit | |||||||||||||||||
| Total short-term marketable securities | |||||||||||||||||
| Long-term certificates of deposit | |||||||||||||||||
| Total long-term marketable securities | |||||||||||||||||
| Total marketable securities | $ | $ | |||||||||||||||
___________________________________
(1)Maturities—Securities available for sale include obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days.
10. SUBSEQUENT EVENT
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and statements related to the impact of the current COVID-19 Pandemic on our business and results of operations, may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed in our annual report on Form 10-K for the Company’s fiscal year ended December 31, 2020. Among other risks, we face significant risk and volatility related to the COVID-19 Pandemic as discussed in this report. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herein and the audited financial statements and other disclosure included in our annual report on Form 10-K for the Company’s fiscal year ended December 31, 2020. In the following discussion and analysis, the term net income refers to net income attributable to NCM, Inc.
Overview
We are America's Movie Network. As the largest cinema advertising network in the U.S., we unite brands with the power of movies and engage movie fans anytime and anywhere. We currently derive revenue principally from the sale of advertising to national, regional and local businesses in Noovie®, our cinema advertising and entertainment pre-show seen on movie screens across the U.S.
We present two different formats of our Noovie pre-show depending on the theater circuit in which it runs. In Regal and Cinemark and 18 of our network affiliates' theaters, the Noovie pre-show now includes advertising inventory after the advertised showtime consisting of (1) the lights down segment that runs for five minutes after the advertised showtime with trailer lighting and (2) the 30- or 60-second Platinum Spot (together, the “Post-Showtime Inventory”). As of July 1, 2021, theaters presenting the new Noovie format with Post-Showtime Inventory made up approximately 56% of our network. All other NCM network theater circuits, which make up the remaining 44% of our network, present the Classic Noovie pre-show, which ends approximately at the advertised movie showtime when the movie trailers begin. The movie trailers that run before the feature film are not part of Noovie.
We also sell advertising on our LEN, a series of strategically placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, we sell online and mobile advertising through our Noovie Audience Accelerator, across our suite of Noovie digital properties, including Noovie.com, Noovie Shuffle, Name That Movie and Noovie Arcade, on third party partner’s internet sites, as well as a variety of complementary out of home venues, including restaurants, retail locations, convenience stores, college campuses and office and residential buildings, in order to reach entertainment audiences beyond the theater. As of July 1, 2021, over 5.6 million moviegoers have downloaded our mobile apps. These downloads and the acquisition of second party data have resulted in first- and second-party data sets of over 202.6 million as of July 1, 2021. We have long-term ESAs (approximately 18.2 weighted average years remaining based on pre-COVID-19 attendance levels) with the founding members and multi-year agreements with our network affiliates, which expire at various dates between August 2021 and December 2037. The weighted average remaining term of the ESAs and the network affiliate agreements is 15.9 years as of July 1, 2021. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. Our Noovie pre-show and LEN programming are distributed predominantly via satellite through our proprietary digital content network “DCN”.
Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. We focus on operating metrics including changes in revenue, Adjusted OIBDA and Adjusted OIBDA margin, as defined and discussed below, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, national and regional advertising pricing (CPM), local advertising rate per screen per week, national and local and regional and total advertising revenue per attendee. We also monitor free cash flow, the dividend coverage ratio, financial leverage ratio (net debt divided by Adjusted OIBDA plus integration payments and other encumbered theater payments), cash balances and revolving credit facility availability to ensure financial debt covenant compliance and that
21
there is adequate cash availability to fund our working capital needs and debt obligations and current and future dividends declared by our Board of Directors.
Our operating results may be affected by a variety of internal and external factors and trends described more fully in the section entitled “Risk Factors” below and in our annual report on Form 10-K filed with the SEC on March 8, 2021 for our fiscal year ended December 31, 2020.
Recent Developments
COVID-19 Impact and Outlook—As previously disclosed, the COVID-19 Pandemic has had a significant impact on the world and our business beginning in March 2020 as the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. These governmental restrictions resulted in the closure of most of our network theaters for approximately six months and thus the Company generated no in-theater advertising revenue during that time. When theaters began to reopen in late in the third quarter of 2020, in-theater advertising revenue continued to be adversely impacted as attendance at the reopened theaters was significantly less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases.
Beginning in 2021, Multiple COVID-19 vaccines were approved and have been widely administered throughout the United States. As a result, during the second quarter of 2021, government restrictions lessened allowing theaters in key larger markets to fully reopen over the course of the second quarter of 2021. As of July 1, 2021, approximately 97.0% of the theaters within the Company’s network were open. Multiple, successful major motion pictures were released during the second quarter of 2021 resulting in the highest attendance numbers within our network since the start of the COVID-19 Pandemic. The movie slate for the remainder of 2021 and into 2022 remains packed due to the addition of the major motion pictures originally scheduled for 2020. Despite the increase in network attendance, second quarter of 2021 in-theater advertising revenue remained significantly below historical levels as we believe many advertisers continued to delay making commitments until they confirmed that industry attendance had achieved necessary critical mass. We were also not able to participate in the 2021 advertising upfront marketplace during the summer of 2020 while theaters were closed. There can be no assurance that the cases of the COVID-19 virus will continue to decline; new variants will not continue to spread; recently reinstated mask mandates will not negatively impact network attendance, advertiser sentiment, and our business in general; social distancing, capacity restrictions, and other public safety measures will not be reintroduced; when or if theaters within our network will return to historic attendance levels and that the theaters which have reopened will remain open.
To ensure sufficient liquidity to endure the impacts of the COVID-19 Pandemic, even if prolonged, we continued to manage our liquidity position through various cost control methods discussed further within the “Financial Condition and Liquidity” section below. Since the beginning of the COVID-19 Pandemic, the Company has significantly reduced payroll related costs through a combination of temporary furloughs, permanent layoffs and salary reductions (“Payroll Related Cost Reductions”). In total, the Company’s headcount has been reduced by over 30% as compared to headcount levels prior to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or in-theater advertising revenue, and therefore, were not incurred for the duration of time that the theaters were closed and attendance-based fees will continue to be reduced for the period of time that attendance is lower than historical levels. We were still required to pay these screen-based fees when theaters are open, which were reduced for months where screens are in use for only part of the month. As a result of these actions and lower attendance, total operating expenses were over 20% lower in the six months ended July 1, 2021, as compared to the six months ended June 25, 2020.
Further, due to these future market uncertainties and in order to provide additional liquidity while revenue levels build and accounts receivable balances are collected, the Board of Directors of NCM, Inc. and required NCM LLC founding members approved the material terms of a $20.0 million unsecured revolving loan agreement between NCM Inc. and NCM LLC. Borrowings by NCM LLC will be available from October 1, 2021 through March 31, 2022. The final definitive loan agreement will be approved by the Audit Committee of NCM, Inc. and is expected to be completed in the third quarter of 2021. Once entered into, this revolving loan facility will provide NCM LLC with short-term working capital loans as NCM LLC rebuilds its advertising revenue base and collects related accounts receivable and will provide additional cushion with respect to the NCM LLC debt covenants.
