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 September 28, 2023
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 | ☐ | 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 November 2, 2023, 96,784,962 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 | |||||||||||
| September 28, 2023 | December 29, 2022 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Short-term marketable securities | |||||||||||
Receivables, net of allowance of $ | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| NON-CURRENT ASSETS: | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
Intangible assets, net of accumulated amortization of $ | |||||||||||
| Other investments | |||||||||||
| 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 NCM LLC’s other members, net (related party payables of $ | $ | $ | |||||||||
Payable under tax receivable agreement (including payables to related parties of $ | |||||||||||
| Accrued expenses | |||||||||||
| Accrued payroll and related expenses | |||||||||||
| Accounts payable | |||||||||||
| Deferred revenue | |||||||||||
Short-term debt, net of debt issuance costs of $ | |||||||||||
| Short-term operating lease liability | |||||||||||
| Total current liabilities | |||||||||||
| NON-CURRENT LIABILITIES: | |||||||||||
| Long-term debt | |||||||||||
Payable under tax receivable agreement (including payables to related parties of $ | |||||||||||
| Long-term operating lease liability | |||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 9) | |||||||||||
| EQUITY/(DEFICIT): | |||||||||||
| NCM, Inc. Stockholders’ Equity/(Deficit): | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ issued and outstanding, respectively | |||||||||||
| Additional paid in capital/(deficit) | ( | ||||||||||
| Retained earnings (accumulated deficit) | ( | ||||||||||
| 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 OPERATIONS
(In millions, except share and per share data)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | ||||||||||||||||||||
REVENUE (including revenue from related parties of $ respectively) | $ | $ | $ | $ | |||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Advertising operating costs | |||||||||||||||||||||||
| Network costs | |||||||||||||||||||||||
ESA theater access fees and revenue share (including fees to related parties of $ | |||||||||||||||||||||||
| Selling and marketing costs | |||||||||||||||||||||||
| Administrative and other costs | |||||||||||||||||||||||
| Impairment of long-lived assets | |||||||||||||||||||||||
| Depreciation expense | |||||||||||||||||||||||
| Amortization expense | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| OPERATING LOSS | ( | ( | ( | ( | |||||||||||||||||||
| NON-OPERATING EXPENSES (INCOME): | |||||||||||||||||||||||
| Interest on borrowings | |||||||||||||||||||||||
| Gain on modification and retirement of debt, net | ( | ||||||||||||||||||||||
| Loss (gain) on re-measurement of the payable under the tax receivable agreement | ( | ||||||||||||||||||||||
| Gain on sale of asset | ( | ||||||||||||||||||||||
| Gain on deconsolidation of affiliate | ( | ||||||||||||||||||||||
| Gain on re-measurement of investment in NCM LLC | ( | ( | |||||||||||||||||||||
| Gain on reconsolidation of NCM LLC | ( | ( | |||||||||||||||||||||
| Other non-operating (income) expense | ( | ( | ( | ||||||||||||||||||||
| Total | ( | ( | |||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ( | |||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| CONSOLIDATED NET INCOME (LOSS) | ( | ( | |||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO NCM, INC. | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NCM, INC. | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| NET INCOME (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)
| Nine Months Ended | |||||||||||
| September 28, 2023 | September 29, 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Consolidated net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities: | |||||||||||
| Depreciation expense | |||||||||||
| Amortization expense | |||||||||||
| Non-cash share-based compensation | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Gain on sale of assets | ( | ||||||||||
| Gain on deconsolidation of affiliate | ( | ||||||||||
| Gain on re-measurement of NCM LLC | ( | ||||||||||
| Gain on reconsolidation of NCM LLC | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Loss (gain) on modification and retirement of debt, net | ( | ||||||||||
| Non-cash loss on re-measurement of the payable under the tax receivable agreement | |||||||||||
| Other | ( | ||||||||||
| ESA integration and other encumbered theater payments | |||||||||||
| 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 $ | ( | ||||||||||
| ESA amounts due to/from, net | ( | ||||||||||
| Prepaid expenses | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other, net | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Cash contributed in reconsolidation | ( | ||||||||||
| Cash, cash equivalents and restricted cash reconsolidated | |||||||||||
| Proceeds from the sale of assets | |||||||||||
| Proceeds from sale and maturities of marketable securities | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of dividends | ( | ( | |||||||||
| Issuance of revolving credit facility | |||||||||||
| Removal of cash, cash equivalents and restricted cash of unconsolidated affiliate | ( | ||||||||||
| Repayment of Notes due 2028 | ( | ||||||||||
| Repayment of term loan facility | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Repurchase of stock for restricted stock tax withholding | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash 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)
| Nine Months Ended | |||||||||||
| September 28, 2023 | September 29, 2022 | ||||||||||
| Supplemental disclosure of non-cash financing and investing activity: | |||||||||||
| Purchase of an intangible asset with NCM LLC equity | $ | $ | |||||||||
| Issuance of shares upon the reconsolidation of NCM LLC | $ | $ | |||||||||
| Fair Value of NCM LLC net assets reconsolidated, net of cash | $ | 434.0 | $ | ||||||||
| Purchase of subsidiary equity with NCM, Inc. equity | $ | ( | $ | ||||||||
| Dividends declared not requiring cash in the period | $ | ( | $ | ||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash refunds 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 (Accumulated Deficit) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance—June 30, 2022 | $ | ( | $ | — | $ | — | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued, net of tax | ( | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expensed/ capitalized | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||
| Balance— September 29, 2022 | $ | ( | $ | — | $ | — | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Balance—June 29, 2023 | $ | ( | $ | — | $ | — | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| NCM LLC common membership unit redemption | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expensed/ capitalized | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance—September 28, 2023 | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| NCM, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||
| Additional Paid in Capital (Deficit) | Retained Earnings (Accumulated Deficit) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance—December 30, 2021 | $ | ( | $ | — | $ | — | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| 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, net of tax | ( | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expensed/ capitalized | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||
| Balance— September 29, 2022 | $ | ( | $ | — | $ | — | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Balance—December 29, 2022 | $ | ( | $ | — | $ | — | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Deconsolidation of affiliate | ( | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||||||||||||
| Income tax and other impacts of NCM LLC ownership changes | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| NCM LLC common membership unit redemption | ( | — | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income, net of tax | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expensed/ capitalized | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance—September 28, 2023 | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
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., a Delaware corporation (“NCM, Inc.”), is a holding company with the sole purpose of becoming a member and sole manager of National CineMedia, LLC (“NCM LLC”), a Delaware limited liability company. NCM LLC is currently owned by NCM, Inc. The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity.
