Quarterly report pursuant to Section 13 or 15(d)

Investment in National CineMedia LLC

v3.21.2
Investment in National CineMedia LLC
6 Months Ended
Jun. 30, 2021
NCM  
Investment in National CineMedia LLC

9.

Investment in National CineMedia LLC

Below is a summary of activity with NCM included in the Company’s condensed consolidated financial statements:

 

 

 

Investment

in NCM

 

NCM Screen Advertising Advances

 

Distributions

from NCM

 

Equity in

Loss

 

Other

Revenue

 

Interest

Expense - NCM

 

Cash Received

 

Balance as of January 1, 2021

 

$

151,962

 

$

(344,255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of common units due to annual common unit adjustment ("CUA")

 

 

10,237

 

 

(10,237

)

 

 

 

 

 

 

 

 

 

 

Screen rental revenues earned under ESA (1)

 

 

 

 

 

 

 

 

 

 

(3,790

)

 

 

 

3,790

 

Interest accrued related to significant financing component

 

 

 

 

(11,797

)

 

 

 

 

 

 

 

11,797

 

 

 

Receipt under tax receivable agreement

 

 

(156

)

 

 

 

(77

)

 

 

 

 

 

 

 

233

 

Equity in loss

 

 

(14,414

)

 

 

 

 

 

14,414

 

 

 

 

 

 

 

Amortization of screen advertising advances

 

 

 

 

15,927

 

 

 

 

 

 

(15,927

)

 

 

 

 

Balance as of and for the six months ended June 30, 2021

 

$

147,629

 

$

(350,362

)

$

(77

)

$

14,414

 

$

(19,717

)

$

11,797

 

$

4,023

 

(1)

Amounts include the per patron and per digital screen theatre access fees due to the Company, net of amounts due to NCM for on-screen advertising time provided to the Company’s beverage concessionaire of approximately $1,399.

 

Investment in National CineMedia

NCM operates a digital in-theatre network in the U.S. for providing cinema advertising. The Company entered into an Exhibitor Services Agreement with NCM (“ESA”), pursuant to which NCM primarily provides advertising to our theatres. The Company does not recognize undistributed equity in the earnings on its original NCM membership units (referred to herein as the Company’s Tranche 1 Investment) until NCM’s future net earnings, less distributions received, surpass the amount of the excess distribution. The Company recognizes equity in earnings on its Tranche 1 Investment only to the extent it receives cash distributions from NCM. The Company recognizes cash distributions it receives from NCM on its Tranche 1 Investment as a component of earnings as Distributions from NCM.  The Company believes that the accounting model provided by ASC Topic 323-10-35-22 for recognition of equity investee losses in excess of an investor’s basis is analogous to the accounting for equity income subsequent to recognizing an excess distribution.

Common Unit Adjustments  

The Company also periodically receives consideration in the form of common units from NCM.  Annual adjustments to the common membership units are made primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated. The common units received are recorded at estimated fair value as an increase in the Company’s investment in NCM with an offset to NCM screen advertising advances.

During March 2021, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, the Company received an additional 2,311,482 common units of NCM, on April 14, 2021. The Company recorded these additional common units at an estimated fair value of $10,237 with a corresponding adjustment to NCM screen advertising advances. The fair value of the common units received was estimated based on the market price of NCMI common stock (Level 1 input as defined in FASB ASC Topic 820) at the time the common units were determined, adjusted for volatility associated with the estimated time period it would take to convert the common units and register the respective shares.

As of June 30, 2021, the Company owned a total of 43,161,550 common units of NCM representing an ownership interest of approximately 26%. Each of the Company’s common units in NCM is convertible into one share of NCM, Inc. common stock.  As of June 30, 2021, the estimated fair value of the Company’s investment in NCM was approximately $218,829 based on NCM, Inc.’s stock price as of June 30, 2021 of $5.07 per share (Level 1 input as defined in FASB ASC Topic 820).  