We believe that the exhibition industry has historically fared well during periods of economic stress, and we remain optimistic, though cannot guarantee, that our founding members and network affiliates will rebound and attendance figures will continue to benefit from pent-up social demand as people seek togetherness with a return to normalcy. However, the ultimate significance of the COVID-19 Pandemic, including the extent of the adverse impact on our financial and operational results, will be dictated by the currently unknowable duration of the pandemic, the effect of the pandemic on the overall economy and the advertising market, responsive governmental regulations, including mandated business closures which could recur causing subsequent closure periods, social distancing guidelines, theater capacity restrictions, government restrictions, shifting movie slates, voluntary theater closures and decreasing levels of theater attendance. Our business also could be significantly affected
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should the disruptions caused by the COVID-19 Pandemic lead to permanent changes in consumer behavior (such as the movie audience’s willingness to return to the movie theaters, which may be influenced by the adoption or continued use of streaming services), or further reductions or impacts to the customary theatrical release window. The COVID-19 Pandemic also makes it more challenging for management to estimate the future performance of our business, particularly over the near to medium term. We are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Summary Historical and Operating Data
You should read this information with the other information contained in this document, and our unaudited historical financial statements and the notes thereto included elsewhere in this document.
Our Operating Data—The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data):
| % Change | |||||||||||||||||||||||||||||||||||
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | Q2 2021 to Q2 2020 | YTD 2021 to YTD 2020 | ||||||||||||||||||||||||||||||
| Revenue | $ | 14.0 | $ | 4.0 | $ | 19.4 | $ | 68.7 | 250.0 | % | (71.8) | % | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Advertising | 20.7 | 5.6 | 31.2 | 42.4 | 269.6 | % | (26.4) | % | |||||||||||||||||||||||||||
| Network, administrative and unallocated costs | 22.9 | 22.2 | 46.1 | 45.2 | 3.2 | % | 2.0 | % | |||||||||||||||||||||||||||
| Total operating expenses | 43.6 | 27.8 | 77.3 | 87.6 | 56.8 | % | (11.8) | % | |||||||||||||||||||||||||||
| Operating loss | (29.6) | (23.8) | (57.9) | (18.9) | 24.4 | % | 206.3 | % | |||||||||||||||||||||||||||
| Non-operating expenses | 17.3 | 13.8 | 31.0 | 27.3 | 25.4 | % | 13.6 | % | |||||||||||||||||||||||||||
| Income tax benefit | — | (4.2) | — | (4.6) | (100.0) | % | (100.0) | % | |||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (24.2) | (19.6) | (46.8) | (24.1) | 23.5 | % | 94.2 | % | |||||||||||||||||||||||||||
| Net loss attributable to NCM, Inc. | $ | (22.7) | $ | (13.8) | $ | (42.1) | $ | (17.5) | 64.5 | % | 140.6 | % | |||||||||||||||||||||||
| Net loss per NCM, Inc. basic share | $ | (0.28) | $ | (0.18) | $ | (0.53) | $ | (0.22) | 55.6 | % | 140.9 | % | |||||||||||||||||||||||
| Net loss per NCM, Inc. diluted share | $ | (0.28) | $ | (0.18) | $ | (0.53) | $ | (0.22) | 55.6 | % | 140.9 | % | |||||||||||||||||||||||
| Adjusted OIBDA | $ | (18.7) | $ | (12.7) | $ | (34.9) | $ | 1.7 | 47.2 | % | (2152.9) | % | |||||||||||||||||||||||
| Adjusted OIBDA margin | (133.6) | % | (317.5) | % | (179.9) | % | 2.5 | % | 183.9 | % | (182.4) | % | |||||||||||||||||||||||
Total theater attendance (in millions) (1) | 49.1 | 0.2 | 62.9 | 120.6 | NM | (47.8) | % | ||||||||||||||||||||||||||||
_________________________
(1)Represents the total attendance within our advertising network, excluding screens and attendance associated with certain AMC Carmike theaters that were part of another cinema advertising network for certain periods presented. Refer to Note 4 to the unaudited Condensed Consolidated Financial Statements included elsewhere in this document.
Non-GAAP Financial Measures
Adjusted Operating Income Before Depreciation and Amortization (“Adjusted OIBDA”) and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States. Adjusted OIBDA represents operating income before depreciation expense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share-based compensation costs and impairment of long-lived assets. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management uses these non-GAAP financial measures to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes these are important supplemental measures of operating performance because they eliminate items that have less bearing on the Company's operating performance and so highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation policies, amortization of intangibles recorded for network
23
theater screen leases, non-cash share based compensation programs, interest rates, debt levels or income tax rates. A limitation of these measures, however, is that they exclude depreciation and amortization of intangibles recorded for network theater screen leases, which represent a proxy for the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s business. In addition, Adjusted OIBDA has the limitation of not reflecting the effect of the Company’s share-based payment costs. Adjusted OIBDA should not be regarded as an alternative to operating income, net income or as an indicator of operating performance, nor should it be considered in isolation of, or as a substitute for, financial measures prepared in accordance with GAAP. The Company believes that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA. Because not all companies use identical calculations, these non-GAAP presentations may not be comparable to other similarly titled measures of other companies, or calculations in the Company’s debt agreement.
The following table reconciles operating income to Adjusted OIBDA for the periods presented (dollars in millions):
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | ||||||||||||||||||||
| Operating loss | $ | (29.6) | $ | (23.8) | $ | (57.9) | $ | (18.9) | |||||||||||||||
| Depreciation expense | 2.6 | 3.2 | 5.9 | 6.4 | |||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 6.2 | 6.1 | 12.3 | 12.2 | |||||||||||||||||||
Share-based compensation costs (1) | 2.1 | 0.1 | 4.8 | 0.3 | |||||||||||||||||||
Impairment of long-lived assets (2) | — | 1.7 | — | 1.7 | |||||||||||||||||||
| Adjusted OIBDA | $ | (18.7) | $ | (12.7) | $ | (34.9) | $ | 1.7 | |||||||||||||||
| Total revenue | $ | 14.0 | $ | 4.0 | $ | 19.4 | $ | 68.7 | |||||||||||||||
| Adjusted OIBDA margin | (133.6) | % | (317.5) | % | (179.9) | % | 2.5 | % | |||||||||||||||
(1)Share-based compensation costs are included in network operations, selling and marketing and administrative expense in the accompanying unaudited Condensed Consolidated Financial Statements.
(2)The impairment of long-lived assets primarily relate to the write off of certain internally developed software.
Our Network—The change in the number of screens in our network by the founding members and network affiliates during the six months ended July 1, 2021 was as follows.
| Number of screens | |||||||||||||||||
| Founding Members | Network Affiliates | Total | |||||||||||||||
| Balance as of December 31, 2020 | 16,515 | 3,935 | 20,450 | ||||||||||||||
New affiliates, net of lost affiliates (1) | — | 464 | 464 | ||||||||||||||
Closures, net of openings (2) | (23) | (8) | (31) | ||||||||||||||
| Balance as of July 1, 2021 | 16,492 | 4,391 | 20,883 | ||||||||||||||
______________________________________
(1)Represents the addition of one new affiliate which added 501 new screens to our network, offset by the loss of three of our affiliates that closed during the first six months of 2021 resulting in a reduction of 37 affiliate screens to our network as of July 1, 2021.