The Company operates the largest cinema advertising network reaching movie audiences in the U.S. and sells advertising under long-term exhibitor service agreements (“ESAs”) with Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc. (“Cinemark”), and American Multi-Cinema, Inc., a wholly owned subsidiary of AMC Entertainment, Inc. (“AMC”) and with certain network affiliates under long-term network affiliates agreements, including Regal Cinemas, Inc. and Regal CineMedia Corporation, wholly owned subsidiaries of Cineworld Group plc and Regal Entertainment Group (“Regal”). As of September 28, 2023, the weighted average remaining term of the ESAs with Cinemark and AMC was approximately 15.3 years. The network affiliate agreements expire at various dates between December 2023 and July 2033. The weighted average remaining term of the ESAs and the network affiliate agreements together is 12.1 years as of September 28, 2023.
Chapter 11 Proceedings
NCM LLC was wholly owned by NCM, Inc. prior to April 11, 2023 when NCM LLC filed a voluntary petition for reorganization (“Chapter 11 Case”) with a prearranged Chapter 11 plan under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). As a result of the Chapter 11 Case and in accordance with applicable accounting principles generally accepted in the United States of America (“GAAP”), the Company concluded that NCM, Inc. no longer controlled NCM LLC for accounting purposes, and therefore, NCM LLC was deconsolidated from the Company’s unaudited financial statements prospectively as of April 11, 2023. On June 27, 2023, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming NCM LLC’s Modified First Amended Plan of Reorganization of National CineMedia, LLC Pursuant to Chapter 11 of the Bankruptcy Code (as amended, modified, or supplemented from time to time, the “Plan”) and approving the Disclosure Statement on a final basis.
Following confirmation of the Plan, on August 7, 2023, all the conditions to effectiveness of the Plan were satisfied or waived, the Restructuring Transactions were substantially consummated, and NCM LLC emerged from bankruptcy (the “Effective Date”). Among other things, on the Effective Date, in accordance with the Plan, NCM, Inc. transferred approximately $15.5 million to NCM LLC consistent with the NCMI 9019 Settlement, NCM LLC assumed certain unexpired Executory Contracts and Unexpired Leases, including AMC’s and Cinemark’s ESAs, all Common Units under NCM LLC’s Third Amended and Restated Limited Liability Company Operating Agreement (the “NCM LLC Operating Agreement”) were canceled and extinguished, NCM LLC commenced distributions to creditors, including the issuance of shares of NCM, Inc. common stock to Holders of Secured Debt Claims and NCM LLC entered into an exit facility to support operations upon emergence, as described herein. Capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q have the meanings given to them in the Plan.
Upon emergence from bankruptcy, NCM, Inc. retained ownership and regained control of NCM LLC. NCM LLC was again consolidated into the Company’s consolidated financial statements prospectively as of the Effective Date. Upon emergence, NCM LLC transferred $8.8 million of cash to a professional fees escrow account and $15.0 million to an unsecured creditor settlements escrow account. As of September 28, 2023, the Company had not completed all agreed upon payments to NCM LLC’s unsecured creditors or professional service providers and held a total of $5.8 million within the escrow accounts and accruals, presented within ‘Restricted cash’ and ‘Accounts Payable’ on the unaudited Condensed Consolidated Balance Sheet as of September 28, 2023, respectively. Please refer to Note 4—Reconsolidation of NCM LLC for more information regarding the reconsolidation of NCM LLC.
Other Developments
In December 2022, AMC and Regal each redeemed all of their outstanding membership units, 5,954,646 and 40,683,797 , respectively, in exchange for shares of NCM, Inc. common stock, reducing AMC’s and Regal’s ownership to 0.0 % in NCM LLC as of September 28, 2023. On February 23, 2023 and March 23, 2023, Cinemark redeemed 41,969,862 and 1,720,935 , respectively, of its outstanding common membership units, in exchange for shares of NCM, Inc. common stock. These redemptions reduced Cinemark’s ownership interest in NCM LLC to 0.0 % as of September 28, 2023. AMC and Cinemark and their affiliates are referred to in this document as “ESA Parties”.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 3, 2023, NCM LLC, entered into a Network Affiliate Transaction Agreement (the “Regal Advertising Agreement”) with Regal. The Regal Advertising Agreement became effective on July 14, 2023. Pursuant to a separate termination agreement (the “Regal Termination Agreement”), effective on July 14, 2023, Regal rejected and terminated its ESA. Additionally Regal and Regal’s affiliates’ waived all rights and interests as to the Tax Receivable Agreement (“TRA”), the Common Unit Adjustment Agreement, the Software License Agreement, the Director Designation Agreement, the Registration Rights Agreement and all the other joint venture agreements described in the NCM LLC Operating Agreement and the Company and NCM LLC, and Regal and Regal’s affiliates waived and released claims against the other party. Regal also agreed to support NCM LLC’s Plan and surrendered all shares of NCM, Inc. common stock upon the Effective Date. In connection with the Regal Advertising Agreement, NCM LLC and Regal also agreed to dismiss with prejudice the ongoing litigation between the parties related to NCM LLC’s request to enforce certain provisions of the ESA, including the exclusivity provision. As of July 14, 2023, Regal is no longer a founding member of NCM, Inc. or NCM LLC.
Basis of Presentation
The Company has prepared the unaudited Condensed Consolidated Financial Statements and related notes of NCM, Inc. in accordance with 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 29, 2022 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 29, 2022.
