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 June 30, 2022
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 4, 2022, 81,888,911 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 | |||||||||||
| June 30, 2022 | December 30, 2021 | ||||||||||
| 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 $ | |||||||||||
| 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 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, $ issued 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 | ||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | ||||||||||||||||||||
REVENUE (including revenue from related parties of $ respectively) | $ | $ | $ | $ | |||||||||||||||||||
| 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 INCOME (LOSS) | ( | ( | ( | ||||||||||||||||||||
| NON-OPERATING EXPENSES (INCOME): | |||||||||||||||||||||||
| Interest on borrowings | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| (Gain) loss on modification and retirement of debt, net | ( | ( | |||||||||||||||||||||
| (Gain) loss on re-measurement of the payable to founding members under the tax receivable agreement | ( | ( | |||||||||||||||||||||
| Other non-operating (income) expense | ( | ( | |||||||||||||||||||||
| Total | |||||||||||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| 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 | |||||||||||
| June 30, 2022 | July 1, 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Consolidated net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile consolidated net loss to net cash used in operating activities: | |||||||||||
| 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 | |||||||||||
| (Gain) loss on modification and retirement of debt, net | ( | ||||||||||
| Non-cash loss (gain) on re-measurement of the payable to founding members under the tax receivable agreement | ( | ||||||||||
| Other | ( | ( | |||||||||
| Founding member integration and other encumbered theater payments | |||||||||||
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 operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of dividends | ( | ( | |||||||||
| Issuance of revolving credit facility | |||||||||||
| Issuance of term loans | |||||||||||
| 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 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 | |||||||||||
| June 30, 2022 | July 1, 2021 | ||||||||||
| 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 in dividend equivalent accrual not requiring cash in the period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash payments (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 (Distribution in Excess of Earnings) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | |||||||||||||||||||||||||||||||||
| 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 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balance—March 31, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive loss, net of tax | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation issued | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—June 30, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| NCM, Inc. | |||||||||||||||||||||||||||||||||||
| Additional Paid in Capital (Deficit) | Retained Earnings (Distribution in Excess of Earnings) | Noncontrolling Interest | |||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Consolidated | Shares | Amount | |||||||||||||||||||||||||||||||||
| 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 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 | ( | — | ( | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expensed/capitalized | — | — | — | ||||||||||||||||||||||||||||||||
Cash dividends declared $ | ( | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Balance—June 30, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
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., Regal Cinemas, Inc. and Regal CineMedia Corporation, wholly owned subsidiaries of Cineworld Group plc and Regal Entertainment Group (“Regal”), 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”). The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity. 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. and sells advertising under long-term exhibitor service agreements (“ESAs”) with the founding members and with 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 as the United States’ government and other state and local governments issued restrictions on travel, public gatherings and other events and issued social distancing guidelines. These and subsequent developments are referred to as the “COVID-19 Pandemic.” All of the theaters within the Company’s network are open and the release of major motion pictures has resumed since the third quarter of 2021 resulting in the highest theater attendance since the start of the COVID-19 Pandemic. Despite the increase in network attendance, in-theater advertising revenue for the year ended December 30, 2021 and the six months ended June 30, 2022 remained below historical levels due to the lag between the recovery of attendees and advertisers.
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 (weighted based upon pre-COVID-19 attendance levels) of approximately 17.2 years as of June 30, 2022. The network affiliate agreements expire at various dates between August 2022 and December 2037. The weighted average remaining term of the ESAs and the network affiliate agreements together is 15.0 years as of June 30, 2022 (weighted based upon pre-COVID-19 attendance levels).
As of June 30, 2022, NCM LLC had 171,821,666 common membership units outstanding, of which 81,492,426 (47.4 %) were owned by NCM, Inc., 40,683,797 (23.7 %) were owned by Regal, 43,690,797 (25.4 %) were owned by Cinemark and 5,954,646 (3.5 %) 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 30, 2021 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 30, 2021.
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. 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 5—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 reportable segment of advertising.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Going Concern—The accompanying unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has borrowings under two Revolving Credit Facilities with $217.0 million outstanding as of June 30, 2022, that mature on June 20, 2023 (see Note 6). The Company does not have available liquidity to repay the full outstanding balance on the date of maturity. Under the Credit Agreement, failure to repay borrowings under the Revolving Credit Facilities at maturity would result in an event of default for the term loans, which would allow a majority of the lenders under the Credit Agreement to accelerate the maturity of the principal amounts of outstanding term loans to become due and payable. It would also result in an event of default for the senior notes, which would allow the indenture trustee or senior note holders of each tranche of senior notes to accelerate the maturity to become due and payable. The Company does not have available liquidity to repay any accelerated principal of term loans or tranches of the outstanding senior notes upon an event of default within one year after the date that the financial statements are issued. Additionally, the Company does not expect to meet its financial covenants within one year following the date that these financial statements are issued. If these financial covenants are not met a majority of the lenders of the Senior Secured Credit Facility are permitted under the Credit Agreement to accelerate the debt which would also result in an event of default for the senior notes. In this event, the Company would not be able to repay the Company’s total outstanding debt balance. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In response to these conditions, management’s plans include amending NCM LLC’s Revolving Credit Facilities to extend the maturity dates, amending its Senior Secured Credit Facility to extend a waiver of these financial covenants, or obtaining additional debt financing through a loan from third parties, and/or NCM, Inc. Management expects to conclude one of these alternatives; however, there can be no assurance that the Company will be successful in completing any of these options. As a result, management’s plan cannot be considered probable and thus does not alleviate the substantial doubt about the Company’s ability to continue as a going concern.
The unaudited Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Significant Accounting Policies
The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 30, 2021 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 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, $0.0 million, $5.8 million and $0.0 million related to the write-off of certain internally developed software during the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, respectively.
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 | ||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | ||||||||||||||||||||
| 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.
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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® pre-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, 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 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 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 or the make-good period expires. The make-good provision is recorded within deferred revenue in the unaudited Condensed Consolidated Balance Sheet.
The Company does not have any contracts with customers with terms in excess of one year that are noncancellable as of June 30, 2022. 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 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 months and six months ended June 30, 2022 and July 1, 2021 (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | ||||||||||||||||||||
| National advertising revenue | $ | $ | $ | $ | |||||||||||||||||||
| Local and regional advertising revenue | |||||||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Deferred Revenue and Unbilled Accounts Receivable
Revenue recognized in the six months ended June 30, 2022 that was included within the Deferred Revenue balance as of December 30, 2021 was $8.3 million. As of June 30, 2022 and December 30, 2021, the Company had $8.0 million and $4.4 million in unbilled accounts receivable, respectively.
Allowance for Doubtful Accounts
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | ||||||||||||||||||||||
| 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. 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 | ||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | ||||||||||||||||||||
| 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 90,374,744 , 86,084,305 , 88,281,544 and 85,307,817 weighted average exchangeable NCM LLC common units held by the founding members for the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, 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 6,442,164 , 4,376,000 , 6,442,164 and 4,376,000 stock options and non-vested (restricted) shares for the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, 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)
scenarios in a probability-weighted estimated future undiscounted cash flow analysis, including the potential of further delays in major motion picture releases, a delay in audience return to the theaters and other potential adverse impacts to certain of NCM LLC's founding members' and affiliates' financial liquidity related to the COVID-19 Pandemic. The estimated future cash flows from the ESAs calculated within the probability-weighted analyses were in excess of the net book value of these intangible assets and no impairment charges were recorded in the year ended December 30, 2021. Such analysis required 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 2022, NCM LLC issued 4,140,896 (6,483,893 issued, net of 2,342,997 returned) common membership units to its 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 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.
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.