(2)Excludes the temporary theater closures in response to the COVID-19 Pandemic.
Our founding member and network affiliate agreements allow us to sell cinema advertising across the largest network of digitally equipped theaters in the U.S. We believe that our market coverage strengthens our selling proposition and competitive positioning against other national, regional and local video advertising platforms, including television, online and mobile video platforms and other out-of-home video advertising platforms by allowing advertisers the broad reach and national scale that they need to effectively reach their target audiences.
Basis of Presentation
The results of operations data for the three months ended July 1, 2021 (second quarter of 2021) and June 25, 2020 (second quarter of 2020) and the six months ended July 1, 2021 and June 25, 2020 and was derived from the unaudited Condensed Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the notes thereto.
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Results of Operations
Second Quarter of 2021 and Second Quarter of 2020
Revenue. Total revenue increased 250.0%, from $4.0 million for the second quarter of 2020 to $14.0 million for the second quarter of 2021. The following is a summary of revenue by category (in millions):
| $ Change | % Change | ||||||||||||||||||||||
| Q2 2021 | Q2 2020 | Q2 2021 to Q2 2020 | Q2 2021 to Q2 2020 | ||||||||||||||||||||
| National and regional advertising revenue | $ | 8.9 | $ | 1.7 | $ | 7.2 | 423.5 | % | |||||||||||||||
| Local advertising revenue | 3.0 | 2.3 | 0.7 | 30.4 | % | ||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | 2.1 | — | 2.1 | 100.0 | % | ||||||||||||||||||
| Total revenue | $ | 14.0 | $ | 4.0 | $ | 10.0 | 250.0 | % | |||||||||||||||
The following table shows data on theater attendance and revenue per attendee for the three months ended July 1, 2021 and June 25, 2020:
| % Change | |||||||||||||||||
| Q2 2021 | Q2 2020 | Q2 2021 to Q2 2020 | |||||||||||||||
| National and regional advertising revenue per attendee | $ | 0.181 | NM | NM | |||||||||||||
| Local advertising revenue per attendee | $ | 0.061 | NM | NM | |||||||||||||
| Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.242 | NM | NM | |||||||||||||
| Total advertising revenue per attendee | $ | 0.285 | NM | NM | |||||||||||||
Total theater attendance (in millions) (1) | 49.1 | 0.2 | NM | ||||||||||||||
________________________________________________________
(1)Represents the total attendance within our advertising network, excluding screens and attendance associated with certain AMC Carmike theaters that were part of another cinema advertising network for certain periods presented.
National and regional advertising revenue. The $7.2 million, or 423.5%, increase in national and regional advertising revenue (excluding beverage revenue from founding members) was due to a significant increase in impressions sold and attendance as 97.0% of the theaters within our network were open and multiple major motion pictures were released during the second quarter of 2021 compared to the temporary closure of almost all of the theaters in our network in response to the COVID-19 Pandemic in the second quarter of 2020.
Local advertising revenue. The $0.7 million, or 30.4%, increase in local advertising revenue was due primarily to the ability to generate onscreen advertising revenue in the second quarter of 2021, compared to the second quarter of 2020 as 97.0% of the theaters within our network were open and multiple major motion pictures were released during the second quarter of 2021 compared to the temporary closure of almost all of the theaters in our network in response to the COVID-19 Pandemic in the second quarter of 2020.
Founding member beverage revenue. The $2.1 million, or 100.0%, increase in national advertising revenue from the founding members’ beverage concessionaire agreements was due to the reopening of 98.8% of founding member theaters within our network and the release of multiple major motion pictures during the second quarter of 2021 compared to the temporary closure of all of the founding member theaters in our network in response to the COVID-19 Pandemic during the second quarter of 2020.
Operating expenses. Total operating expenses increased $15.8 million, or 56.8%, from $27.8 million for the second quarter of 2020 to $43.6 million for the second quarter of 2021. The following table shows the changes in operating expense for the second quarter of 2021 (in millions):
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| $ Change | % Change | ||||||||||||||||||||||
| Q2 2021 | Q2 2020 | Q2 2021 to Q2 2020 | Q2 2021 to Q2 2020 | ||||||||||||||||||||
| Advertising operating costs | $ | 3.2 | $ | 1.1 | $ | 2.1 | 190.9 | % | |||||||||||||||
| Network costs | 1.9 | 1.6 | 0.3 | 18.8 | % | ||||||||||||||||||
| Theater access fees and revenue share—founding members | 11.2 | — | 11.2 | 100.0 | % | ||||||||||||||||||
| Selling and marketing costs | 8.9 | 6.7 | 2.2 | 32.8 | % | ||||||||||||||||||
| Administrative and other costs | 9.6 | 7.4 | 2.2 | 29.7 | % | ||||||||||||||||||
| Impairment of long-lived assets | — | 1.7 | (1.7) | (100.0) | % | ||||||||||||||||||
| Depreciation expense | 2.6 | 3.2 | (0.6) | (18.8) | % | ||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 6.2 | 6.1 | 0.1 | 1.6 | % | ||||||||||||||||||
Total operating expenses | $ | 43.6 | $ | 27.8 | $ | 15.8 | 56.8 | % | |||||||||||||||
Advertising operating costs. Advertising operating costs increased $2.1 million, or 190.9%, from $1.1 million for the second quarter of 2020 to $3.2 million for the second quarter of 2021. The increase was due primarily to a $2.0 million increase in advertising affiliate expense due to higher revenue in the second quarter of 2021 as compared to the second quarter of 2020 and the addition of a new affiliate representing 501 screens during 2021.
Network costs. Network costs increased $0.3 million, or 18.8%, from $1.6 million for the second quarter of 2020 to $1.9 million for the second quarter of 2021. The increase was primarily related to a $0.4 million increase in personnel expenses primarily related to the return of certain employees from furlough and restoration of hours and/or salaries of certain other employees from reductions that had been implemented at the beginning of the second quarter of 2020 in response to the COVID-19 Pandemic.
Theater access fees and revenue share—founding members. Theater access fees and revenue share increased from $0.0 million in the second quarter of 2020 to $11.2 million in the second quarter of 2021. The increase was due to there being theater attendance and active founding member screens in the second quarter of 2021, compared to closures of all the founding member theaters in our network in the second quarter of 2020.
Selling and marketing costs. Selling and marketing costs increased $2.2 million, or 32.8%, from $6.7 million for the second quarter of 2020 to $8.9 million for the second quarter of 2021. This increase was primarily related to a $1.9 million increase in personnel expenses primarily related to the return of a portion of our sales and marketing departments from furlough and restoration of hours and/or salaries of certain other employees from reductions that had been implemented at the beginning of the second quarter of 2020 in response to the COVID-19 Pandemic, an increase in commission expense related to higher revenue during the second quarter of 2021, as compared to the second quarter of 2020, and the higher share-based compensation expense.