In the opinion of management, all adjustments necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made and all intercompany accounts have been eliminated in consolidation. The Company has reclassified certain historical amounts on the unaudited Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows to conform to current period presentation. Historically, the Company’s business has been seasonal and for this and other reasons operating results for interim periods have not been indicative of the Company’s full year results or future performance. As a result of the various related party agreements discussed in Note 6—Related Party Transactions, the operating results as presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties. The Company manages its business under one operating and reportable segment of advertising.
Estimates—The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the reserve for uncollectible accounts receivable, share-based compensation and income taxes. Actual results could differ from estimates.
Reverse Stock Split—On August 3, 2023, the Company effected a one-for-ten (1:10 ) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by the Company’s stockholders on August 2, 2023. The reverse stock split reduced the number of outstanding shares of the Company’s common stock from 174,112,385 shares as of August 3, 2023, to 17,411,323 shares outstanding post-split. The primary purpose of the reverse stock split was to comply with the Company’s obligations under the NCMI 9019 Settlement and so that the Plan may become effective as well as to increase the per share market price of the Company’s common stock in an effort to maintain compliance with applicable Nasdaq continued listing standards with respect to the closing price of the Company’s common stock.
Significant Accounting Policies
The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 29, 2022 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.
7
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-lived Assets—The Company assesses impairment of long-lived assets pursuant to Accounting Standards Certification 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, $0.0 million, $0.0 million and $5.8 million related to the write-off of certain internally developed software during the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, respectively.
Share-Based Compensation—The Company has issued stock options, restricted stock, and restricted stock units to certain employees and its independent directors. The restricted stock and restricted stock unit grants for Company management vest upon the achievement of Company performance measures and/or service conditions, while non-management grants vest only upon the achievement of service conditions. Compensation expense of restricted stock and restricted stock units that vest upon the achievement of Company performance measures is based on management’s financial projections and the probability of achieving the projections, which require considerable judgment. A cumulative adjustment is recorded to share-based compensation expense in periods that management changes its estimate of the number of shares of restricted stock and restricted stock units expected to vest. Ultimately, the Company adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Dividends are accrued when declared on unvested restricted stock and restricted stock units that are expected to vest and are only paid with respect to shares that actually vest. On February 28, 2021, March 2, 2021 and January 19, 2022, the Company’s Board of Directors approved certain modifications to equity awards awarded under the Company’s 2016 Equity Incentive Plan and 2020 Omnibus Equity Incentive Plan to adjust performance metrics, vesting amount and future performance goals in light of the novel coronavirus pandemic (“COVID-19 Pandemic”) resulting in incremental share-based compensation expense of $0.1 million, $0.1 million, $0.2 million and $0.5 million for the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, respectively. During the three months ended September 28, 2023 and September 29, 2022 and the nine months ended September 28, 2023 and September 29, 2022, 29,954 , 23,069 , 234,870 and 115,582 shares of restricted stock and restricted stock units vested, respectively.
Additionally, in conjunction with NCM LLC’s emergence from bankruptcy, 50 shares of Series B Preferred Stock were issued to the Company’s Chief Executive Officer.
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | ||||||||||||||||||||
| Net income (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, net | |||||||||||||||||||||||
| Change from net income (loss) attributable to NCM, Inc. and transfers from noncontrolling interests | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Recently Adopted Accounting Pronouncements
The Company did not adopt any new accounting pronouncements during the three and nine months ended September 28, 2023.
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, 2024. The Company concluded the LIBOR transition did not have a material impact 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 the Noovie® show, 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 promotions in theater lobbies. In addition, the Company sells online and mobile advertising, including through Noovie Audience Accelerator, and through the Company’s digital gaming products including Noovie Trivia, Name That Movie and Noovie Shuffle, which can be played on the mobile apps and through partnerships with certain internet platforms. Further the Company sells advertising in a variety of complementary out of home venues, including restaurants, convenience stores and college campuses. The Company also has a long-term agreement to exhibit the advertising of the ESA Parties’ 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 provision until the advertising airs to the audience specified in the advertising contract or the make-good period expires.
The Company does not have any contracts with customers with terms in excess of one year that are noncancellable as of September 28, 2023. 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; local and regional; beverage concessionaire; and management fee reimbursement revenue related to NCM LLC. This method of disaggregation is in alignment with how revenue is reviewed by management and discussed with, and historically disclosed to investors.
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes revenue from contracts with customers for the three months and nine months ended September 28, 2023 and September 29, 2022 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | ||||||||||||||||||||
| National advertising revenue | $ | $ | $ | $ | |||||||||||||||||||
| Local and regional advertising revenue | |||||||||||||||||||||||
| ESA advertising revenue from beverage concessionaire agreements | |||||||||||||||||||||||
| Management fee reimbursement | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Deferred Revenue and Unbilled Accounts Receivable
Revenue recognized in the nine months ended September 28, 2023 that was included within the Deferred Revenue balance as of December 29, 2022 was $8.6 million. As of September 28, 2023 and December 29, 2022, the Company had $1.5 million and $5.0 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 nine months ended September 28, 2023 and September 29, 2022, respectively, were as follows (in millions):
| Nine Months Ended | |||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | ||||||||||||||||||||||
| Allowance for National Customer Receivables | Allowance for Local/ Regional Customer Receivables | 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. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding. Diluted income (loss) per share is computed on the basis of the weighted average number of shares of common stock 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 income (loss) per NCM, Inc. share are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | ||||||||||||||||||||
| Net income (loss) attributable to NCM, Inc. (in millions) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net income attributable to NCM, Inc. following conversion of dilutive membership units (in millions) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Add: Dilutive effect of stock options, restricted stock and exchangeable membership units | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Income (loss) per NCM, Inc. share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The effect of the 9,032,924 and 8,896,411 weighted average exchangeable NCM LLC common units held by AMC, Cinemark, and Regal for the three months and nine months ended September 29, 2022, respectively, have been excluded from the calculation of diluted weighted average shares and income (loss) per NCM, Inc. share as they were anti-dilutive. The weighted average exchangeable NCM LLC common units held by NCM LLC’s other members for the three months and nine months ended September 28, 2023 is 0 and 913,872 983,825 , 727,533 , 983,825 and 727,533 stock options and non-vested (restricted) shares for the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, 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.