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 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 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 June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, the Company recorded a reduction to net intangible assets of $1.1 million, $0.2 million, $1.3 million and $0.2 million, respectively, related to other encumbered theater payments. During the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, AMC and Cinemark paid a total of $0.3 million, $0.1 million, $1.5 million and $0.1 million, respectively, in integration and other encumbered theater payments (as payments are made one quarter and one month in arrears, respectively). 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
Founding 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, Inc., NCM LLC and the founding members which are outlined below. AMC has owned less than 5% of NCM LLC since July 2018 and is no longer a related party. AMC remains a party to the ESA, Common Unit Adjustment Agreement, Tax Receivable Agreement (“TRA”) and
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 June 30, 2022, AMC’s ownership was 3.5 % on an as converted to NCM, Inc.’s common stock basis.
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: | June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
Beverage concessionaire revenue (included in advertising revenue) (1) | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Theater access fee and revenue share to founding members (2) | $ | $ | $ | $ | |||||||||||||||||||
Advertising operating costs (3) | $ | $ | $ | $ | |||||||||||||||||||
________________________________________
(1)For the three and six months ended June 30, 2022 and July 1, 2021, 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
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
seconds equivalent CPM rate specified by the ESA. 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”). Theater access fees and revenue share expenses were reduced 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: | June 30, 2022 | December 30, 2021 | |||||||||
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) | $ | $ | |||||||||
________________________________________
(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.
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. Due to the continued recovery from the COVID-19 Pandemic during the six months ended June 30, 2022 and decrease in 2021 in-theater advertising revenue, the mandatory distributions of available cash by NCM LLC to its related party founding members and NCM, Inc. for the three months ended June 30, 2022 were calculated as negative $6.0 million (including negative $1.6 million for Cinemark, negative $1.5 million for Regal and negative $2.9 million for NCM, Inc.). The mandatory distributions of available cash by NCM LLC to its related party founding members and NCM, Inc. for the six months ended June 30, 2022 were calculated as negative $32.2 million (including negative $8.5 million for Cinemark, negative $7.9 million for Regal and negative $15.8 million for NCM, Inc.). Therefore, there will be no payment made for the second quarter of 2022. 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 Third 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 June 30, 2022 were comprised of the following (in millions):
| Cinemark | Regal | Total | |||||||||||||||
| Theater access fees and revenue share, net of beverage revenues and other encumbered theater payments | $ | $ | $ | ||||||||||||||
| Cost and other reimbursement | |||||||||||||||||
| 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 | $ | $ | $ | ||||||||||||||
| Total amounts due to founding members, net | $ | $ | $ | ||||||||||||||
AC JV, LLC Transactions—In December 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company, AC JV, LLC, owned 32 % by each of the founding members and 4 % by NCM LLC. The Company accounts
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 323-30, Investments—Equity Method and Joint Ventures (“ASC 323-30”) because AC JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 323-30 requires the use of equity method accounting unless the Company’s interest is so minor that it would have virtually no influence over partnership operating and financial policies. Although NCM LLC does not have a representative on AC JV, LLC’s Board of Directors or any voting, consent or blocking rights with respect to the governance or operations of AC JV, LLC, the Company concluded that its interest was more than minor under the accounting guidance. The Company’s investment in AC JV, LLC was $0.7 million and $0.7 million as of June 30, 2022 and December 30, 2021, respectively. During the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, NCM LLC received cash distributions from AC JV, LLC of $0.1 million, $0.0 million , $0.2 million and $0.0 million , respectively. Equity in earnings (losses) from AC JV, LLC of $0.1 million, $0.0 million , $0.2 million and $(0.1 ) million for the three months and six months ended June 30, 2022 and July 1, 2021, respectively, is included in “Other non-operating income” in the unaudited Condensed Consolidated Statements of Income.
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. BORROWINGS
The following table summarizes NCM LLC’s total outstanding debt as of June 30, 2022 and December 30, 2021 and the significant terms of its borrowing arrangements (in millions):
| Outstanding Balance as of | ||||||||||||||||||||||||||
| Borrowings | June 30, 2022 | December 30, 2021 | Maturity Date | Interest Rate | ||||||||||||||||||||||
| 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.
Senior Secured Credit Facility—NCM LLC’s credit agreement, as amended, (the “Credit Agreement”) consists of a term loan facility and a revolving credit facility. As of June 30, 2022, NCM LLC’s senior secured credit facility consisted of a $175.0 million revolving credit facility, a $259.2 million term loan (first tranche) and a $49.4 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 a second amendment to its Credit Agreement (“Credit Agreement Second Amendment”). Among other things, the Credit Agreement Second Amendment provides for certain modifications to the negative covenants, 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 to 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”.
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 provides 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; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 9.25 to 1.00 and 7.25 to 1.00 , respectively, for the fiscal quarter ending on or about March 30, 2023, 8.50 to 1.00 and 6.50 to 1.00 , respectively, for the fiscal quarter ending on or about June 29, 2023, 8.00 to 1.00 and 6.00 to 1.00 , respectively, for the fiscal quarter ending on or about September 28, 2023, and 6.25 to 1.00 and 4.50 to 1.00 , respectively, for the fiscal quarter ending on or about December 28, 2023 and each fiscal quarter thereafter. Upon execution of the Credit Agreement Third Amendment, $6.4 million was recorded as debt issuance costs and $0.4 million was recorded as a loss on the modification of debt during the year ended December 30, 2021.
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, each of which has been modified by the Credit Agreement Third Amendment. Pursuant to the terms of the Credit Agreement Third Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
quarter ending on or about December 28, 2023, 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 consolidated net senior secured 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 June 30, 2022, NCM LLC was in compliance with the requirements of the Credit Agreement Third Amendment described above and the noncompliance with the financial covenants was automatically waived.
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 %. The rate increased from LIBOR index plus 2.75 % or the base rate plus 1.75 %. The interest rate on the term loans as of June 30, 2022 was 5.69 %. The term loans amortize at a rate equal to 1.00 % annually, to be paid in equal quarterly installments. As of June 30, 2022, NCM LLC has paid principal of $10.8 million, reducing the outstanding balance to $259.2 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 June 30, 2022 was 9.69 %. The term loans amortize at a rate equal to 1.00 % annually, to be paid in equal quarterly installments. As of June 30, 2022, NCM LLC has paid principal of $0.6 million, reducing the outstanding balance to $49.4 million.
Revolving Credit Facility 2018—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 due to the COVID-19 Pandemic. As of June 30, 2022, NCM LLC’s total availability under the $175.0 million revolving credit facility was $6.8 million, net of $167.0 million outstanding and $1.2 million in letters of credit. The unused line fee is 0.50 % per annum which is consistent with the previous facility. Borrowings under the revolving credit facility bear interest at NCM LLC’s option of either the LIBOR index plus an applicable margin ranging from 1.75 % to 2.25 % or the base rate plus an applicable margin ranging from 0.75 % to 1.25 %. 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 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 June 30, 2022 was 5.10 %.
Revolving Credit Facility 2022—On January 5, 2022, NCM LLC also entered into a new revolving credit agreement (the “Revolving Credit Agreement 2022”). The Revolving Credit Agreement 2022 provides for revolving loan commitments of $50.0 million of secured revolving loans, the entire amount of which was funded on January 5, 2022. The Revolving Credit Agreement 2022 provides 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 (iii) a termination premium if NCM LLC terminates the commitments under the Revolving Credit Agreement 2022 at any time before maturity. The Revolving Credit Agreement 2022 also contains covenants, representations and warranties and events of default that are substantially similar to the Credit Agreement. As of June 30, 2022, NCM LLC’s total availability under the $50.0 million revolving credit facility was $0.0 million. The weighted-average interest rate on the revolving credit facility as of June 30, 2022 was 9.11 %.
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, reducing the principal amount to $230.0 million as of June 30, 2022.