Administrative and other costs. Administrative and other costs increased $2.2 million, or 29.7%, from $7.4 million in the second quarter of 2020 to $9.6 million in the second quarter of 2021. This increase was primarily due to a $2.5 million increase in personnel expenses due to higher share-based compensation expense primarily from the issuance of equity grants in late 2020 and early 2021, higher projected performance against internal bonus targets during the six months ended July 1, 2021 and due to a decrease in capitalized personnel costs resulting from the nature of the work being performed by our technology department during the second quarter of 2021, as compared to the second quarter of 2020. Administrative and other costs also increased $0.5 million related to cloud computing expense incurred in the second quarter of 2021 related to the implementation of our new end-to-end order management and scheduling system in January 2021. These increases were partially offset by a $0.9 million decrease in legal and professional fees primarily related to legal services obtained in the second quarter of 2020 related to the various implications of the COVID-19 Pandemic.
Impairment of long-lived assets. Impairment of long-lived assets decreased $1.7 million, or 100.0%, from $1.7 million in the second quarter of 2020 to $0.0 million in the second quarter of 2021. This decrease in impairment expense was primarily related to the write-off of certain long-lived assets during the second quarter of 2020.
Depreciation expense. Depreciation expense decreased $0.6 million, or 18.8%, from $3.2 million for the second quarter of 2020 to $2.6 million in the second quarter of 2021, as assets became fully depreciated.
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Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen leases increased $0.1 million, or 1.6%, from $6.1 million for the second quarter of 2020 to $6.2 million for the second quarter of 2021.
Non-operating expenses. Total non-operating expenses increased $3.5 million, or 25.4%, from $13.8 million for the second quarter of 2020 to $17.3 million for the second quarter of 2021. The following table shows the changes in non-operating expense for the second quarter of 2021 and the second quarter of 2020 (in millions):
| $ Change | % Change | ||||||||||||||||||||||
| Q2 2021 | Q2 2020 | Q2 2021 to Q2 2020 | Q2 2021 to Q2 2020 | ||||||||||||||||||||
| Interest on borrowings | $ | 16.9 | $ | 13.6 | $ | 3.3 | 24.3 | % | |||||||||||||||
| Interest income | (0.1) | (0.3) | 0.2 | (66.7) | % | ||||||||||||||||||
| Loss on modification and retirement of debt, net | 0.4 | 0.3 | 0.1 | 33.3 | % | ||||||||||||||||||
| Loss on the re-measurement of the payable to founding members under the tax receivable agreement | 0.1 | 0.1 | — | — | % | ||||||||||||||||||
| Other non-operating expense (income) | — | 0.1 | (0.1) | (100.0) | % | ||||||||||||||||||
| Total non-operating expenses | $ | 17.3 | $ | 13.8 | $ | 3.5 | 25.4 | % | |||||||||||||||
The increase in non-operating expense was primarily due to a $3.3 million increase in interest on borrowings related to the issuance of the second tranche of the terms loans and the increase in the contracted interest rate on the initial tranche of the term loans and the revolving credit facility following the Credit Agreement Second Amendment entered into on March 8, 2021.
Income Tax Benefit. Income tax benefit decreased from income tax benefit of $4.2 million for the second quarter of 2020 to $0.0 million of income tax benefit for the second quarter of 2021. The decrease in income tax benefit was primarily due to the full valuation allowance recorded against the Company’s deferred tax assets as of July 1, 2021 which reduced deferred tax expense to $0.0 million for the three months ended July 1, 2021.
Net Loss. Net loss increased $8.9 million from net loss of $13.8 million for the second quarter of 2020 to $22.7 million for the second quarter of 2021. The increase in net loss was due to a $5.8 million increase in operating loss, a $4.2 million decrease in income tax benefit and a $3.5 million increase in non-operating expense, partially offset by a $4.6 million increase in net loss attributable to noncontrolling interests.
Six months ended July 1, 2021 and June 25, 2020
Revenue. Total revenue decreased 71.8%, from $68.7 million for the six months ended June 25, 2020 to $19.4 million for the six months ended July 1, 2021. The following is a summary of revenue by category (in millions):
| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | YTD 2021 to YTD 2020 | YTD 2021 to YTD 2020 | ||||||||||||||||||||
| National and regional advertising revenue | $ | 12.6 | $ | 51.5 | $ | (38.9) | (75.5) | % | |||||||||||||||
| Local advertising revenue | 4.2 | 11.7 | (7.5) | (64.1) | % | ||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | 2.6 | 5.5 | (2.9) | (52.7) | % | ||||||||||||||||||
| Total revenue | $ | 19.4 | $ | 68.7 | $ | (49.3) | (71.8) | % | |||||||||||||||
The following table shows data on theater attendance and revenue per attendee for six months ended July 1, 2021 and June 25, 2020:
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| Six Months Ended | % Change | ||||||||||||||||
| July 1, 2021 | June 25, 2020 | YTD 2021 to YTD 2020 | |||||||||||||||
| National and regional advertising revenue per attendee | $ | 0.200 | $ | 0.427 | (53.2) | % | |||||||||||
| Local advertising revenue per attendee | $ | 0.067 | $ | 0.097 | (30.9) | % | |||||||||||
| Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.267 | $ | 0.524 | (49.0) | % | |||||||||||
| Total advertising revenue per attendee | $ | 0.308 | $ | 0.570 | (46.0) | % | |||||||||||
| Total theater attendance (in millions) (1) | 62.9 | 120.6 | (47.8) | % | |||||||||||||
________________________________________________________
(1)Represents the total attendance within our advertising network, excluding screens and attendance associated with certain AMC Carmike theaters that were part of another cinema advertising network for certain periods presented.
National and regional advertising revenue. The $38.9 million, or 75.5%, decrease in national and regional advertising revenue (excluding beverage revenue from founding members) was due to an 81.8% decrease in impressions sold due to the significant decrease in attendance from historical levels as a result of fewer open theaters within our network, fewer motion picture releases and a longer period of government mandated capacity restrictions during the six months ended July 1, 2021, compared to the six months ended June 25, 2020.
Local advertising revenue. The $7.5 million, or 64.1%, decrease in local advertising revenue was due to fewer open theaters within our network, fewer motion picture releases and a longer period of government mandated capacity restrictions during the six months ended July 1, 2021, compared to the six months ended June 25, 2020.
Founding member beverage revenue. The $2.9 million, or 52.7%, decrease in national advertising revenue from the founding members’ beverage concessionaire agreements was primarily due to a 51.2% decrease in founding member attendance for the six months ended July 1, 2021, as compared to the six months ended June 25, 2020, due to the temporary theater closures and lower attendance described above related to the COVID-19 Pandemic.