On August 3, 2023, the Company effected a one-for-ten (1:10 ) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by the Company’s stockholders on August 2, 2023. The reverse stock split reduced the number of outstanding shares of the Company’s common stock from 174,112,385 shares as of August 3, 2023, to 17,411,323 shares outstanding post-split. In accordance with ASC 260—Earnings Per Share, loss per share for the three months and nine months ended September 29, 2022 were retrospectively adjusted for the reverse stock split.
4. RECONSOLIDATION OF NCM LLC
Upon filing the Chapter 11 Case and in accordance with applicable GAAP, the Company concluded that NCM, Inc. no longer controlled NCM LLC for accounting purposes as of April 11, 2023 (the “Petition Date”), the date on which NCM LLC filed its Chapter 11 petition, as NCM LLC was under the control of the Bankruptcy Court, and therefore, NCM LLC was deconsolidated from the Company’s consolidated financial statements prospectively, resulting in a $557.7 million gain recorded in “Gain on deconsolidation of affiliate” in the unaudited Condensed Consolidated Statement of Operations. On August 7, 2023, NCM LLC emerged from bankruptcy and NCM, Inc. contributed $15.0 million in cash to NCM LLC in exchange for 2.8 % of additional ownership of NCM LLC in accordance with the NCMI 9019 Settlement stipulated within the Plan and $0.5 million to assist with payments to unsecured creditors in accordance with the settlement with the unsecured creditors. NCM, Inc. also issued 83,421,135 shares to the secured creditors in accordance with the NCMI 9019 Settlement and terms of the Plan with a fair value of $245.3 million based on the closing stock price of $2.94 . Upon NCM LLC’s emergence from bankruptcy, NCM, Inc. retained 100% of NCM LLC, regained control of and reconsolidated NCM LLC.
The Company accounted for the NCM LLC reconsolidation as a business combination under ASC 805—Business Combinations and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of reconsolidation, the Effective Date. The determination of fair values requires management to make significant estimates and assumptions. The estimated fair values of the assets acquired and liabilities assumed are considered provisional and are based on currently available information. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, these provisional estimates may be adjusted upon the availability of new information regarding facts and circumstances which existed at the reconsolidation date. The Company expects to finalize the valuation of assets and liabilities as soon as practicable, but not later than one year from the reconsolidation date.
The following table summarizes the fair value of NCM LLC and provisional fair values of the assets acquired and liabilities assumed as of the reconsolidation date:
| Fair value of assets acquired: | ||||||||
| Cash, cash equivalents and restricted cash | $ | |||||||
| Receivables, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property and equipment, net | ||||||||
| Other investments | ||||||||
| Debt issuance costs, net | ||||||||
| Fair value of intangible assets | ||||||||
| Other assets | ||||||||
| Total assets acquired | ||||||||
| Fair value of liabilities assumed: | ||||||||
| Amounts due to members, net | ( | |||||||
| Accrued expenses | ( | |||||||
11
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Accrued payroll and related expenses | ( | |||||||
| Accounts payable | ( | |||||||
| Deferred revenue | ( | |||||||
| Other current liabilities | ( | |||||||
| Long-term debt | ( | |||||||
| Other liabilities | ( | |||||||
| Total liabilities assumed | ( | |||||||
| Fair value of NCM LLC | $ | |||||||
The provisional identifiable intangible assets of $415.0 million are subject to amortization. The following table summarizes the major classes of intangible assets acquired and their respective weighted-average estimated useful lives.
| Estimated Fair Value | Useful Life (years) | |||||||||||||
| Exhibitor service agreements | $ | |||||||||||||
| Network affiliates agreements | ||||||||||||||
| Customer relationships | ||||||||||||||
| Trademarks | ||||||||||||||
| Total intangible assets | $ | |||||||||||||
The estimated fair values of the ESAs, network affiliate agreements and trademarks were estimated using the income approach. The multi-period excess earnings method starts with a forecast of all of the expected future net cash flows associated with the asset. The forecasts are then adjusted to present value by applying an appropriate discount rate that reflects the risks associated with the company specific cash flow streams. Significant assumptions utilized within the income approach include the weighted average cost of capital and forecasted cash flows. The estimated fair values of the customer relationships were estimated using the cost approach. The cost approach included estimating the investment required to replace the contracts with customers, with significant assumptions including the replacement cost. The Company elected the practical expedients allowed in ASC 805-20-30-29a in estimating the fair value of the contract liabilities assumed.
Upon NCM LLC’s emergence from the Chapter 11 Case, NCM, Inc. remeasured the value of the investment in NCM LLC to the estimated fair value calculated as NCM, Inc.’s percentage ownership of NCM LLC, due to NCM, Inc.’s ownership of the secured debt of NCM LLC and the NCMI 9019 Settlement, multiplied by the fair value of NCM LLC as of the Effective Date of $483.6 million. The value of the cost investment of NCM LLC immediately prior to the Effective Date was $11.9 million based upon NCM, Inc.’s ownership of the secured debt of NCM LLC and an estimation of the enterprise value of NCM LLC developed utilizing discounted cash flows and comparable company analysis as of the Petition Date. The increase in the fair value resulted in a gain on remeasurement of the investment in NCM LLC of $35.3 million.