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. In the quarter ended June 30, 2022, NCM Inc. purchased $25.8 million of the Notes due 2028 on
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the open market, reducing the principal amount owed by NCM LLC to third parties to $374.2 million as of June 30, 2022 and resulting in a $6.0 million gain on extinguishment of debt in the second quarter.
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 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 $17.8 million and short-term and long-term lease liabilities of $2.2 million and $19.3 million, respectively, on the balance sheet as of June 30, 2022 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 June 30, 2022, the Company had a weighted average remaining lease term of 7.1 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 June 30, 2022, 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 June 30, 2022 and July 1, 2021, 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.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | June 30, 2022 | July 1, 2021 | ||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
The Company made total lease payments of $1.0 million, $1.1 million, $1.9 million and $2.0 million during the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, 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.
17
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 . 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 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 June 30, 2022 and December 30, 2021, 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) $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 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 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 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.
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 guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount. As of June 30, 2022, the maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $113.2 million over the remaining terms of the network affiliate agreements. These minimum guarantees relate to various affiliate agreements ranging in term from three years to twenty years , prior to any renewal periods of which some are at the option of the Company. The Company accrued $0.5 million and $0.4 million related to affiliate agreements with guaranteed minimums in excess of the revenue share agreement as of June 30, 2022 and December 30, 2021, respectively. As the guaranteed minimums are based upon agreed upon minimum attendance or affiliate revenue levels, the Company will not incur minimum revenue share fees during a period of time the minimum theater attendance or revenue levels are not met by the affiliate.
18
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 | |||||||||||
| June 30, 2022 | December 30, 2021 | ||||||||||
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.
During the three months ended June 30, 2022 and July 1, 2021 and six months ended June 30, 2022 and July 1, 2021, the Company recorded impairment charges of $0.0 million, $0.0 million, $0.1 million and $0.0 million, respectively, on certain of its investments due to new information regarding the fair value of the investee, which brought the total remaining value of the respective impaired investments to $0.1 million as of June 30, 2022. As of June 30, 2022, no other 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. The estimated fair values of the Company’s financial instruments where carrying values do not approximate fair value were as follows (in millions):
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| As of June 30, 2022 | As of December 30, 2021 | ||||||||||||||||||||||
| 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 June 30, 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 | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Fair Value as of December 30, 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 | $ | $ | $ | $ | |||||||||||||||||||
___________________________________________
(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 June 30, 2022 and December 30, 2021, there were $1.0 million and $1.0 million, respectively, of available-for-sale debt securities in unrealized loss positions without an allowance for credit losses. The Company has not recorded an allowance for credit losses for the marketable securities balance as of June 30, 2022 or December 30, 2021 given the immaterial difference between the amortized cost basis and the aggregate fair value of the Company's securities.
20
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 June 30, 2022 and December 30, 2021 were as follows:
| As of June 30, 2022 | |||||||||||||||||
| 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 30, 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 | $ | $ | |||||||||||||||
___________________________________
(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
21
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 under the heading “Risk Factors” below and in our annual report on Form 10-K for the Company’s fiscal year ended December 30, 2021. 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 is a supplement to and 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 30, 2021. 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 young, diverse audiences through the power of movies and popular culture. We currently derive revenue principally from the sale of advertising to national, local and regional businesses in our Noovie® pre-show, 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 a portion of our network affiliates’ theaters, the Noovie pre-show now includes Post-Showtime 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. As of June 30, 2022, theaters presenting the new Noovie pre-show format with Post-Showtime Inventory made up approximately 58% of our network. All other NCM network theater circuits, which make up the remaining 42% 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 our Noovie preshow.
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 Trivia, Noovie Shuffle, Name That Movie® and Noovie ARcade, as well as a variety of complementary out of home venues, including restaurants and convenience stores, in order to reach entertainment audiences beyond the theater. As of June 30, 2022, over 7.1 million moviegoers have downloaded our mobile apps. These downloads and the acquisition of second- and third-party data have resulted in data sets of approximately 328.7 million as of June 30, 2022. We have long-term ESAs (approximately 17.2 weighted average years remaining) with the founding members and multi-year agreements with our network affiliates, which expire at various dates between August 2022 and December 2037. The weighted average remaining term of the ESAs and the network affiliate agreements is 15.0 years as of June 30, 2022. 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 theater per week, and national, local, 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 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.
22
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 3, 2022 for our fiscal year ended December 30, 2021.
Recent Developments
COVID-19 Impact and Outlook—The COVID-19 Pandemic has had and continues to have a significant impact on the world and our business.
All of the theaters within the Company’s network have reopened and the release of major motion pictures has resumed since the third quarter of 2021 resulting in the highest attendance numbers within our network since the start of the COVID-19 Pandemic. Despite the increase in network attendance, in-theater advertising revenue for the year ended December 30, 2021 and the six months ended June 30, 2022 remained below historical levels due to the lag between the recovery of attendees and advertisers. The movie slate for 2022 improved, while experiencing impacts from post-production delays, and attendance levels are approaching historical levels. Variants of the COVID-19 virus continue to circulate throughout the United States and could impact consumer behavior.
To ensure sufficient liquidity during the recovery from the impacts of the COVID-19 Pandemic, we managed 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 measures as well as a headcount reduction of approximately 44% as of June 30, 2022, 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 were open, which were reduced for months where screens were in use for only part of the month.
On January 5, 2022, NCM LLC entered into the Credit Agreement Third Amendment. Among other things, the Credit Agreement Third Amendment provides 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) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 9.25 to 1.00 and 7.25 to 1.00, respectively, for the fiscal quarter ending on or about March 30, 2023, 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or about June 29, 2023, 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or about September 28, 2023, and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or about December 28, 2023 and each fiscal quarter thereafter.
On January 5, 2022, NCM LLC also entered into the New Revolving Credit Agreement among NCM LLC, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent. The New Revolving Credit Agreement provides for revolving loan commitments of $50.0 million of secured revolving loans, the entire amount of which was funded on January 5, 2022. The New Revolving Credit Agreement provides for (i) a cash interest rate of term SOFR plus 8.00%, with a 1.00% floor, (ii) a maturity date of June 20, 2023 and (iii) a termination premium if NCM LLC terminates the commitments under the New Revolving Credit Agreement at any time before maturity. The New Revolving Credit Agreement also contains covenants, representations and warranties and events of default that are substantially similar to the Credit Agreement.
