Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10–Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “may,” “will,” “forecast,” “estimate,” “project,” “intend,” “plan,” “expect,” “should,” “believe” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. Examples of forward-looking statements include statements we make regarding the impact of COVID-19, future attendance levels and our liquidity. These forward-looking statements are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions and speak only as of the date on which it is made. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors, including those discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
● The risks and uncertainties relating to the sufficiency of our existing cash and cash equivalents and available borrowing capacity to comply with minimum liquidity requirements under our debt covenants, fund operations, and satisfy obligations including cash outflows for increased rent and planned capital expenditures currently and through early May of 2022. This requires that we achieve significant increases in attendance levels beginning in the third quarter of 2021 and ultimately reaching approximately 85% of pre COVID-19 attendance levels by the fourth quarter of 2021 and through the first and second quarters of 2022 as the vaccine rollout continues and more Hollywood product is released in our theatres. If we are unable to achieve more normalized levels of attendance and operating revenues as described above, we may be required to obtain additional liquidity. If such additional liquidity were not realized or insufficient we likely would seek an in-court or out-of-court restructuring of our liabilities, and in the event of such future liquidation or bankruptcy proceeding, holders of our common stock and other securities would likely suffer a total loss of their investment;
● the impact of the COVID-19 virus on us, the motion picture exhibition industry, and the economy in general, including our response to the COVID-19 virus related to suspension of operations at our theatres, personnel reductions and other cost-cutting measures and measures to maintain necessary liquidity and increases in expenses relating to precautionary measures at our facilities to protect the health and well-being of our customers and employees;
● risks and uncertainties relating to our significant indebtedness, including our borrowings and our ability to meet our financial maintenance and other covenants;
● shrinking exclusive theatrical release windows;
● certain covenants in the agreements that govern our indebtedness may limit our ability to take advantage of certain business opportunities and limit or restrict our ability to pay dividends;
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● risks relating to impairment losses, including with respect to goodwill and other intangibles, and theatre and other closure charges;
● risks relating to motion picture production and performance;
● our lack of control over distributors of films;
● intense competition in the geographic areas in which we operate;
● increased use of alternative film delivery methods including premium video on demand or other forms of entertainment;
● general and international economic, political, regulatory, social and financial market conditions and other risks, including the effects of the exit of the United Kingdom from the European Union;
● limitations on the availability of capital or poor financial results may prevent us from deploying strategic initiatives;
● our ability to achieve expected synergies, benefits and performance from our strategic initiatives;
● our ability to refinance our indebtedness on terms favorable to us or at all;
● our ability to optimize our theatre circuit through new construction, the transformation of our existing theatres, and strategically closing underperforming theatres may be subject to delay and unanticipated costs;
● AMC Stubs ® A-List may not meet anticipated revenue projections which could result in a negative impact upon operating results;
● failures, unavailability or security breaches of our information systems;
● our ability to utilize interest expense deductions may be limited annually due to Section 163(j) of the Tax Cuts and Jobs Act of 2017;
● our ability to recognize interest deduction carryforwards, net operating loss carryforwards and other tax attributes to reduce our future tax liability;
● our ability to recognize certain international deferred tax assets which currently do not have a valuation allowance recorded;
● impact of the elimination of the calculation of USD LIBOR rates on our contracts indexed to USD LIBOR:
● review by antitrust authorities in connection with acquisition opportunities;
● risks relating to the incurrence of legal liability, including costs associated with the ongoing securities class action lawsuits;
● dependence on key personnel for current and future performance and our ability to attract and retain senior executives and other key personnel, including in connection with any future acquisitions;
● increased costs in order to comply or resulting from a failure to comply with governmental regulation, including the General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act (“CCPA”) and pending future domestic privacy laws and regulations;
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● the dilution caused by recent and future sales of our Class A common stock could adversely affect the market price of the Class A common stock;
● the market price and trading volume of our shares of Class A common stock has been and may continue to be volatile, and purchasers of our securities could incur substantial losses;