Operating expenses. Total operating expenses decreased $10.3 million, or 11.8%, from $87.6 million for the six months ended June 25, 2020 to $77.3 million for the six months ended July 1, 2021. The following table shows the changes in operating expense for the six months ended July 1, 2021 and June 25, 2020 (in millions):
| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | YTD 2021 to YTD 2020 | YTD 2021 to YTD 2020 | ||||||||||||||||||||
| Advertising operating costs | $ | 4.7 | $ | 7.3 | $ | (2.6) | (35.6) | % | |||||||||||||||
| Network costs | 3.7 | 4.5 | (0.8) | (17.8) | % | ||||||||||||||||||
| Theater access fees—founding members | 14.3 | 17.7 | (3.4) | (19.2) | % | ||||||||||||||||||
| Selling and marketing costs | 16.6 | 20.6 | (4.0) | (19.4) | % | ||||||||||||||||||
| Administrative and other costs | 19.8 | 17.2 | 2.6 | 15.1 | % | ||||||||||||||||||
| Impairment of long-lived assets | — | 1.7 | (1.7) | (100.0) | % | ||||||||||||||||||
| Depreciation expense | 5.9 | 6.4 | (0.5) | (7.8) | % | ||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 12.3 | 12.2 | 0.1 | 0.8 | % | ||||||||||||||||||
| Total operating expenses | $ | 77.3 | $ | 87.6 | $ | (10.3) | (11.8) | % | |||||||||||||||
Advertising operating costs. Advertising operating costs decreased $2.6 million, or 35.6%, from $7.3 million for the six months ended June 25, 2020 to $4.7 million for the six months ended July 1, 2021. The decrease was due primarily to a $2.0 million decrease in advertising affiliate expense due to lower revenue in the six months ended July 1, 2021 as compared to the six months ended June 25, 2020 due to the COVID-19 Pandemic and a $0.3 million decrease in personnel related expenses due to the Payroll Related Cost Reductions implemented in response to the COVID-19 Pandemic which were in place for the full six months ended July 1, 2021, as compared to three of the six months ended June 25, 2020.
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Network costs. Network costs decreased $0.8 million, or 17.8%, from $4.5 million for the six months ended June 25, 2020 to $3.7 million for the six months ended July 1, 2021. The decrease was primarily related to a $0.5 million decrease in personnel related expenses related to the Payroll Related Cost Reductions implemented in response to the COVID-19 Pandemic which were in place for the full six months ended July 1, 2021, as compared to three of the six months ended June 25, 2020, and a $0.1 million decrease related to non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic.
Theater access fees and revenue share—founding members. Theater access fees and revenue share decreased $3.4 million, or 19.2%, from $17.7 million in the six months ended June 25, 2020 to $14.3 million in the six months ended July 1, 2021. Theater access fees and revenue share decreased $5.6 million due to a 51.2% decrease in founding member attendance. The decrease due to attendance was partially offset by a $1.3 million increase due to the annual contractual rate increase related to the fee for post-showtime attendance and digital screens and a $0.9 million increase due to an increase in active screens for the six months ended July 1, 2021, as compared to the six months ended June 25, 2020.
Selling and marketing costs. Selling and marketing costs decreased $4.0 million, or 19.4%, from $20.6 million for the six months ended June 25, 2020 to $16.6 million for the six months ended July 1, 2021. This decrease was primarily related to a $2.3 million decrease related to non-essential operating expenditures, including marketing, training, research, consulting and employee travel that were suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic and a $1.0 million decrease in bad debt expense related to lower revenue in the six months ended July 1, 2021, compared to the six months ended June 25, 2020. Personnel expense also decreased $1.0 million primarily related to the Payroll Related Cost Reductions implemented in response to the COVID-19 Pandemic and a decrease in commission expense driven by the revenue declines during the six months ended July 1, 2021, as compared to the six months ended June 25, 2020. These decreases were partially offset by a $0.8 million increase in expense associated with our digital offerings due to an increase in digital revenue for the six months ended July 1, 2021, as compared to the six months ended June 25, 2020.
Administrative and other costs. Administrative and other costs increased $2.6 million, or 15.1%, from $17.2 million for the six months ended June 25, 2020 to $19.8 million for the six months ended July 1, 2021. This increase was primarily due to a $5.4 million increase in performance-based compensation expense following the modification of certain of the Company’s performance-based equity grants, issuance of new equity grants and higher projected performance against internal bonus targets during the six months ended July 1, 2021. This increase was partially offset by a $1.6 million decrease in salary and other personnel related expenses related to the Payroll Related Cost Reductions in place during the six months ended July 1, 2021 in response to the COVID-19 Pandemic, a $1.5 million decrease in legal and professional fees for the six months ended July 1, 2021, as compared to the six months ended June 25, 2020 due in part to legal services obtained in the second quarter of 2020 related to the various implications of the COVID-19 Pandemic and a $0.3 million decrease related to reductions in non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic.
Impairment of long-lived assets. Impairment of long-lived assets decreased $1.7 million, or 100.0%, from $1.7 million in the six months ended June 25, 2020 to $0.0 million in the six months ended July 1, 2021. This decrease in impairment expense was primarily related to the write-off of certain long-lived assets during the second quarter of 2020.
Depreciation expense. Depreciation expense decreased $0.5 million, or 7.8%, from $6.4 million for the six months ended June 25, 2020 to $5.9 million in the six months ended July 1, 2021, as assets became fully depreciated.
Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen leases increased $0.1 million, or 0.8%, from $12.2 million for the six months ended June 25, 2020, to $12.3 million for the six months ended July 1, 2021.
Non-operating expenses. Total non-operating expenses increased $3.7 million, or 13.6%, from $27.3 million for the six months ended June 25, 2020 to $31.0 million for the six months ended July 1, 2021. The following table shows the changes in non-operating expense for the six months ended July 1, 2021 and June 25, 2020 (in millions):
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| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| July 1, 2021 | June 25, 2020 | YTD 2021 to YTD 2020 | YTD 2021 to YTD 2020 | ||||||||||||||||||||
| Interest on borrowings | $ | 31.6 | $ | 27.2 | $ | 4.4 | 16.2 | % | |||||||||||||||
| Interest income | (0.1) | (0.5) | 0.4 | (80.0) | % | ||||||||||||||||||
| Loss on modification and retirement of debt, net | 0.8 | 0.3 | 0.5 | 166.7 | % | ||||||||||||||||||
| (Gain) loss on re-measurement of the payable to founding members under the tax receivable agreement | (1.4) | 0.3 | (1.7) | (566.7) | % | ||||||||||||||||||
| Other non-operating expense | 0.1 | — | 0.1 | 100.0 | % | ||||||||||||||||||
| Total non-operating expenses | $ | 31.0 | $ | 27.3 | $ | 3.7 | 13.6 | % | |||||||||||||||
The increase in non-operating expense was primarily due to a $4.4 million increase in interest on borrowings related to the issuance of the second tranche of the terms loans and the increase in the contracted interest rate on the initial tranche of the term loans and the revolving credit facility and a $0.5 million increase in the loss on modifications and retirements of debt, net resulting from the Credit Agreement Second Amendment entered into on March 8, 2021. These increases were partially offset by a $1.7 million increase in the gain on re-measurement of the payable to founding members under the Tax Receivable Agreement (“TRA”) due to a reduction in the payable to the founding members under the TRA following the recognition of certain deferred tax assets related to cancellation of debt income recognized for tax purposes in the first quarter of 2021 related to the Credit Agreement Second Amendment.