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):
23
| % Change | |||||||||||||||||||||||||||||||||||
| Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | Q2 2021 to Q2 2022 | YTD 2021 to YTD 2022 | ||||||||||||||||||||||||||||||
| Revenue | $ | 67.1 | $ | 14.0 | $ | 103.0 | $ | 19.4 | 379.3 | % | 430.9 | % | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Advertising | 39.0 | 20.7 | 70.3 | 31.2 | 88.4 | % | 125.3 | % | |||||||||||||||||||||||||||
| Network, administrative and unallocated costs | 22.5 | 22.9 | 49.6 | 46.1 | (1.7) | % | 7.6 | % | |||||||||||||||||||||||||||
| Total operating expenses | 61.5 | 43.6 | 119.9 | 77.3 | 41.1 | % | 55.1 | % | |||||||||||||||||||||||||||
| Operating income (loss) | 5.6 | (29.6) | (16.9) | (57.9) | (118.9) | % | (70.8) | % | |||||||||||||||||||||||||||
| Non-operating expenses | 14.2 | 17.3 | 37.7 | 31.0 | (17.9) | % | 21.6 | % | |||||||||||||||||||||||||||
| Income tax expense | — | — | — | — | — | % | — | % | |||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (7.9) | (24.2) | (28.7) | (46.8) | (67.4) | % | (38.7) | % | |||||||||||||||||||||||||||
| Net loss attributable to NCM, Inc. | $ | (0.7) | $ | (22.7) | $ | (25.9) | $ | (42.1) | (96.9) | % | (38.5) | % | |||||||||||||||||||||||
| Net loss per NCM, Inc. basic share | $ | (0.01) | $ | (0.28) | $ | (0.32) | $ | (0.53) | (96.4) | % | (39.6) | % | |||||||||||||||||||||||
| Net loss per NCM, Inc. diluted share | $ | (0.01) | $ | (0.28) | $ | (0.32) | $ | (0.53) | (96.4) | % | (39.6) | % | |||||||||||||||||||||||
| Adjusted OIBDA | $ | 15.1 | $ | (18.7) | $ | 8.2 | $ | (34.9) | (180.7) | % | (123.5) | % | |||||||||||||||||||||||
| Adjusted OIBDA margin | 22.5 | % | (133.6) | % | 8.0 | % | (179.9) | % | 156.1 | % | 187.9 | % | |||||||||||||||||||||||
Total theater attendance (in millions) (1) | 124.2 | 49.1 | 200.2 | 62.9 | 153.0 | % | 218.3 | % | |||||||||||||||||||||||||||
_________________________
(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 during the 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, impairment of long-lived assets and costs related to the reorganization of the sales force. 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 theater screen leases, non-cash share based compensation programs, impairment of long-lived assets, costs related to sales force reorganization, 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, the impairment of long-lived assets or costs related to sales force reorganization. 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.
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The following table reconciles operating income to Adjusted OIBDA for the periods presented (dollars in millions):
| Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | ||||||||||||||||||||
| Operating income (loss) | $ | 5.6 | $ | (29.6) | $ | (16.9) | $ | (57.9) | |||||||||||||||
| Depreciation expense | 1.5 | 2.6 | 3.5 | 5.9 | |||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 6.3 | 6.2 | 12.4 | 12.3 | |||||||||||||||||||
Share-based compensation costs (1) | 1.7 | 2.1 | 3.0 | 4.8 | |||||||||||||||||||
Impairment of long-lived assets (2) | — | — | 5.8 | — | |||||||||||||||||||
Sales force reorganization costs (3) | — | — | 0.4 | — | |||||||||||||||||||
| Adjusted OIBDA | $ | 15.1 | $ | (18.7) | $ | 8.2 | $ | (34.9) | |||||||||||||||
| Total revenue | $ | 67.1 | $ | 14.0 | $ | 103.0 | $ | 19.4 | |||||||||||||||
| Adjusted OIBDA margin | 22.5 | % | (133.6) | % | 8.0 | % | (179.9) | % | |||||||||||||||
(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 relates to the write down of certain internally developed software no longer in use.
(3)Sales force reorganization costs represents redundancy costs associated with changes to the Company’s sales force implemented during the first quarter of 2022.
Our Network—The change in the number of screens in our network by the founding members and network affiliates during the six months ended June 30, 2022 was as follows.
| Number of screens | |||||||||||||||||
| Founding Members | Network Affiliates | Total | |||||||||||||||
| Balance as of December 30, 2021 | 16,436 | 4,304 | 20,740 | ||||||||||||||
Closures, net of openings (1) | (20) | (86) | (106) | ||||||||||||||
| Balance as of June 30, 2022 | 16,416 | 4,218 | 20,634 | ||||||||||||||
______________________________________
(1)Represents the closure of 106 screens, net of new screens added, across our founding members and network affiliates.
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 June 30, 2022 (second quarter of 2022) and July 1, 2021 (second quarter of 2021) and the six months ended June 30, 2022 and July 1, 2021 was derived from the unaudited Condensed Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the accompanying notes.
Results of Operations
Second Quarter of 2022 and Second Quarter of 2021
Revenue. Total revenue increased 379.3%, from $14.0 million for the second quarter of 2021 to $67.1 million for the second quarter of 2022. The following is a summary of revenue by category (in millions):
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| $ Change | % Change | ||||||||||||||||||||||
| Q2 2022 | Q2 2021 | Q2 2021 to Q2 2022 | Q2 2021 to Q2 2022 | ||||||||||||||||||||
| National advertising revenue | $ | 50.7 | $ | 8.6 | $ | 42.1 | 489.5 | % | |||||||||||||||
| Local and regional advertising revenue | 10.5 | 3.3 | 7.2 | 218.2 | % | ||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | 5.9 | 2.1 | 3.8 | 181.0 | % | ||||||||||||||||||
| Total revenue | $ | 67.1 | $ | 14.0 | $ | 53.1 | 379.3 | % | |||||||||||||||
The following table shows data on theater attendance and revenue per attendee for the three months ended June 30, 2022 and July 1, 2021:
| % Change | |||||||||||||||||
| Q2 2022 | Q2 2021 | Q2 2021 to Q2 2022 | |||||||||||||||
| National advertising revenue per attendee | $ | 0.408 | $ | 0.175 | 133.1 | % | |||||||||||
| Local and regional advertising revenue per attendee | $ | 0.085 | $ | 0.067 | 26.9 | % | |||||||||||
| Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.493 | $ | 0.242 | 103.7 | % | |||||||||||
| Total revenue per attendee | $ | 0.540 | $ | 0.285 | 89.5 | % | |||||||||||
Total theater attendance (in millions) (1) | 124.2 | 49.1 | 153.0 | % | |||||||||||||
________________________________________________________
(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 during the periods presented.
National advertising revenue. National advertising revenue increased by $42.1 million, or 489.5%, from $8.6 million for the second quarter of 2021 to $50.7 million for the second quarter of 2022. The increase was due to a significant increase in impressions sold and a 48.1% increase in national advertising CPMs (excluding beverage) in the second quarter of 2022, compared to the second quarter of 2021. The increase in impressions sold was primarily due to an increase in network attendance and an increase in national advertising utilization due to the increased movie slate and return of advertisers to the network in the second quarter of 2022.
Local and regional advertising revenue. Local and regional advertising revenue increased by $7.2 million, or 218.2%, from $3.3 million for the second quarter of 2021. The increase in local and regional advertising revenue was driven by a significant increase in network attendance primarily due to an increase in movie slate in the second quarter of 2022, compared to the second quarter of 2021.
Founding member beverage revenue. National advertising revenue from the founding members’ beverage concessionaire agreement increased $3.8 million, or 181.0%, from $2.1 million for the second quarter of 2021 to $5.9 million for the second quarter of 2022. The increase was due to a 160.2% increase in founding member attendance for the second quarter of 2022, compared to the second quarter of 2021 as the movie slate and box office remained dormant from COVID-19 related closures and restrictions. Additionally, increases in beverage revenue CPMs in 2022, compared to 2021, contributed to the increase as well.
Operating expenses. Total operating expenses increased $17.9 million, or 41.1%, from $43.6 million for the second quarter of 2021 to $61.5 million for the second quarter of 2022. The following table shows the changes in operating expense for the second quarter of 2022 (in millions):
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| $ Change | % Change | ||||||||||||||||||||||
| Q2 2022 | Q2 2021 | Q2 2021 to Q2 2022 | Q2 2021 to Q2 2022 | ||||||||||||||||||||
| Advertising operating costs | $ | 8.3 | $ | 3.2 | $ | 5.1 | 159.4 | % | |||||||||||||||
| Network costs | 2.1 | 1.9 | 0.2 | 10.5 | % | ||||||||||||||||||
| Theater access fees and revenue share—founding members | 23.2 | 11.2 | 12.0 | 107.1 | % | ||||||||||||||||||
| Selling and marketing costs | 10.4 | 8.9 | 1.5 | 16.9 | % | ||||||||||||||||||
| Administrative and other costs | 9.7 | 9.6 | 0.1 | 1.0 | % | ||||||||||||||||||
| Depreciation expense | 1.5 | 2.6 | (1.1) | (42.3) | % | ||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 6.3 | 6.2 | 0.1 | 1.6 | % | ||||||||||||||||||
Total operating expenses | $ | 61.5 | $ | 43.6 | $ | 17.9 | 41.1 | % | |||||||||||||||
Advertising operating costs. Advertising operating costs increased $5.1 million, or 159.4%, from $3.2 million for the second quarter of 2021 to $8.3 million for the second quarter of 2022. The majority of the increase was due to $5.0 million of higher advertising affiliate expense, which was driven by improved revenue for the second quarter of 2022, as compared to the second quarter of 2021.