● future offerings of debt, which would be senior to our Class A common stock for purposes of distributions or upon liquidation, could adversely affect the market price of our Class a common stock;
● geopolitical events, including the threat of terrorism or cyber-attacks, or widespread health emergencies, such as the novel coronavirus or other pandemics or epidemics, causing people to avoid our theatres or other public places where large crowds are in attendance;
● anti-takeover protections in our amended and restated certificate of incorporation and our amended and restated by laws may discourage or prevent a takeover of our Company, even if an acquisition would be beneficial to our stockholders;
● an issuance of preferred stock could dilute the voting power of the common stockholders and adversely affect the market value of our Class A common stock; and
● other risks referenced from time to time in filings with the SEC.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative but not exhaustive. In addition, new risks and uncertainties may arise from time to time. Accordingly, all forward-looking statements should be evaluated with an understanding of their inherent uncertainty and we caution accordingly against relying on forward-looking statements.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements. For further information about these and other risks and uncertainties as well as strategic initiatives, see Item 1A. “Risk Factors,” and Item 1. “Business” in our Annual Report on Form 10–K for the year ended December 31, 2020, and our other public filings.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10–Q, and we do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Temporarily Suspended or Limited Operations
On or before March 17, 2020, we temporarily suspended all theatre operations in our U.S. markets and International markets in compliance with local, state, and federal governmental restrictions and recommendations on social gatherings to prevent the spread of COVID-19 and as a precaution to help ensure the health and safety of our guests and theatre staff. We resumed limited operations in the International markets in early June 2020 and limited operations in the U.S. markets in late August 2020. A COVID-19 resurgence during the fourth quarter of 2020 resulted in additional local, state, and federal governmental restrictions and many previously reopened theatres in International markets temporarily suspended operations again. As a result of these temporarily suspended or limited operations, our revenues and expenses for the three months ended March 31, 2021 are significantly lower than the revenues and expenses for the three months ended March 31, 2020.
As of January 1, 2021, we were operating at 394 domestic theatres with limited seating capacities, representing approximately 67% of our domestic theatres. During the first quarter ended March 31, 2021, in response to eased restrictions by state and local governments, we resumed operations in key markets such as New York and Los Angeles. As of March 31, 2021, we were operating at 585 domestic theatres with limited seating capacities, representing approximately 99% of our domestic theatres. As of January 1, 2021, we were operating at 109 International leased and partnership theatres, with limited seating capacities, representing approximately 30% of our International theatres. As of March 31, 2021, we were operating at 97 International theatres with limited seating capacities, representing approximately 27% of our International theatres. Our average screens operated during the three months ended March
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31, 2021 declined by 24.2% from the prior year.
Overview
AMC is the world’s largest theatrical exhibition company and an industry leader in innovation and operational excellence. We operate theatres in 13 countries, including the U.S., Europe and Saudi Arabia.
Our theatrical exhibition revenues are generated primarily from box office admissions and theatre food and beverage sales. The balance of our revenues is generated from ancillary sources, including on-screen advertising, fees earned from our AMC Stubs® customer loyalty program, rental of theatre auditoriums, income from gift card and exchange ticket sales, and online ticketing fees. As of March 31, 2021, we owned, operated or had interests in 945 theatres and 10,518 screens.
Box Office Admissions and Film Content
Box office admissions are our largest source of revenue. We predominantly license “first-run” films from distributors owned by major film production companies and from independent distributors on a film-by-film and theatre-by-theatre basis. Film exhibition costs are accrued based on the applicable admissions revenues and estimates of the final settlement pursuant to our film licenses. These licenses typically state that rental fees are based on aggregate terms established prior to the opening of the picture. In certain circumstances and less frequently, our rental fees are based on a mutually agreed settlement upon the conclusion of the picture. In some European territories, rental fees are established on a weekly basis for the coming week’s percentage forecast. Some European licenses use a per capita agreement instead, paying a flat amount per ticket, where the sum is agreed in long-term agreements in advance of the film showing. Under an aggregate terms formula, we usually pay the distributor a specified percentage of box office gross or pay based on a scale of percentages tied to different amounts of box office gross, or in Europe, we pay based on the number of weeks since release. The settlement process allows for negotiation based upon how a film actually performs.