Income Tax Benefit. Income tax benefit decreased from income tax benefit of $4.6 million for the six months ended June 25, 2020 to $0.0 million of income tax benefit for the six months ended July 1, 2021. The decrease in income tax benefit was primarily due to the full valuation allowance recorded against the Company’s deferred tax assets as of July 1, 2021 which reduced deferred tax expense to $0.0 million for the six months ended July 1, 2021.
Net Loss. Net loss increased $24.6 million from net loss of $17.5 million for the six months ended June 25, 2020 to $42.1 million for the six months ended July 1, 2021. The increase in net loss was due to a $39.0 million increase in operating loss, a $4.6 million decrease in income tax benefit and a $3.7 million increase in non-operating expense, partially offset by a $22.7 million increase in net loss attributable to noncontrolling interests.
Known Trends and Uncertainties
COVID-19—As discussed within the ‘Recent Developments’ section, due to the COVID-19 Pandemic certain theaters within the Company’s network remained temporarily closed during the six months ended July 1, 2021 and the Company's ability to advertise within the opened theaters has been and will continue to be limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of new major motion picture releases as compared to prior years due to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or revenue, and therefore, are not incurred when theaters are closed and attendance-based fees will be reduced for the period of time that attendance is lower than historical levels.
Due to the rapidly changing business environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 Pandemic, we are currently unable to fully determine the extent of the COVID-19 Pandemic’s impact on our business in future periods. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Beverage Revenue—Under the ESAs, up to 90 seconds of the Noovie® pre-show program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. For the first three and six months of 2021 and 2020, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds to satisfy their obligations under their beverage concessionaire agreements. The founding members’ current long-term contracts with their beverage suppliers require the 30 or 60 seconds of beverage advertising, although such commitments could change in the future. Should the amount of time required as part of these beverage concessionaire agreements decline, this premium time will be available for sale to other clients. Per the ESA with AMC, the time sold to the founding member beverage supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of the Noovie pre-show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC. The CPM on our beverage concessionaire revenue related to AMC in 2021 did not change compared to 2020. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal's beverage suppliers
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instead increased at a fixed rate of 2.0%. Founding member attendance has been and may continue to be lower than historical levels following the re-opening of theaters due to the COVID-19 Pandemic, which could reduce the Company’s beverage revenue.
Theater Access Fees—In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron and a fixed payment per digital screen (connected to the DCN). The payment per theater patron increases by 8% every five years, with the next increase occurring in fiscal year 2022. Pursuant to the ESAs, the payment per digital screen increases annually by 5%. Pursuant to the 2019 ESA Amendments, Cinemark and Regal each receive an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron: (i) beginning at $0.025 per patron on November 1, 2019, (ii) $0.0375 per patron beginning on November 1, 2020, (iii) $0.05 per patron beginning on November 1, 2021, (iv) $0.052 per patron beginning on November 1, 2022 and (v) increasing 8% every five years beginning November 1, 2027. The Company does not owe the founding members any theater access fees when the theaters are closed. The digital screen fee is calculated based upon screens in use during each month. No digital screen fees will be incurred for the months where a screen is not in use and fees may be reduced for months where screens are in use for only part of the month. Further, founding member attendance has been and may continue to be lower than historical levels following the re-opening of theaters, which could reduce the Company’s theater access fees.
Platinum Spot—In consideration for the utilization of the theaters post-showtime for Platinum Spots, Cinemark and Regal receive 25% of all revenue generated for the actual display of Platinum Spots in their applicable theaters, subject to a specified minimum. If NCM LLC runs advertising in more than one concurrent advertisers’ Platinum Spot for any portion of the network over a period of time, then NCM LLC will be required to satisfy a minimum average CPM for that period of time.
Financial Condition and Liquidity
Liquidity and Capital Resources
Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as available cash payments (as defined in the NCM LLC Operating Agreement) to NCM LLC’s founding members, interest or principal payments on our term loans and the Notes due 2026 and Notes due 2028, income tax payments, TRA payments to NCM LLC’s founding members and amount of quarterly dividends to NCM, Inc.’s common stockholders.
As discussed within the ‘Recent Developments’ section, due to the COVID-19 Pandemic, certain theaters within the Company’s network remained temporarily closed during the six months ended July 1, 2021 and the Company's ability to advertise within the reopened theaters has been and may continue to be limited due to lower than historical levels of attendance due in part to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of major motion picture releases as compared to prior years due to the COVID-19 Pandemic. The Company will have limited cash receipts until attendance levels normalize and advertising revenue increases. Further, once the above conditions are met there will be a lag between when revenue is generated and when the Company ultimately collects the associated accounts receivable balance. The Company also had reduced cash payments during the period when theaters within the Company's network were closed or attendance levels were low as expenses related to theater attendance were either not incurred or incurred at lower levels (i.e. theater access fees, Platinum Spot revenue share and network affiliate revenue share payments). As 97.0% of the theaters within our network were open as of July 1, 2021, the screen-based portion of these expenses is expected to return to historical levels during the third quarter of 2021 and the attendance-based portion of these expenses is expected to increase as attendance increases following the upcoming releases of many major motion pictures. The Company also implemented the following cost-saving measures in order to preserve cash at the start of the COVID-19 Pandemic, and those measures remain in place as of the filing date:
•During the six months ended July 1, 2021, 45%-75% of our current employee base continued to be furloughed or had salary reductions of up to 50%. Further, since the start of the COVID-19 Pandemic our total headcount has been reduced by over 30% from pre-COVID-19 Pandemic headcount levels.
•Temporarily reduced cash compensation of the Company's Board of Directors by 20% and offered the option for the Board to receive the cash retainers for the first, second and third quarter in equivalent value of the Company’s common stock in lieu of cash;
•Suspended or curtailed certain non-essential operating expenditures, including marketing, research, employee travel and consulting services;
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•Temporarily suspended the 401K employee match program;
•Terminated or deferred certain non-essential capital expenditures;
•Strategically worked with our vendors, and other business partners to manage, defer, and/or abate certain costs during the disruptions caused by the COVID-19 Pandemic;
•Decreased our quarterly dividend to $0.07 per share for the first three quarters of 2020 and to $0.05 for the fourth quarter of 2020 and first and second quarters of 2021 from $0.19 per share in the fourth quarter of 2019. When compared to the first quarter of 2020 this results in a cash savings of $10.8 million in the second quarter of 2021 and cash savings of $52.4 million for NCM, Inc. since the beginning of the pandemic; and
•Introduced an active cash management process, which, among other things, requires CEO approval of all outgoing payments.