Network costs. Network costs increased $0.2 million, or 10.5%, from $1.9 million for the second quarter of 2021 to $2.1 million for the second quarter of 2022. This increase was primarily due to a $0.2 million increase in personnel related expenses from the reinstatement of full salaries to employees in the first quarter of 2022, compared to the second quarter of 2021 when temporary salary and wage reductions were in place.
Theater access fees and revenue share—founding members. Theater access fees and revenue share increased from $11.2 million for the second quarter of 2021 to $23.2 million for the second quarter of 2022. This increase was primarily due to the substantial increase in theater attendance for the second quarter of 2022 as compared to the second quarter of 2021, resulting in $8.1 million of additional expense. Additionally, $3.1 million of the increase was associated with the founding member digital screens which were partially not in use in the second quarter of 2021 and a $0.8 million increase in platinum revenue share in the second quarter of 2022, compared to the second quarter of 2021.
Selling and marketing costs. Selling and marketing costs increased $1.5 million, or 16.9%, from $8.9 million for the second quarter of 2021 to $10.4 million for the second quarter of 2022. This increase was primarily due to a $0.6 million increase in personnel related expenses from the reinstatement of full salaries to employees in the first quarter of 2022, compared to the second quarter of 2021 when temporary salary and wage reductions were in place, a $0.5 million expense increase related to increasing market activity and a $0.5 million increase in the allowance for doubtful accounts driven by the increase in revenue in the second quarter of 2022, compared to the second quarter of 2021. These increases were partially offset by a $0.2 million decrease in publisher expense for the second quarter of 2022, compared to the second quarter of 2021.
Administrative and other costs. Administrative and other costs remained stable with an increase of $0.1 million, or 1.0%, from $9.6 million for the second quarter of 2021 to $9.7 million for the second quarter of 2022.
Depreciation expense. Depreciation expense decreased $1.1 million, or 42.3%, from $2.6 million for the second quarter of 2021 to $1.5 million in the second quarter of 2022, primarily due to the write-off of internally developed software in the first quarter of 2022.
Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen increased $0.1 million, or 1.6%, from $6.2 million for the second quarter of 2021 to $6.3 million for the second quarter of 2022.
Non-operating expenses. Total non-operating expenses decreased $3.1 million, or 17.9%, from $17.3 million for the second quarter of 2021 to $14.2 million for the second quarter of 2022. The following table shows the changes in non-operating expense for the second quarter of 2022 and the second quarter of 2021 (in millions):
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| $ Change | % Change | ||||||||||||||||||||||
| Q2 2022 | Q2 2021 | Q2 2021 to Q2 2022 | Q2 2021 to Q2 2022 | ||||||||||||||||||||
| Interest on borrowings | $ | 20.4 | $ | 16.9 | $ | 3.5 | 20.7 | % | |||||||||||||||
| Interest income | (0.1) | (0.1) | — | — | % | ||||||||||||||||||
| (Gain) loss on modification and retirement of debt, net | (5.9) | 0.4 | (6.3) | (1575.0) | % | ||||||||||||||||||
| (Gain) loss on the re-measurement of the payable to founding members under the tax receivable agreement | (0.1) | 0.1 | (0.2) | (200.0) | % | ||||||||||||||||||
| Other non-operating (income) expense | (0.1) | — | (0.1) | (100.0) | % | ||||||||||||||||||
| Total non-operating expenses | $ | 14.2 | $ | 17.3 | $ | (3.1) | (17.9) | % | |||||||||||||||
The decrease in non-operating expense was primarily due to a $6.3 million increase in the gain on the modification and retirement of debt driven by NCM Inc.’s purchase of $25.8 million of the Notes due 2028 on the open market, reducing the principal amount owed by NCM LLC to third parties as of June 30, 2022. This was partially offset by a $0.2 million increase in the gain on the re-measurement of the payable to founding members under the TRA related to the increase in our payable to the founding members under the TRA resulting from an increase in projected taxable income before TRA deductions for the year ended December 29, 2022. The increase was also due to a $3.5 million increase in interest on borrowings primarily related to the issuance of the New Revolving Credit Agreement in January of 2022.
Net Loss. Net loss decreased $22.0 million from net loss of $22.7 million for the second quarter of 2021 to $0.7 million for the second quarter of 2022. The decrease in net loss was due to a $35.2 million increase in operating income and a $3.1 million decrease in non-operating expense, offset by a $16.3 million decrease in net loss attributable to noncontrolling interests.
Six months ended June 30, 2022 and July 1, 2021
Revenue. Total revenue increased 430.9%, from $19.4 million for the six months ended July 1, 2021 to $103.0 million for the six months ended June 30, 2022. The following is a summary of revenue by category (in millions):
| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | YTD 2021 to YTD 2022 | YTD 2021 to YTD 2022 | ||||||||||||||||||||
| National advertising revenue | $ | 77.0 | $ | 11.8 | $ | 65.2 | 552.5 | % | |||||||||||||||
| Local and regional advertising revenue | 16.6 | 5.0 | 11.6 | 232.0 | % | ||||||||||||||||||
| Founding member advertising revenue from beverage concessionaire agreements | 9.4 | 2.6 | 6.8 | 261.5 | % | ||||||||||||||||||
| Total revenue | $ | 103.0 | $ | 19.4 | $ | 83.6 | 430.9 | % | |||||||||||||||
The following table shows data on theater attendance and revenue per attendee for the six months ended June 30, 2022 and July 1, 2021:
| Six Months Ended | % Change | ||||||||||||||||
| June 30, 2022 | July 1, 2021 | YTD 2021 to YTD 2022 | |||||||||||||||
| National advertising revenue per attendee | $ | 0.385 | $ | 0.188 | 104.8 | % | |||||||||||
| Local and regional advertising revenue per attendee | $ | 0.083 | $ | 0.079 | 5.1 | % | |||||||||||
| Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.468 | $ | 0.267 | 75.3 | % | |||||||||||
| Total revenue per attendee | $ | 0.514 | $ | 0.308 | 66.9 | % | |||||||||||
Total theater attendance (in millions) (1) | 200.2 | 62.9 | 218.3 | % | |||||||||||||
________________________________________________________
(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 during the periods presented.
National advertising revenue. National advertising revenue increased by $65.2 million, or 552.5%, from $11.8 million for the six months ended July 1, 2021 to $77.0 million for the six months ended June 30, 2022. The increase was due to a significant increase in impressions sold and a 41.4% increase in national advertising CPMs for the six months ended
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June 30, 2022, compared to the six months ended July 1, 2021. The increase in impressions sold was primarily due to an increase in network attendance and an increase in national advertising utilization due to the increased movie slate and return of advertisers to the network in the second quarter of 2022.
Local and regional advertising revenue. Local and regional advertising revenue increased by $11.6 million, or 232.0%, from $5.0 million for the six months ended July 1, 2021 to $16.6 million for the six months ended June 30, 2022. The increase in local and regional advertising revenue was due primarily to our network being fully reopened for the six months ended June 30, 2022, considering that 40% of our network remained closed for three of the six months ended July 1, 2021. The increase was also driven by a significant increase in network attendance primarily due to an increase in movie slate in the six months ended June 30, 2022, compared the six months ended July 1, 2021.