The North American and International industry box offices have also been significantly impacted by the COVID-19 pandemic during the three months ended March 31, 2021. As a result, studios have postponed new film releases or moved them to the home video market, and movie release dates may continue to move in the future. Major movie releases that were previously scheduled to be released in 2020 have either been rescheduled for 2021 or slated for direct to streaming or premium video on demand (“PVOD”) in lieu of a theatrical release, which left a reduced slate of movie releases for 2020, and release dates may continue to move. Certain competitors have decided to temporarily reclose their theatres in light of the ongoing pandemic and the reduced slate of movie releases, which may further exacerbate the trend described above. As a result of the reduced slate of first-run movie releases, we have licensed and exhibited a larger number of films that were released in prior years or decades and where the film rental terms are much lower than for first-run movie releases.
The combination of theatre closures, reopening restrictions and limited new film distribution has resulted in a significantly lower industry box office for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. In response to the current low attendance levels, (in addition to any local capacity restrictions) we have made adjustments to theatre operating hours in those markets where we are open to align screen availability and associated theatre operating costs with attendance levels for each theatre. We also introduced AMC Private Screening, which allows moviegoers to reserve a separate AMC Safe & Clean auditorium for a private screening for up to 20 people, starting at $99 plus tax.
During 2020, we entered into an agreement with Universal, a division of Comcast Corporation (NASDAQ:CMCSA), to distribute films utilizing a minimum 17-day theatrical exhibition window, after which time Universal will have the option to make its titles available across PVOD platforms. This multi-year agreement preserves exclusivity for theatrical viewing for at least the first three weekends of a film’s release, during which time a considerable majority of a movie’s theatrical box office revenue typically is generated. AMC will also share in new revenue streams that will come to the movie ecosystem from PVOD.
Our revenues attributable to individual distributors may vary significantly from year to year depending upon the commercial success of each distributor’s films in any given year. Our results of operations may vary significantly from quarter to quarter and from year to year based on the timing and popularity of film releases.
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Movie Screens
The following table provides detail with respect to digital delivery, 3D enabled projection, large screen formats, such as IMAX ® and our proprietary Dolby Cinema™, other Premium Large Format (“PLF”) screens, enhanced food and beverage offerings and our premium seating as deployed throughout our circuit on March 31, 2021. This data represents available services in a pre-COVID-19 environment. Due to mandated government attendance restrictions, the ability for guests to utilize all these amenities has been significantly curtailed:
U.S. Markets
International Markets
Number of
Number of
Number of
Number of
Screens As of
Screens As of
Screens As of
Screens As of
Format
March 31, 2021
March 31, 2020
March 31, 2021
March 31, 2020
IMAX®
185
188
37
35
Dolby Cinema TM
153
150
6
5
Other Premium Large Format ("PLF")
55
55
74
71
Dine-in theatres
735
725
8
8
Premium seating
3,339
3,282
531
470
Guest Amenities
We believe we are an industry leader in the development and operation of theatres. Typically, our theatres have 12 or more screens and offer amenities to enhance the movie-going experience, such as stadium seating providing unobstructed viewing, digital sound and premium seat design. As part of our long-term strategy, we seek to continually upgrade the quality of our theatre circuit through substantial renovations featuring our seating concepts, acquisitions, new builds (including expansions), expansion of food and beverage offerings (including dine-in theatres), and by disposing of older screens through closures and sales. As discussed above, certain aspects of our long-term strategy, such as growth capital expenditures, with the exception of prior commitments are suspended at this time as a result of the impact of the COVID-19 pandemic on our business. We cannot currently determine when we will be able to resume these aspects of our long-term growth strategy.
Recliner seating is the key feature of theatre renovations. We believe that maximizing comfort and convenience for our customers will be increasingly necessary to maintain and improve our relevance. These renovations, in conjunction with capital contributions from our landlords, involve stripping theatres to their basic structure in order to replace finishes throughout, upgrading the sight and sound experience, installing modernized points of sale and, most importantly, replacing traditional theatre seats with plush, electric recliners that allow customers to deploy a leg rest and fully recline at the push of a button. As of December 31, 2019, prior to the COVID-19 pandemic, the quality improvement in the customer experience could drive a 33% increase in attendance, on average, at these locations in their first year post renovation. These increases will only continue post-COVID-19 pandemic if attendance returns to normalized pre-COVID-19 levels. Upon reopening a remodeled theatre, we typically increase the ticket price to reflect the enhanced consumer experience.