Exhibitor Services Agreement

As discussed above, the Company’s domestic theatres are part of the in-theatre digital network operated by NCM under the ESA. NCM provides advertising to the Company’s theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for our theatres.  The Company receives a monthly theatre access fee for participation in the NCM network and also earns screen advertising revenue on a per patron basis.   The screen advertising revenues earned under the ESA are reflected in other revenue on the condensed consolidated income statement.

  Prior to September 17, 2019, the ESA was accounted for under ASC Topic 606, Revenue from Contracts with Customers.   Effective September 17, 2019, the Company signed an amendment to the ESA, under which the Company will provide incremental advertising time to NCM and has extended the term through February 2041.  Since the agreement was amended, the Company was required to evaluate the revised contract under ASC Topic 842, Leases, and as a result, determined that the ESA met the definition of a lease.  The Company leases nonconsecutive periods of use of its domestic theatre screens to NCM for purposes of showing third party advertising content.  The lease, which is classified as an operating lease, generally requires variable lease payments based on the number of patrons attending the showtimes during which such advertising is shown.  The lease agreement is considered short-term due to the fact that the nonconsecutive periods of use, or advertising time slots, are set on a weekly basis.  The revenues earned under the ESA, both before and after the amendment, are reflected in other revenue on the consolidated income statement.

The recognition of revenue related to the NCM screen advertising advances are recorded through February 2041.

 

 

 

Twelve Months Ended June 30,

 

 

 

 

 

 

 

 

 

Remaining Maturity

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

 

Total

 

NCM screen advertising advances (1)

 

$

8,819

 

 

$

9,428

 

 

$

10,081

 

 

$

10,780

 

 

$

11,528

 

 

$

299,726

 

 

$

350,362

 

 

(1)

Amounts are net of the estimated interest to be accrued for the periods presented.  See discussion of significant financing component below.  

 

Significant Financing Component

In connection with the completion of the NCMI initial public offering, the Company amended and restated its ESA with NCM and received approximately $174,000 in cash consideration from NCM. The proceeds were recorded as deferred revenue and are being amortized over the term of the modified ESA, or through February 2041. In addition to the consideration received upon the ESA modification during 2007, the Company also receives consideration in the form of common units from NCM, at each annual common unit adjustment settlement, in exchange for exclusive access to the Company’s newly opened domestic screens under the ESA. Due to the significant length of time between receiving the consideration from NCM and fulfillment of the related performance obligation, the ESA includes an implied significant financing component, as per the guidance in ASC Topic 606. As a result of the significant financing component, the Company recognized incremental screen rental revenue and interest expense of $15,927 and $11,797, respectively, during the six months ended June 30, 2021 and incremental screen rental revenue and interest expense of $15,612 and $11,825, respectively, during the six months ended June 30, 2020. The interest expense was calculated using the Company’s incremental borrowing rates at the time when the cash was received from the NCMI IPO and each tranche of common units was received from NCM, which ranged from 4.4% to 8.3%.  

Effective September 17, 2019, upon the Company’s evaluation and determination that ASC Topic 842 applies to the amended ESA, the Company determined it acceptable to apply the significant financing component guidance from ASC Topic 606 by analogy as the economic substance of the agreement represents a financing arrangement.  

NCM Financial Information

Below is summary financial information for NCM for the periods indicated:

 

 

Three Months Ended

 

 

Three Months ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2021

 

 

June 25, 2020

 

 

July 1, 2021

 

 

June 25, 2020

 

Gross revenues

 

$

13,958

 

 

$

4,000

 

 

$

19,403

 

 

$

68,700

 

Operating income (loss)

 

$

(29,699

)

 

$

(23,800

)

 

$

(57,938

)

 

$

(18,900

)

Net loss

 

$

(46,867

)

 

$

(37,800

)

 

$

(90,364

)

 

$

(46,400

)

 

 

 

 

As of

 

 

As of

 

 

 

July 1, 2021

 

 

December 31, 2020

 

Current assets

 

$

114,665

 

 

$

142,566

 

Noncurrent assets

 

$

674,769

 

 

$

685,643

 

Current liabilities

 

$

40,546

 

 

$

46,872

 

Noncurrent liabilities

 

$

1,115,424

 

 

$

1,072,207

 

Members deficit

 

$

(366,536

)

 

$

(290,870

)