Founding member beverage revenue. National advertising revenue from the founding members’ beverage concessionaire agreement increased $6.8 million, or 261.5%, from $2.6 million for the six months ended July 1, 2021 to $9.4 million for the six months ended June 30, 2022. The increase was due to a 230.9% increase in founding member attendance for the six months ended June 30, 2022, compared to the six months ended July 1, 2021 and an increase in beverage revenue CPMs in 2022, compared to 2021.
Operating expenses. Total operating expenses increased $42.6 million, or 55.1%, from $77.3 million for the six months ended July 1, 2021 to $119.9 million for the six months ended June 30, 2022. The following table shows the changes in operating expense for the six months ended June 30, 2022 and July 1, 2021 (in millions):
| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | YTD 2021 to YTD 2022 | YTD 2021 to YTD 2022 | ||||||||||||||||||||
| Advertising operating costs | $ | 13.0 | $ | 4.7 | $ | 8.3 | 176.6 | % | |||||||||||||||
| Network costs | 4.1 | 3.7 | 0.4 | 10.8 | % | ||||||||||||||||||
| Theater access fees and revenue share—founding members | 41.1 | 14.3 | 26.8 | 187.4 | % | ||||||||||||||||||
| Selling and marketing costs | 20.6 | 16.6 | 4.0 | 24.1 | % | ||||||||||||||||||
| Administrative and other costs | 19.4 | 19.8 | (0.4) | (2.0) | % | ||||||||||||||||||
| Impairment of long-lived assets | 5.8 | — | 5.8 | (100.0) | % | ||||||||||||||||||
| Depreciation expense | 3.5 | 5.9 | (2.4) | (40.7) | % | ||||||||||||||||||
| Amortization of intangibles recorded for network theater screen leases | 12.4 | 12.3 | 0.1 | 0.8 | % | ||||||||||||||||||
Total operating expenses | $ | 119.9 | $ | 77.3 | $ | 42.6 | 55.1 | % | |||||||||||||||
Advertising operating costs. Advertising operating costs increased $8.3 million, or 176.6%, from $4.7 million for the six months ended July 1, 2021 to $13.0 million for the six months ended June 30, 2022. The majority of the increase was due to $8.1 million of higher advertising affiliate expense, which was driven by improved revenue for the six months ended June 30, 2022, compared to the six months ended July 1, 2021.
Network costs. Network costs increased $0.4 million, or 10.8%, from $3.7 million for the six months ended July 1, 2021 to $4.1 million for the six months ended June 30, 2022. The increase was primarily related to a $0.3 million increase in personnel related costs due to the reinstatement of full salaries to all employees in the first quarter of 2022 impacting the six months ended June 30, 2022, compared to the six months ended July 1, 2021 when temporary salary and wage reductions were in place.
Theater access fees and revenue share—founding members. Theater access fees and revenue share increased from $14.3 million for the six months ended July 1, 2021 to $41.1 million for the six months ended June 30, 2022. This increase was primarily due to $14.5 million caused by the substantial increase in theater attendance for the six months ended June 30, 2022, as compared to the six months ended July 1, 2021. Additionally, $11.2 million of the increase in the expense was associated with the founding member digital screens which were partially not in use in the six months ended July 1, 2021 and a $1.1 million increase in platinum revenue share in the six months ended June 30, 2022, compared to the six months ended July 1, 2021.
Selling and marketing costs. Selling and marketing costs increased $4.0 million, or 24.1%, from $16.6 million for the six months ended July 1, 2021 to $20.6 million for the six months ended June 30, 2022. This increase was primarily due to a $1.7 million expense increase related to increasing market activity, a $1.5 million increase in personnel related expenses from the reinstatement of full salaries to employees in the first quarter of 2022 impacting the six months ended June 30, 2022, compared to the six months ended July 1, 2021 when temporary salary and wage reductions were in
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place and a $1.0 million increase in bad debt expense driven by the increase in revenue in the second quarter of 2022, compared to the second quarter of 2021. These increases were partially offset by a $0.7 million decrease in non-cash barter expense for the six months ended June 30, 2022, compared to the six months ended July 1, 2021.
Administrative and other costs. Administrative and other costs decreased $0.4 million, or 2.0%, from $19.8 million for the six months ended July 1, 2021 to $19.4 million for the six months ended June 30, 2022. This decrease was primarily due to a $1.6 million decrease in personnel related expenses driven by a $1.4 million decrease in share-based compensation expense in the six months ended June 30, 2022, compared to the six months ended July 1, 2021, partially offset by a $0.4 million decrease in capitalized personnel costs. The decrease was also partially offset by a $0.4 million increase in cloud computing expense incurred following the implementation of our new cinema advertising management system in the first quarter of 2021, $0.2 million related to an increase in insurance expense and a $0.1 million increase in legal and professional fees.
Impairment of long-lived assets. Impairment of long-lived assets increased $5.8 million, or 100%, from $0.0 million for the six months ended July 1, 2021 to $5.8 million for the six months ended June 30, 2022. This increase in impairment expense consisted of the write-off of certain long-lived assets during the first quarter of 2022.
Depreciation expense. Depreciation expense decreased $2.4 million, or 40.7%, from $5.9 million for the six months ended July 1, 2021 to $3.5 million for the six months ended June 30, 2022, primarily due to the write-off of internally developed software in the first quarter of 2022.
Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen increased $0.1 million, or 0.8%, from $12.3 million for the six months ended July 1, 2021 to $12.4 million for the six months ended June 30, 2022.
Non-operating expenses. Total non-operating expenses increased $6.7 million, or 21.6%, from $31.0 million for the six months ended July 1, 2021 to $37.7 for the six months ended June 30, 2022. The following table shows the changes in non-operating expense for the six months ended June 30, 2022 and July 1, 2021 (in millions):
| Six Months Ended | $ Change | % Change | |||||||||||||||||||||
| June 30, 2022 | July 1, 2021 | YTD 2021 to YTD 2022 | YTD 2021 to YTD 2022 | ||||||||||||||||||||
| Interest on borrowings | $ | 37.6 | $ | 31.6 | $ | 6.0 | 19.0 | % | |||||||||||||||
| Interest income | (0.1) | (0.1) | $ | — | — | % | |||||||||||||||||
| (Gain) loss on modification and retirement of debt, net | (5.9) | 0.8 | $ | (6.7) | (837.5) | % | |||||||||||||||||
| Loss (gain) on the re-measurement of the payable to founding members under the tax receivable agreement | 6.3 | (1.4) | $ | 7.7 | (550.0) | % | |||||||||||||||||
| Other non-operating (income) expense | (0.2) | 0.1 | $ | (0.3) | (300.0) | % | |||||||||||||||||
| Total non-operating expenses | $ | 37.7 | $ | 31.0 | $ | 6.7 | 21.6 | % | |||||||||||||||
The increase in non-operating expense was primarily due to a $7.7 million increase in the loss on the re-measurement of the payable to founding members under the TRA related to the increase in our payable to the founding members under the TRA resulting from an increase in projected taxable income before TRA deductions for the year ended December 29, 2022 and a $6.0 million increase in interest on borrowings primarily related to the issuance of the New Revolving Credit Agreement in January of 2022. These increases were partially offset by a $6.7 million increase in the gain on the modification and retirement of debt driven by NCM Inc.’s purchase of $25.8 million of the Notes due 2028 on the open market, reducing the principal amount owed by NCM LLC to third parties as of June 30, 2022.