Upon reconsolidation, NCM, Inc. recorded the provisional fair values of the assets acquired and liabilities assumed as of the reconsolidation date and the investment in NCM LLC was further adjusted to the full purchase price value of $483.6 million. The difference between the purchase price of NCM LLC and the fair value of NCM, Inc.’s investment in NCM LLC as calculated above, the $15.5 million of cash contributed by NCM, Inc. and the shares issued to NCM LLC’s secured lenders of $245.3 million resulted in a gain on reconsolidation of $168.0 million upon the reconsolidation of NCM LLC. The Company recognized a gain due to the variance between the fair value of NCM LLC’s assets and liabilities and NCM, Inc.’s depressed stock price on the Effective Date and the NCM, Inc. shares retained by the existing shareholders as part of the NCMI 9019 Settlement. NCM, Inc.’s stock price has been negatively impacted beginning with the COVID-19 pandemic followed by Cineworld’s bankruptcy proceeding and NCM LLC’s Chapter 11 Case, as well as by other socioeconomic factors.
The Company’s unaudited condensed Consolidated Statements of Operations include total net revenues and net loss attributable to NCM LLC of $64.3 million and $64.6 million, respectively, for the total of the consolidated periods of December 30, 2022 through April 11, 2023 and August 7, 2023 through September 28, 2023.
Pro Forma Financial Information (Unaudited)
The following table presents unaudited pro forma financial information as if the NCM LLC reconsolidation had occurred on December 31, 2021. The unaudited pro forma results reflect adjustments for depreciation of acquired property and equipment, amortization of acquired intangible assets and amortization of acquired debt issuance costs. The unaudited pro
12
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
forma financial information is presented for informational purposes only and is not necessarily indicative of future operations or results had the NCM LLC reconsolidation been completed as of December 31, 2021.
| Three months ended | Nine months ended | |||||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Net (Loss) Income | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||
5. INTANGIBLE ASSETS
The Company’s intangible assets consist of contractual rights to provide its services within the theaters under the ESAs and the network affiliate agreements, customer relationships developed and maintained by the Company’s sales force and trademarks held and used by the Company. The intangible assets are stated at their estimated fair values upon the reconsolidation of NCM LLC on August 7, 2023 as further described within Note 4—Reconsolidation of NCM LLC, net of accumulated amortization. The Company records amortization using the straight-line method over the estimated useful life of the intangibles, corresponding to the expected term of the ESAs, the average renewable term of the contracts with the network affiliates and industry standard lives for customer relationships and trademarks. In addition, the Company records intangible assets for up-front fees paid to network affiliates upon commencement of a network affiliate agreement. In accordance with ASC 360—Property, Plant and Equipment, the Company continuously monitors the performance of the underlying assets for potential triggering events suggesting an impairment review should be performed. No such triggering events were identified in the period since the reconsolidation of NCM LLC on August 7, 2023.
Common Unit Adjustments—In accordance with NCM LLC’s Common Unit Adjustment Agreement, on an annual basis NCM LLC determines the amount of common membership units to be issued to or returned by AMC and Cinemark based on theater additions, new builds or dispositions during the previous year. In the event AMC or Cinemark 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 either AMC or Cinemark 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. Upon the issuance of common membership units, the Company records an addition to the intangible asset related to AMC and Cinemark’s respective ESAs equal to the fair market value of NCM, Inc.’s publicly traded stock as of the date on which the common membership units were issued. The NCM LLC common membership units are fully convertible into NCM, Inc.’s common stock.
During the first quarter of 2022, NCM LLC issued 4,140,896 (6,483,893 issued, net of 2,342,997 returned) common membership units to AMC, Cinemark, and Regal for the rights to exclusive access to the theater screens and attendees added, net of dispositions, to NCM LLC’s network during the 2021 fiscal year. The net impact as a result of the Common Unit Adjustment to the intangible asset was $10.4 million during the first quarter of 2022. Pursuant to the Plan and in connection with the Chapter 11 Case, during the nine months ended September 28, 2023, NCM LLC did not issue common membership units to Cinemark for the rights to exclusive access to the theater screens and attendees added, net of dispositions, to NCM LLC’s network for the 2022 fiscal year and the 16,581,829 units issued to AMC were issued and cancelled on the Effective Date.
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 applicable ESA Party may elect to receive common membership units related to those encumbered theaters in connection with the Common Unit Adjustment. If the ESA Party makes 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 makes 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 ESA Parties’ on-screen advertising commitments under their beverage concessionaire agreements for encumbered theaters. These payments are also accounted for as a reduction to the intangible asset related to the ESAs. During the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, the Company recorded a reduction to net intangible assets of $0.9 million, $0.3 million, $2.1 million and $1.6 million, respectively, related to other encumbered theater payments. During the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, AMC and Cinemark paid a total of $1.1 million, $1.2 million,
13
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RELATED PARTY TRANSACTIONS
ESA Party and Managing Member Transactions—In connection with NCM, Inc.’s initial public offering (“IPO”), the Company entered into several agreements to define and regulate the relationships among NCM LLC, NCM, Inc. and AMC, Cinemark, and Regal which are outlined below.
AMC has owned less than 5 % of NCM LLC, on an as converted basis, since July 2018 and is no longer a related party. AMC remains a party to the ESA, Common Unit Adjustment Agreement and certain other original agreements and is a member under the terms of the NCM LLC Operating Agreement, subject to fulfilling the requirements of Section 3.1 of the NCM LLC Operating Agreement. AMC will continue to participate in the annual Common Unit Adjustment and receive available cash distributions or allocation of earnings and losses in NCM LLC (as long as its ownership in NCM LLC is greater than zero) and theater access fees. Further, AMC will continue to pay beverage revenue, among other things, to NCM LLC. AMC’s ownership percentage does not impact future integration payments and other encumbered theater payments owed to NCM LLC by AMC. As of September 28, 2023, AMC’s ownership was 0.0 % of NCM LLC and NCM, Inc.
Cinemark has owned less than 5 % of NCM LLC, on an as converted basis, since NCM LLC emerged from bankruptcy on August 7, 2023 and is no longer a related party. Cinemark remains a party to the ESA, Common Unit Adjustment Agreement and certain other original agreements and is a member under the terms of the NCM LLC Operating Agreement, subject to fulfilling the requirements of Section 3.1 of the NCM LLC Operating Agreement. Cinemark will continue to participate in the annual Common Unit Adjustment and receive available cash distributions or allocation of earnings and losses in NCM LLC (as long as its ownership in NCM LLC is greater than zero) and theater access fees. Further, Cinemark will continue to pay beverage revenue, among other things, to NCM LLC. Cinemark’s ownership percentage does not impact future integration payments and other encumbered theater payments owed to NCM LLC by Cinemark. As of September 28, 2023, Cinemark’s ownership was 4.5 % of NCM, Inc. and 0.0 % of NCM LLC.