Due to the future market uncertainties and in order to provide additional liquidity while revenue levels build and accounts receivable balances are collected, the Board of Directors of NCM, Inc. and required NCM LLC founding members approved the material terms of a $20 million unsecured revolving loan agreement between NCM Inc. and NCM LLC. Borrowings by NCM LLC will be available from October 1, 2021 through March 31, 2022. The final definitive loan agreement will be approved by the Audit Committee of NCM, Inc. and is expected to be completed in the third quarter of 2021. Once entered into, this revolving loan facility will provide NCM LLC with short-term working capital loans as NCM LLC rebuilds its advertising revenue base and collects related accounts receivable and will provide additional cushion with respect to the NCM LLC debt covenants.
In March 2020, we drew down an additional $110.0 million on our revolving credit facility and in March 2021 we received $43.0 million in proceeds under incremental term loans that mature on December 20, 2024. The $98.2 million of cash at NCM LLC as of July 1, 2021 will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. shareholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
In accordance with the Credit Agreement amendment entered into on April 30, 2020 (“the Credit Agreement First Amendment”) and the Credit Agreement Second Amendment, for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the third quarter of 2022, NCM LLC must maintain a minimum liquidity balance of $55.0 million consisting of a combination of unrestricted cash on hand and availability under NCM LLC's revolving credit facility. As of July 1, 2021, NCM LLC was in compliance with the requirements of the Credit Agreement, as amended.
A summary of our financial liquidity is as follows (in millions):
| As of | $ Change | $ Change | |||||||||||||||||||||||||||
| July 1, 2021 | December 31, 2020 | June 25, 2020 | Q2 2021 to YE 2020 | Q2 2021 to Q2 2020 | |||||||||||||||||||||||||
Cash, cash equivalents and marketable securities (1) | $ | 149.0 | $ | 181.8 | $ | 249.9 | $ | (32.8) | $ | (100.9) | |||||||||||||||||||
NCM LLC revolver availability (2) | 5.6 | 4.4 | 4.4 | 1.2 | 1.2 | ||||||||||||||||||||||||
| Total liquidity | $ | 154.6 | $ | 186.2 | $ | 254.3 | $ | (31.6) | $ | (99.7) | |||||||||||||||||||
_________________________
(1)Included in cash, cash equivalents and marketable securities as of July 1, 2021, December 31, 2020 and June 25, 2020, was $98.2 million, $123.9 million and $168.1 million, respectively, of cash held by NCM LLC that is not available to satisfy dividends declared by NCM, Inc., income tax, tax receivable payments to NCM LLC’s founding members and other obligations.
(2)The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility was $175.0 million as of July 1, 2021, December 31, 2020 and June 25, 2020. As of July 1, 2021, December 31, 2020 and June 25, 2020, the amount available under the NCM LLC revolving credit facility in the table above was net of the amount outstanding under the revolving credit facility of $167.0 million, $167.0 million and $167.0 million, respectively, and net letters of credit of $2.4 million, $3.6 million and $3.6 million, respectively.
As of July 1, 2021, the weighted average remaining maturity of our debt was 4.9 years. As of July 1, 2021, approximately 57% of our total borrowings bear interest at fixed rates. The remaining 43% of our borrowings bear interest at variable rates and our net income and earnings per share could fluctuate with market interest rate fluctuations that could increase or decrease the interest paid on our borrowings.
We have used and generated cash as follows (in millions):
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| Six Months Ended | |||||||||||
| July 1, 2021 | June 25, 2020 | ||||||||||
| Operating cash flow | $ | (61.6) | $ | 107.4 | |||||||
| Investing cash flow | $ | (2.9) | $ | 15.5 | |||||||
| Financing cash flow | $ | 31.6 | $ | 66.6 | |||||||
•Operating Activities. The $169.0 million increase in cash used in operating activities for the six months ended July 1, 2021, compared to the six months ended June 25, 2020 was primarily due to a $142.9 million decrease in accounts receivable collections during the six months ended July 1, 2021, as compared to the six months ended June 25, 2020, a $47.3 million increase in consolidated net loss and a $9.6 million decrease in founding member integration and other encumbered theater payments. These decreases were due to the temporary closure of the theaters within our network in response to the COVID-19 Pandemic resulting in significantly decreased revenue and negative Adjusted OIBDA, from which integration payments are calculated. These decreased cash inflows were partially offset by a $18.9 million decrease in accounts payable and accrued expenses payments due in part to the cash preservation actions taken by the Company to mitigate the impact of the COVID-19 Pandemic and an $8.5 million increase in amounts due to founding members for the six months ended July 1, 2021, as compared to the six months ended June 25, 2020 due to the increase in theater access fees, net of beverage discussed above.
•Investing Activities. The $18.4 million increase in cash used in investing activities for the six months ended July 1, 2021, compared to the six months ended June 25, 2020 was primarily due to a $20.7 million decrease in proceeds from the sale of marketable securities, net of purchases. This decrease was partially offset by a $2.3 million decrease in purchases of property and equipment in 2021, compared to 2020 due to the cash preservation actions taken by the Company to mitigate the impact of the COVID-19 Pandemic.
•Financing Activities. The $35.0 million decrease in cash provided by financing activities for the six months ended July 1, 2021, compared to the six months ended June 25, 2020 was primarily due to a $128.0 million decrease in proceeds from the revolving credit facility, net of repayments, and a $5.5 million increase in the payment of debt issuance costs related to Credit Agreement Second Amendment executed in the first quarter of 2021. These decreases were partially offset by a $50.0 million increase in the issuance of term loans, a $36.8 million decrease in distributions to founding members in the six months ended July 1, 2021, compared to the six months ended June 25, 2020, and a $12.2 million decrease in dividends paid related to the decrease in the dividend amounts declared from $0.26 per share during the six months ended June 25, 2020 to $0.10 per share during the six months ended July 1, 2021.
Sources of Capital and Capital Requirements
NCM, Inc.’s primary source of liquidity and capital resources is the quarterly available cash distributions from NCM LLC as well as its existing cash balances and marketable securities, which as of July 1, 2021 were $50.8 million (excluding $98.2 million of cash held by NCM LLC). NCM LLC’s primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its revolving credit facility and cash on hand. NCM LLC drew down an additional $110.0 million of its revolving credit facility in March 2020 and received net proceeds of $43.0 million from incremental terms loans in March 2021 in order to supplement the decrease in cash provided by operating activities during the period during which a portion or all of our network theaters are closed. The $98.2 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is used to fund income taxes, payments associated with the TRA with the founding members and for future payment of dividends to NCM, Inc. shareholders.