Net Loss. Net loss decreased $16.2 million from net loss of $42.1 million for the six months ended July 1, 2021 to $25.9 million for the six months ended June 30, 2022. The decrease in net loss was due to a $41.0 million decrease in operating loss, partially offset by a $18.1 million decrease in net loss attributable to noncontrolling interests and a $6.7 million decrease in non-operating expense.
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 were temporarily closed during a portion of 2021. The Company's ability to advertise within theaters once opened in 2021 was limited due to reduced movie schedules and patron capacities at many network theaters and
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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, were not incurred when theaters were closed and attendance-based fees were reduced for the period of time that attendance was 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 2022 and 2021, 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. 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. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers now increases at a fixed rate of 2.0% each year.
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 an increase occurring in the current year and the next increase occurring in 2027. 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) $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) increasing 8% every five years beginning November 1, 2027.
Platinum Spot—In consideration for the utilization of the theaters post-showtime for Platinum Spots, Cinemark and Regal 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.
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 Cinemark and Regal, interest or principal payments on our term loans and the Notes due 2026 and Notes due 2028, income tax payments, TRA payments to the 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 a portion of 2021 and the Company's ability to advertise within the reopened theaters in 2021 was 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’s attendance levels have continued to improve but still remain below historic levels, which continues to impact cash receipts and advertising revenue. Further, there is 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 (i.e., theater access fees, Platinum Spot revenue share and network affiliate revenue share payments) were either not incurred or incurred at lower levels . As all of the theaters within our network were
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open during the first six months of 2022, the screen-based portion of these expenses returned to historical levels and the attendance-based portion of these expenses is expected to continue to increase as attendance increases following the continued release 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:
•Offered the option for the Board to receive the cash retainers beginning with the first quarter of 2021 in equivalent value of the Company’s common stock in lieu of cash;
•Curtailed certain non-essential operating expenditures, including marketing, research, and consulting services;
•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 beginning in the second quarter of 2020, which results in cash savings of $13.0 million in the second quarter of 2022 and cash savings of $84.3 million for NCM, Inc. since the beginning of the pandemic; and
•Introduced an active cash management process, which, among other things, requires CEO or CFO approval of all outgoing payments.
In March 2020, we drew down an additional $110.0 million on our revolving credit facility, in March 2021, we received $43.0 million in proceeds under incremental term loans that mature on December 20, 2024, and in January 2022 we received $43.3 million in proceeds under an incremental revolving credit facility that matures on June 20, 2023. The $57.7 million of cash at NCM LLC as of June 30, 2022 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. stockholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
On January 5, 2022, NCM LLC entered into the Credit Agreement Third Amendment. Among other things, the Credit Agreement Third Amendment provides 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; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 9.25 to 1.00 and 7.25 to 1.00, respectively, for the fiscal quarter ending on or about March 30, 2023, 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or about June 29, 2023, 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or about September 28, 2023, and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or about December 28, 2023 and each fiscal quarter thereafter, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 30, 2021, a waiver of the requirement to deliver an auditor’s opinion for such financial statements without a “going concern” or like qualification or exception.
Also on January 5, 2022, NCM LLC also entered into the New Revolving Credit Agreement among NCM LLC, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent. The New Revolving Credit Agreement provides for revolving loan commitments of $50.0 million of secured revolving loans, the entire amount of which was funded on January 5, 2022. The New Revolving Credit Agreement provides for (i) a cash interest rate of term SOFR plus 8.00%, with a 1.00% floor, (ii) a maturity date of June 20, 2023 and (iii) a termination premium if NCM LLC terminates the commitments under the New Revolving Credit Agreement at any time before maturity. The New Revolving Credit Agreement also contains covenants, representations and warranties and events of default that are substantially similar to the Credit Agreement. In accordance with the New Revolving Credit Agreement and the Credit Agreement Third Amendment, for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the fourth quarter of 2023, 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 June 30, 2022, NCM LLC was in compliance with the requirements of the Credit Agreement, as amended, and the New Revolving Credit Agreement.
The Company has borrowings under two Revolving Credit Facilities with $217.0 million outstanding as of June 30, 2022, that mature on June 20, 2023 (see Note 6). The Company does not have available liquidity to repay the full outstanding balance on the date of maturity. Under the Credit Agreement, failure to repay borrowings under the Revolving Credit Facilities at maturity would result in an event of default for the term loans, which would allow a majority of the lenders under the Credit Agreement to accelerate the maturity of the principal amounts of outstanding term loans to become due and payable. It would also result in an event of default for the senior notes, which would allow the indenture trustee or senior note holders of each tranche of senior notes to accelerate the maturity to become due and payable. The Company does not have available liquidity to repay any accelerated principal of term loans or tranches of the outstanding senior notes upon an event of default within one year after the date that the financial statements are issued. Additionally, the Company does not expect to meet its financial
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covenants within one year following the date that these financial statements are issued. If these financial covenants are not met a majority of the lenders of the Senior Secured Credit Facility are permitted under the Credit Agreement to accelerate the debt which would also result in an event of default for the senior notes. In this event, the Company would not be able to repay the Company’s total outstanding debt balance. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In response to these conditions, management’s plans include amending NCM LLC’s Revolving Credit Facilities to extend the maturity dates, amending its Senior Secured Credit Facility to extend a waiver of these financial covenants, or obtaining additional debt financing through a loan from third parties, and/or NCM, Inc. Management expects to conclude one of these alternatives; however, there can be no assurance that the Company will be successful in completing any of these options. As a result, management’s plan cannot be considered probable and thus does not alleviate the substantial doubt about the Company’s ability to continue as a going concern. Based on the Company’s current financial position and liquidity sources, including current cash balances, and forecasted future cash flows, management believes the Company can meet its operating obligations as they become due.
A summary of our financial liquidity is as follows (in millions):
| As of | $ Change | $ Change | |||||||||||||||||||||||||||
| June 30, 2022 | December 30, 2021 | July 1, 2021 | YE 2021 to Q2 2022 | Q2 2021 to Q2 2022 | |||||||||||||||||||||||||
Cash, cash equivalents and marketable securities (1) | $ | 74.4 | $ | 102.5 | $ | 149 | $ | (28.1) | $ | (74.6) | |||||||||||||||||||
NCM LLC revolving credit facility availability (2) | 6.8 | 6.8 | 5.6 | — | 1.2 | ||||||||||||||||||||||||
| Total liquidity | $ | 81.2 | $ | 109.3 | $ | 154.6 | $ | (28.1) | $ | (73.4) | |||||||||||||||||||
_________________________
(1)Included in cash, cash equivalents and marketable securities as of June 30, 2022, December 30, 2021 and July 1, 2021, was $57.7 million, $58.6 million and $98.2 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 pursuant to the Credit Agreement was $175.0 million as of June 30, 2022, December 30, 2021 and July 1, 2021. As of June 30, 2022, December 30, 2021 and July 1, 2021, the amount available under the NCM LLC revolving credit facility pursuant to the Credit Agreement 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 $1.2 million, $1.2 million and $2.4 million, respectively.
As of June 30, 2022, the weighted average remaining maturity of our debt was 3.7 years. As of June 30, 2022, approximately 53% of our total borrowings bear interest at fixed rates. The remaining 47% 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):
| Six Months Ended | |||||||||||
| June 30, 2022 | July 1, 2021 | ||||||||||
| Operating cash flow | $ | (40.4) | $ | (61.6) | |||||||
| Investing cash flow | $ | (1.5) | $ | (2.9) | |||||||
| Financing cash flow | $ | 13.8 | $ | 31.6 | |||||||
•Operating Activities. The $21.2 million decrease in cash used in operating activities for the six months ended June 30, 2022, as compared to the six months ended July 1, 2021, was primarily due to a $34.3 million decrease in consolidated net loss, $7.7 million decrease in the noncash loss on the remeasurement of the payable to founding members under the TRA, a $5.8 million increase in the impairment of long-lived assets related to the write down in the first quarter of 2022 of certain internally developed software no longer in use and a $4.8 million decrease in cash used in other changes in operating assets and liabilities, partially offset by a $15.0 million decrease in the receivable balance driven by higher revenue in the six months ended June 30, 2022, compared to the six months ended July 1, 2021, a $7.7 million increase in deferred revenue related to higher revenue and a $6.7 million increase in the gain on the early retirement of debt.