On June 3, 2023, NCM LLC entered into the Regal Advertising Agreement and Regal Termination Agreement which became effective on July 14, 2023. Pursuant to the Regal Termination Agreement, Regal rejected and terminated its ESA with NCM LLC. Additionally Regal and Regal’s affiliates’ waived all rights and interests as to the TRA, the Common Unit Adjustment Agreement, the Software License Agreement, the Director Designation Agreement, the Registration Rights Agreement and all the other joint venture agreements described in the NCM LLC Operating Agreement and the Company and NCM LLC, and Regal and Regal’s affiliates waived and released claims against the other party. Regal also agreed to support NCM LLC’s Plan and surrendered all 4,068,350 shares in the Company, totaling $13.0 million, upon the effective date of the Plan. In connection with the Regal Advertising Agreement, NCM LLC and Regal also agreed to dismiss with prejudice the ongoing litigation between the parties related to NCM LLC’s request to enforce certain provisions of the ESA, including the exclusivity provision. As of July 14, 2023, Regal is no longer an ESA Party or related party to NCM, Inc. or NCM LLC.
The material agreements with the ESA Parties are as follows:
•ESAs. Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the ESA Parties’ theaters (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the ESA Parties). 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® show, use of the LEN and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the Noovie show is sold to the ESA Parties to satisfy the ESA Parties’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the ESA Parties’ theaters, theater patrons, the network equipment required to display on-screen and LEN video advertising and the use of theaters for lobby promotions, the ESA Parties receive a monthly theater access fee. In conjunction with the 2019 ESA Amendments, NCM LLC also pays Cinemark and Regal (through July 14, 2023) 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 Cinemark ESA was extended until 2041. The ESAs and 2019 ESA Amendments are considered leases with related parties under ASC 842. As described above, the Regal ESA was rejected by Regal in connection with Regal’s Chapter 11 case and terminated by the Regal Termination Agreement.
•Common Unit Adjustment Agreement. The common unit adjustment agreement provides a mechanism for increasing or decreasing the membership units held by the ESA Parties based on the acquisition or construction of new theaters or sale of theaters that are operated by each ESA Party and included in NCM LLC’s network.
14
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
•Tax Receivable Agreement. The TRA provides for the effective payment by NCM, Inc. to AMC and Cinemark 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 that is related to AMC and Cinemark’s share in the effect at the time the TRA was signed.
•Software License Agreement. At the date of the Company’s IPO, NCM LLC was granted a perpetual, royalty-free license from AMC, Cinemark, and Regal 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 AMC, Cinemark, and Regal, if any.
The following tables provide summaries of the transactions between NCM, Inc. and AMC, Cinemark, and Regal when they were related parties (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| Included in the unaudited Condensed Consolidated Statements of Operations: | September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | |||||||||||||||||||
| Revenue: | (1) | ||||||||||||||||||||||
Beverage concessionaire revenue (included in advertising revenue) (2) | $ | $ | $ | $ | |||||||||||||||||||
| Management fee reimbursement | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
ESA theater access fee and revenue share (3) | $ | $ | $ | $ | |||||||||||||||||||
Selling and marketing costs (4) | $ | $ | $ | $ | |||||||||||||||||||
Advertising operating costs (3) | $ | $ | $ | $ | |||||||||||||||||||
________________________________________
(1)For the three months ended September 28, 2023 there was no related party activity for AMC, Cinemark, and Regal as for all activity following the reconsolidation of NCM LLC on August 7, 2023, none of AMC, Cinemark and Regal were considered related parties.
(2)For the nine months ended September 28, 2023 and three and nine months ended September 29, 2022, Cinemark and Regal (through July 14, 2023) 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 cost per thousand impressions (“CPM”) rate specified by the ESA. Beverage revenue above is only reflective of periods where Cinemark and Regal were related parties.
(3)Comprised of payments per theater attendee, payments per digital screen with respect to AMC Cinemark, and Regal 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 (through July 14, 2023) 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”). Theater access fees and revenue share expenses above are only reflective of periods where Cinemark and Regal were related parties.
(4)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 Cinemark and Regal in the ordinary course of business.
| As of | |||||||||||
| Included in the unaudited Condensed Consolidated Balance Sheets: | September 28, 2023 | December 29, 2022 | |||||||||
Common unit adjustments and ESA extension costs, net of amortization and integration payments (included in intangible assets) (1) | $ | $ | |||||||||
Current payable under tax receivable agreement (2) | $ | $ | |||||||||
Long-term payable under tax receivable agreement (2) | $ | $ | |||||||||
________________________________________
(1)Refer to Note 5—Intangible Assets for further information on common unit adjustments and integration payments. As Cinemark and Regal are no longer related parties, there are no related party balances to reflect as of September 28, 2023.
(2)NCM, Inc. paid Cinemark and Regal $0.0 million and $0.0 million during the nine months ended September 28, 2023 and September 29, 2022, respectively, in payments pursuant to the TRA for the 2022 or 2021 tax years. As Cinemark and Regal are no longer related parties, there are no related party balances to reflect as of September 28, 2023.