Cash flows generated by NCM LLC’s distributions to NCM, Inc. and the founding members will be impacted by the temporary closure of our network theaters and may be deferred through the quarter ending September 29, 2022 or longer if NCM LLC is not in compliance with the following limitations: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less. NCM LLC is required pursuant to the terms of the NCM LLC Operating Agreement to distribute its available cash, as defined in the operating agreement, unless prohibited by NCM LLC's Credit Agreement, quarterly to its members (Regal, Cinemark and NCM, Inc.). The available cash distribution to the members of NCM LLC for the three months ended July 1, 2021 was calculated as approximately negative $39.2 million, of which NCM, Inc.'s share is approximately negative $18.9 million. The available cash distribution to the members of NCM LLC for the six months ended July 1, 2021 was calculated as approximately negative $70.1 million, of which NCM, Inc.'s share is approximately negative $33.8 million. Further there was $85.9 million of negative available cash generated during 2020. Pursuant to the NCM LLC Operating Agreement and the Credit Agreement amendments, there will be no available cash distributions made for the third quarter of 2021. Negative available cash
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distributions for the first and second quarter of 2021 and the negative available cash from 2020 are expected to be netted in accordance with the NCM LLC Operating Agreement against future positive available cash distributions after the Extended Covenant Waiver Holiday, contingent upon the Company's compliance with the covenants outlined within the Credit Agreement Second Amendment defined within Note 6—Borrowings and in accordance with the NCM LLC Operating Agreement.
NCM, Inc. expects to use its cash balances and cash received from future available cash distributions (as allowed for under the Amended Credit Agreement) to fund income taxes, pay associated with the TRA with the founding members, fund the unsecured revolving loan to NCM LLC, and pay current and future dividends as declared by the Board of Directors, including a dividend declared on August 9, 2021 of $0.05 per share (approximately $4.1 million) on each share of the Company’s common stock (not including outstanding restricted stock) to stockholders of record on August 23, 2021 to be paid on September 6, 2021. These items should be sufficient to fund payments associated with the TRA with the founding members, income taxes and its quarterly dividend for the foreseeable future at the discretion of the Board of Directors. The Company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the Company’s intention to distribute substantially all its free cash flow to stockholders through its quarterly dividend. The declaration, payment, timing and amount of any future dividends payable will be at the sole discretion of the Board of Directors who will consider general economic and advertising market business conditions, the Company’s financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant, which includes short-term and long-term impacts to the Company related to the COVID-19 Pandemic, restrictions under the NCM LLC Credit Agreement and the current availability and funding of the unsecured revolving loan agreement between NCM Inc. and NCM LLC.
Critical Accounting Policies
For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our unaudited Condensed Consolidated Financial Statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” contained in our annual report on Form 10-K filed for the fiscal year ended December 31, 2020 and incorporated by reference herein. As of July 1, 2021, there were no significant changes in those critical accounting policies.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see the information provided under Note 1—The Company to the unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Consolidated Financial Statements.
Related Party Transactions
For a discussion of related party transactions, see the information provided under Note 5—Related Party Transactions to the unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
We do not believe the Company has any off-balance sheet arrangements that are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.
Contractual and Other Obligations
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual and Other Obligations” contained in our annual report on Form 10-K for the fiscal year ended December 31, 2020 and incorporated by reference herein. There were no material changes to our contractual obligations during the six months ended July 1, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk to which we are exposed is interest rate risk. The Notes due 2026 and the Notes due 2028 are at fixed rates, and therefore are not subject to market risk. As of July 1, 2021, the only interest rate risk that we are exposed to is related to our $175.0 million revolving credit facility and our term loans. A 100-basis point fluctuation in market interest rates underlying our term loans and revolving credit facility would have the effect of increasing or decreasing our cash interest
34
expense by approximately $4.8 million for an annual period on the $167.0 million revolving credit balance, $261.9 million term loan and $49.9 million incremental term loan outstanding as of July 1, 2021.
In response to the COVID-19 Pandemic, the government lowered the Federal Reserve interest rate leading to historically low interest rates as of July 1, 2021 that has had the effect of reducing the Company's interest rate risk. If interest rates increase, this will increase the Company’s interest rate risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (principal executive and financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the Chief Executive Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of July 1, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures as of July 1, 2021 were effective.
In designing and evaluating our disclosure controls and procedures, management recognizes that any control, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended July 1, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are sometimes involved in legal proceedings arising in the ordinary course of business. We are not aware of any other litigation currently pending that would have a material adverse effect on our operating results or financial condition.
Item 1A. Risk Factors
There have been no material changes from risk factors as previously disclosed in our annual report on Form 10-K filed with the SEC on March 8, 2021 for the fiscal year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information about shares delivered to the Company from restricted stock held by Company employees upon vesting for purpose of funding the recipient’s tax withholding obligations.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs | |||||||||||||||||||
| April 2, 2021 through April 29,2021 | 3,711 | $ | 4.52 | — | N/A | ||||||||||||||||||
| April 30, 2021 through May 27, 2021 | 60,540 | $ | 4.27 | — | N/A | ||||||||||||||||||
| May 28, 2021 through July 1, 2021 | — | $ | — | — | N/A | ||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
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Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit | Reference | Description | ||||||
| 10.1 | (1) | |||||||
| 10.2 | (2) | |||||||
| 10.3 | (3) | |||||||
| 10.4 | (4) | |||||||
| 31.1 | * | |||||||
| 32.1 | ** | |||||||
| 101.SCH | * | Inline XBRL Taxonomy Extension Schema Document | ||||||
| 101.CAL | * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
| 101.DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||
| 101.LAB | * | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||
| 101.PRE | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
| 104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||
__________________________________
| * | Filed herewith. | ||||
| ** | Furnished herewith. | ||||
| (1) | Incorporated by reference to Exhibits 10.1 to the Company’s current report on Form 8-K (File No. 001-33296) filed on May 6, 2021. | ||||
| (2) | Incorporated by reference to Exhibits 10.1 to the Company’s current report on Form 8-K (File No. 001-33296) filed on June 10, 2021. | ||||
| (3) | Incorporated by reference to Exhibits 10.2 to the Company’s current report on Form 8-K (File No. 001-33296) filed on June 10, 2021. | ||||
| (4) | Incorporated by reference to Exhibits 10.3 to the Company’s current report on Form 8-K (File No. 001-33296) filed on June 10, 2021. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATIONAL CINEMEDIA, INC. | |||||||||||
| (Registrant) | |||||||||||
| Date: | August 9, 2021 | /s/ Thomas F. Lesinski | |||||||||
| Thomas F. Lesinski | |||||||||||
| Chief Executive Officer and Director | |||||||||||
| (Principal Executive Officer and Interim Principal Financial Officer) | |||||||||||
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Exhibit 31.1
CERTIFICATIONS
I, Thomas F. Lesinski, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of National CineMedia, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 9, 2021 | /s/ Thomas F. Lesinski | |||||||
| Thomas F. Lesinski | ||||||||
| Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer and Interim Principal Financial Officer) | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ending July 1, 2021 (the “Report”) of National CineMedia, Inc. (the “Registrant”) as filed with the Securities and Exchange Commission on the date hereof, I, Thomas F. Lesinski, the Chief Executive Officer and Director of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Date: August 9, 2021 | /s/ Thomas F. Lesinski | |||||||
| Thomas F. Lesinski | ||||||||
| Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer and Interim Principal Financial Officer) | ||||||||
This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.