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•Investing Activities. The $1.4 million decrease in cash used in investing activities for the six months ended June 30, 2022, as compared to the six months ended July 1, 2021, was due to a $1.4 million decrease in purchases of property and equipment in the six months ended June 30, 2022, as compared to the six months ended July 1, 2021.
•Financing Activities. The $17.8 million decrease in cash provided by financing activities for the six months ended June 30, 2022, as compared to the six months ended July 1, 2021 was primarily due to the $50.0 million issuance of the second tranche of term loans that occurred in the first quarter of 2021 and $19.8 million increase in the purchase of Notes due 2028, partially offset by the $50.0 million increase from the issuance of the New Revolving Credit Facility in the first quarter of 2022, and a $1.8 million decrease in dividends paid related to the decrease in the dividend amounts declared from $0.10 per share during the six months ended July 1, 2021 to $0.08 per share during the six months ended June 30, 2022.
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 June 30, 2022 were $74.4 million (including $57.7 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 in order to supplement the decrease in cash provided by operating activities during the period our network theaters were closed. On January 5, 2022, NCM LLC entered in the New Revolving Credit Agreement and drew down upon the new revolving credit facility of $50.0 million. The $57.7 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. stockholders.
Cash flows generated by NCM LLC’s distributions to NCM, Inc. and the founding members have been affected by the impact of the COVID-19 Pandemic on our operations and may be deferred through the quarter ending December 28, 2023 or longer due to the limitations instituted by the Credit Agreement First Amendment, Credit Agreement Second Amendment and Credit Agreement Third Amendment. 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, AMC and NCM, Inc.). The available cash distribution to NCM LLC’s members for the six months ended June 30, 2022 was calculated as approximately negative $33.4 million, of which NCM, Inc.'s share is approximately negative $15.8 million. Further there was $93.7 million and $85.2 million of negative available cash generated during the years ended December, 30, 2021 and December 31, 2020, respectively. Pursuant to the NCM LLC operating agreement and the Credit Agreement amendments, there will be no available cash distributions made for the first or second quarter of 2022. Negative available cash distributions for the years of 2021 and 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 Third 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 Credit Agreement) to fund payments associated with the TRA with the founding members and current and future dividends as declared by the Board of Directors, including a dividend declared on August 8, 2022 of $0.03 per share (approximately $2.4 million) on each share of the Company’s common stock (not including outstanding restricted stock) to stockholders of record on August 22, 2022 to be paid on September 6, 2022. The Company does not expect to make a TRA payment in 2022 for the 2021 tax year. The Company will also consider opportunistically using cash received for partial repayments of NCM LLC's outstanding debt balance. Distributions from NCM LLC and NCM, Inc. cash balances should be sufficient to fund payments associated with the TRA with the founding members, income taxes and its regular 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 take into account 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 and restrictions under the NCM LLC Credit Agreement.
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
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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 30, 2021 and incorporated by reference herein. As of June 30, 2022, 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.
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 June 30, 2022, the only interest rate risk that we are exposed to is related to our $225.0 million revolving credit facilities and our term loans. A 100-basis point fluctuation in market interest rates underlying our term loans and revolving credit facilities would have the effect of increasing or decreasing our cash interest expense by approximately $5.3 million for an annual period on the $217.0 million in revolving credit balances, $49.4 million term loan and $259.2 million incremental term loan outstanding as of June 30, 2022.
In response to the COVID-19 Pandemic, the government lowered the Federal Reserve interest rate leading to historically low interest rates as of June 30, 2022 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 officer) and Chief Financial Officer (principal financial and accounting officer), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the Chief Executive Officer and Chief Financial 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 June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures as of June 30, 2022 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 June 30, 2022 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
Excluding the risk factor outlined below, 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 3, 2022 for the fiscal year ended December 30, 2021.
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We may be unsuccessful in extending the maturity dates of NCM LLC’s Revolving Credit Facilities, amending its Senior Secured Credit Facility to extend a waiver of these financial covenants or obtaining additional debt financing from third parties. The failure to obtain such an extension, waiver or obtain additional debt financing could lead to our failure to pay outstanding debt when due and an event of default, which gives rise to substantial doubt about our ability to continue as a going concern.
The Company has borrowings under two Revolving Credit Facilities with $217.0 million outstanding as of June 30, 2022, that mature on June 20, 2023. The Company does not have available liquidity to repay the full outstanding balance on the date of maturity. Under the Credit Agreement, failure to repay borrowings under the Revolving Credit Facilities at maturity would result in an event of default for the term loans, which would allow a majority of the lenders under the Credit Agreement to accelerate the maturity of the principal amounts of outstanding term loans to become due and payable. It would also result in an event of default for each tranche of the senior notes, which would allow the indenture trustee or senior note holders of each tranche of senior notes to accelerate the maturity to become due and payable. The Company does not have available liquidity to repay any accelerated principal of term loans or tranches of the outstanding senior notes upon an event of default within one year after the date that the financial statements are issued. Additionally, the Company does not expect to meet its financial covenants within one year following the date that these financial statements are issued. If these financial covenants are not met a majority of the lenders of the Senior Secured Credit Facility are permitted under the Credit Agreement to accelerate the debt which would also result in an event of default for the senior notes. In this event, the Company would not be able to repay the Company’s total outstanding debt balance. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. Management believes it will be able to amend NCM LLC’s Revolving Credit Facilities to extend the maturity dates, amend its Senior Secured Credit Facility to extend a waiver of these financial covenants or obtain additional debt financing through a loan from third parties, and/or NCM, Inc., but there is no assurance that the Company will be successful in completing any of these options in a timely manner, or on acceptable terms, if at all.
Management believes that based on the Company’s current financial position and liquidity sources, including current cash balances, and forecasted future cash flows, the Company can meet its operating obligations as they become due. However, the failure to amend the Revolving Credit Facilities to extend the maturity dates, amend its Senior Secured Credit Facility to extend a waiver of these financial covenants or obtain additional debt financing through a loan from third parties and any associated events of default under the Credit Agreement or NCM LLC’s senior notes would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment.
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 the 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 1, 2022 through April 28, 2022 | 343 | $ | 2.17 | — | N/A | ||||||||||||||||||
| April 29, 2022 through May 26, 2022 | 478 | $ | 2.21 | — | N/A | ||||||||||||||||||
| May 27, 2022 through June 30, 2022 | — | $ | — | — | N/A | ||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit | Reference | Description | ||||||
| 10.1 | (1) | |||||||
| 10.2 | (2) | |||||||
| 10.3 | * | |||||||
| 10.4 | * | |||||||
| 10.5 | * | |||||||
| 31.2 | * | |||||||
| 31.1 | * | |||||||
| 32.1 | ** | |||||||
| 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 Exhibit 10.1 from the Registrant’s Current Report on Form 8-K (File No. 001-33296) filed on May 9, 2022. | ||||
| (2) | Incorporated by reference to Exhibit 10.1 from the Registrant’s Current Report on Form 8-K (File No. 001-33296) filed on June 2, 2022. | ||||
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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 8, 2022 | /s/ Thomas F. Lesinski | |||||||||
| Thomas F. Lesinski | |||||||||||
| Chief Executive Officer and Director | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: | August 8, 2022 | /s/ Ronnie Y. Ng | |||||||||
| Ronnie Y. Ng | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
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