15
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The mandatory distributions of available cash by NCM LLC to its related party members and NCM, Inc. for the nine months ended September 28, 2023 were calculated as negative $57.9 million due to a carryforward from negative available cash from previous quarters. Under the terms of the NCM LLC Operating Agreement, these negative amounts will be netted against future positive available cash distributions for the second quarter each fiscal year after the extended covenant waiver holiday, contingent upon the Company’s compliance with the Revolving credit facility 2023 within Note 7—Borrowings and in accordance with the NCM LLC Operating Agreement
| Cinemark | Regal | Total | |||||||||||||||
| ESA theater access fees and revenue share, net of beverage revenues and other encumbered theater payments | $ | $ | $ | ||||||||||||||
| Total amounts due, net | $ | $ | $ | ||||||||||||||
7. BORROWINGS
The following table summarizes total outstanding debt as of September 28, 2023 and December 29, 2022 and the significant terms of its borrowing arrangements (in millions):
_________________________________________________
| Outstanding Balance as of | ||||||||||||||||||||||||||
| Borrowings | September 28, 2023 | December 29, 2022 | Maturity Date | Interest Rate | ||||||||||||||||||||||
| Revolving credit facility 2023 | $ | $ | August 7, 2026 | (1) | ||||||||||||||||||||||
| Revolving credit facility 2018 | June 20, 2023 | (1) | ||||||||||||||||||||||||
| Revolving credit facility 2022 | June 20, 2023 | (1) | ||||||||||||||||||||||||
| Term loans – first tranche | June 20, 2025 | (1) | ||||||||||||||||||||||||
| Term loans – second tranche | December 20, 2024 | (1) | ||||||||||||||||||||||||
| Senior secured notes due 2028 | April 15, 2028 | |||||||||||||||||||||||||
| Senior unsecured notes due 2026 | August 15, 2026 | |||||||||||||||||||||||||
| 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 facilities and term loans are described below.
Loan, Security and Guarantee Agreement – On August 7, 2023, NCM LLC entered into a Loan, Security and Guarantee Agreement (the “Revolving Credit Facility 2023”) with CIT Northbridge Credit LLC as agent. The Revolving Credit Facility 2023 is an asset backed line facility where the capacity depends upon NCM LLC’s trade accounts receivable balance, as adjusted for aged balances and other considerations. The maximum availability NCM LLC has access to under the Revolving Credit Facility 2023 is $55,000,000 . The proceeds of the Revolving Credit Facility 2023 may be used for, inter alia, working capital and capital expenditures. The Revolving Credit Facility 2023 will mature on August 7, 2026. The interest rate under the Revolving credit facility 2023 is a base rate or SOFR benchmark plus (i) 3.75 % if less than 50 % of revolving commitments are utilized or (ii) 4.50 % if 50 % or more of revolving commitments are utilized (utilizing the average revolver usage for the prior calendar month as a benchmark for this determination). The Revolving Credit Facility 2023 also contains a financial maintenance covenant requiring that the fixed charge coverage ratio ending on the last day of each fiscal month is at least 1.1 to 1.0 during a “Trigger Period.” A Trigger Period begins upon (i) an event of default or (ii) if availability is less than the greater of (a) $5,000,000 and (b) 10 % of aggregate revolving commitments. A Trigger Period ends only if (i) no event of default existed for the preceding thirty (30) consecutive days and (ii) availability is greater than both (a) $5,000,000 and (b) 10 % of aggregate revolving commitments. Upon the effectiveness of the Revolving Credit Facility 2023, NCM LLC immediately drew $10.0 million from the facility, which represents the only amounts currently outstanding under the Revolving Credit Facility 2023, as of September 28, 2023. The Revolving Credit Facility 2023 also contains customary representations, warranties, covenants, events of default, terms and conditions, including limitations on liens, incurrence of debt, mergers and significant
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
asset dispositions. As of September 28, 2023, NCM LLC’s maximum availability under the $55.0 million Revolving Credit Facility 2023 was $44.4 million, net of $10.0 million outstanding and net letters of credit of $0.6 million. The weighted-average interest rate on the Revolving Credit Facility 2023 as of September 28, 2023 was 9.20 %. Upon execution of the Revolving Credit Facility 2023, NCM LLC recorded $2.4 million as debt issuance costs and received $9.1 million in proceeds. As of September 28, 2023, NCM LLC was in compliance with the financial covenants of the Revolving Credit Facility 2023 described above.
Senior Secured Credit Facility—NCM LLC’s credit agreement, as amended, (the “Credit Agreement”) consisted of a term loan facility and a revolving credit facility. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Credit Agreement was discharged and the Credit Agreement was terminated.
On March 8, 2021, NCM LLC entered into a second amendment to its Credit Agreement (“Credit Agreement Second Amendment”). Among other things, the Credit Agreement Second Amendment provided for certain modifications to the negative covenants, additional waivers and term changes outlined below and granted security interests in certain assets of NCM LLC and other potential loan parties that were not then 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 to be used for general corporate purposes.
On January 5, 2022, NCM LLC entered into a third amendment to its Credit Agreement (“Credit Agreement Third Amendment”). Among other things, the Credit Agreement Third Amendment provided for: (i) certain modifications to and extensions to modifications of the affirmative and negative covenants therein; (ii) the suspension of the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the fiscal quarter ending December 29, 2022; and (iii) changes to the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants. Upon execution of the Credit Agreement Third Amendment, $6.4 million was recorded as debt issuance costs and $0.4 million was recorded within “Loss on modification and retirement of debt, net” during the year ended December 29, 2022.
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 4.00 % or the base rate plus 3.00 %. The rate increased from LIBOR index plus 2.75 % or the base rate plus 1.75 %. The term loans amortized at a rate equal to 1.00 % annually, paid in equal quarterly installments. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Credit Agreement, including the terms loans, was discharged and the Credit Agreement was terminated.
Term Loans—Second Tranche—The interest rate on the second tranche of term loans was the LIBOR index plus 8.00 %. The term loans amortized at a rate equal to 1.00 % annually, paid in equal quarterly installments. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Credit Agreement, including the term loans, was discharged and the Credit Agreement was terminated.
Revolving Credit Facility 2018—The revolving credit facility portion of NCM LLC’s senior secured credit facility was 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 Credit Agreement, and a portion was 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 due to the COVID-19 Pandemic. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Credit Agreement, including borrowings under the revolving credit facility, was discharged and the Credit Agreement was terminated. The unused line fee was 0.50 % per annum which was consistent with the previous facility. Borrowings under the revolving credit facility accrued interest at NCM LLC’s option of either the LIBOR index plus an applicable margin ranging from 3.00 % to 3.50 % or the base rate plus an applicable margin ranging from 2.00 % to 2.50 %. The margin changed to the aforementioned range from a fixed margin of LIBOR index plus 2.00 % or the base rate plus 1.00 %. The applicable margin for the revolving credit facility was determined quarterly and was 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).
Revolving Credit Facility 2022—On January 5, 2022, NCM LLC entered into a revolving credit agreement (the “Revolving Credit Agreement 2022”). The Revolving Credit Agreement 2022 provided for revolving loan commitments of $50.0 million of secured revolving loans, the entire amount of which was funded on January 5, 2022. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Revolving Credit Agreement 2022 was discharged and the Revolving Credit Agreement 2022 was terminated. The Revolving Credit Agreement 2022 provided for (i) a cash interest rate of term Secured Overnight Financing Rate (SOFR) plus 8.00 %, with a 1.00 % floor, (ii) a maturity date of June 20, 2023 and
17
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(iii) a termination premium if NCM LLC terminated the commitments under the Revolving Credit Agreement 2022 at any time before maturity.
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 paid 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 were the senior unsecured obligations of NCM LLC. As of August 7, 2023, upon emergence from bankruptcy, all outstanding debt under the Notes due 2026 was discharged and the Notes due 2026 were terminated, following $10.0 million made in cure payments.
8. INCOME TAXES
Following the Regal Termination Agreement whereby Regal waived all rights and interests as to the TRA, the Company reduced the “Payable under the TRA” on the unaudited Condensed Consolidated Balance Sheets for the amounts expected to be owed to Regal. This decrease was ultimately offset by the increase in the ‘Payable under the TRA’ on the unaudited Condensed Consolidated Balance Sheets due to the additional basis created upon the revaluation and reconsolidation of NCM LLC on the Effective Date.
9. 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 adverse 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 $4.6 million and short-term and long-term lease liabilities of $1.1 million and $5.3 million, respectively, on the balance sheet as of September 28, 2023 for all material leases with terms longer than twelve months. These balances are included within “Other assets”, “Short-term operating lease liability” and “Long-term operating lease liability”, respectively, on the unaudited Condensed Consolidated Balance Sheets. As of September 28, 2023, the Company had a weighted average remaining lease term of 6.1 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 September 28, 2023, the Company’s weighted average annual discount rate used to establish the ROU assets and lease liabilities was 7.4 %.
During the three months ended September 28, 2023 and September 29, 2022, 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 Operations depending upon the nature of the use of the facility.
18
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 28, 2023 | September 29, 2022 | September 28, 2023 | September 29, 2022 | ||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
The Company made total lease payments of $0.8 million, $0.9 million, $2.9 million and $2.9 million during the three months ended September 28, 2023 and September 29, 2022 and nine months ended September 28, 2023 and September 29, 2022, 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 and multi-year agreements with 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 ESA Parties 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 5—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 Operations.
In consideration for NCM LLC’s access to the ESA Parties’ theater attendees for on-screen advertising and use of lobbies and other space within the ESA Parties’ theaters for the LEN and lobby promotions, the ESA Parties 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 . The payment per theater patron increased in 2022 and will again in fiscal year 2027, and the payment per digital screen and for digital cinema equipment increases annually by 5 %. The theater access fee paid in the aggregate 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 September 28, 2023 and December 29, 2022, the Company had no
Following the 2019 ESA Amendments, Cinemark receives 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) $0.0375 per patron beginning on November 1, 2020, (ii) $0.05 per patron beginning on November 1, 2021, (iii) $0.052 per patron beginning on November 1, 2022 and (iv) 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 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 is entitled to receive a percentage 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 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. The digital screen fee is calculated based upon average screens in use during each month.
The network affiliates compensation is considered variable lease expense and varies by circuit depending upon the agreed upon terms of the network affiliate agreement. The majority of agreements are centered around a revenue share where an agreed upon percentage of the advertising revenue received from a theater’s attendance is paid to the circuit. As part of the network affiliate agreements entered into in the ordinary course of business under which the Company sells advertising for display in various network affiliate theater chains, the Company has agreed to certain minimum revenue guarantees on a per attendee basis. If a network affiliate achieves the attendance set forth in their respective agreement, the Company has
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. FAIR VALUE MEASUREMENTS
All current assets and liabilities are estimated to approximate their fair value due to the short-term nature of these balances. 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 | |||||||||||
| September 28, 2023 | December 29, 2022 | ||||||||||
| Investment in AC JV, LLC | $ | $ | |||||||||
| Other investments | |||||||||||
| Total | $ | $ | |||||||||
As of September 28, 2023, 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 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 facilities are considered a reasonable estimate of fair value due to its floating-rate terms. As of August 7, 2023, upon emergence from bankruptcy, all historical debt of NCM LLC was discharged. The estimated fair values of the Company’s financial instruments where carrying values do not approximate fair value were as follows (in millions):
20
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| As of September 28, 2023 | As of December 29, 2022 | ||||||||||||||||||||||
| Carrying Value | Fair Value (1) | Carrying Value | Fair Value (1) | ||||||||||||||||||||
| Revolving credit facility 2018 | $ | $ | $ | $ | |||||||||||||||||||
| Revolving credit facility 2022 | $ | $ | $ | $ | |||||||||||||||||||
| 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 December 29, 2022 | 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 are generally classified as Level 2 in the fair value hierarchy. As of December 29, 2022, there were $0.2 million of available-for-sale debt securities in unrealized loss positions without an allowance for credit losses. The Company did not recorded an allowance for credit losses for the marketable securities balance as of December 29, 2022 given the immaterial difference between the amortized cost basis and the aggregate fair value of the Company’s securities.
21
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| As of December 29, 2022 | |||||||||||||||||
| Amortized Cost Basis (in millions) | Aggregate Fair Value (in millions) | Maturities (1) (in years) | |||||||||||||||
| MARKETABLE SECURITIES: | |||||||||||||||||