As of March 31, 2021, in our U.S. markets we featured recliner seating in approximately 345 U.S. theatres, including Dine-in-Theatres, totaling approximately 3,339 screens and representing 43.5% of total U.S. screens. In our International markets, as of March 31, 2021, we had recliner seating in approximately 83 International theatres, totaling approximately 531 screens and representing 18.7% of total International screens.
Open-source internet ticketing makes our AMC seats (approximately 1.1 million as of March 31, 2021) in all our U.S. theatres and auditoriums, for all our showtimes as available as possible, on as many websites as possible. Our tickets are currently on sale either directly or through mobile apps, at our own website and mobile apps and other third-party ticketing vendors.
Food and beverage sales are our second largest source of revenue after box office admissions. Our deployment initiatives also apply to food and beverage enhancements. We have expanded our menu of enhanced food and beverage products to include meals, healthy snacks, premium beers, wine and mixed drinks, and other gourmet products. Our long-term growth strategy calls for investment across a spectrum of enhanced food and beverage formats, ranging from simple, less capital-intensive food and beverage design improvements to the development of new dine-in theatre options. As a result of the COVID-19 pandemic, we have temporarily modified our food and beverage operations to include more simplified concession menus, cashless transactions technology, hand sanitizer and disinfecting wipes, and condiment and drink refills available by request, all in an effort to reduce the number of touch-
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points between guests and employees. We have also upgraded our Coca Cola Freestyle beverage machines to include a mobile app allowing guests to dispense drinks without the need to utilize the machine’s touch screen.
Our MacGuffins Bar and Lounges (“MacGuffins”) give us an opportunity to engage our legal age customers. As of March 31, 2021, we offer alcohol in approximately 341 AMC theatres in the U.S. markets and 243 theatres in our International markets and continue to explore expansion globally.
Loyalty Programs and Other Marketing
In our U.S. markets, we begin the process of engagement with AMC Stubs® our customer loyalty program which allows members to earn rewards, receive discounts and participate in exclusive members-only offerings and services. It features a traditional paid tier called AMC Stubs Premiere™ for a $15 annual membership fee and a non-paid tier called AMC Stubs Insider™. Both programs reward loyal guests for their patronage of AMC theatres. Rewards earned are redeemable on future purchases at AMC locations.
The portion of the admissions and food and beverage revenues attributed to the rewards is deferred as a reduction of admissions and food and beverage revenues and is allocated between admissions and food and beverage revenues based on expected member redemptions. Upon redemption, deferred rewards are recorded as revenues along with associated cost of goods. We estimate point breakage in assigning value to the points at the time of sale based on historical trends. The program’s annual membership fee is allocated to the material rights for discounted or free products and services and is initially deferred, net of estimated refunds, and recorded as the rights are redeemed based on estimated utilization, over the one-year membership period in admissions, food and beverage, and other revenues. A portion of the revenues related to a material right are deferred as a virtual rewards performance obligation using the relative standalone selling price method and are recorded as the rights are redeemed or expire.
AMC Stubs® A-List is our monthly subscription-based tier of our AMC Stubs® loyalty program. This program offers guests admission to movies at AMC up to three times per week including multiple movies per day and repeat visits to already seen movies for $19.95 to $23.95 per month depending upon geographic market. AMC Stubs® A-List also includes premium offerings including IMAX®, Dolby Cinema™ at AMC, RealD, Prime and other proprietary PLF brands. AMC Stubs® A-List members can book tickets on-line in advance and select specific seats at AMC Theatres with reserved seating. Upon the temporary suspension of theatre operations due to the COVID-19 pandemic, all monthly A-List subscription charges were put on hold. As we reopened theatres, A-List members had the option to reactivate their subscription, which restarted the monthly charge for the program.
As of March 31, 2021, we had more than 23,400,000 member households enrolled in AMC Stubs® A-List, AMC Stubs Premiere™ and AMC Stubs Insider™ programs, combined. Our AMC Stubs® members represented approximately 35% of AMC U.S. markets attendance during the year ended March 31, 2021. Our large database of identified movie-goers also provides us with additional insight into our customers’ movie preferences. This enables us to have a larger, more personalized and targeted marketing effort.
In our International markets, we currently have loyalty programs in the major territories in which we operate. The movie-goers can earn points for spending money at the theatre, and those points can be redeemed for tickets and concession items at a later date. We currently have more than 11,400,000 members in our various International loyalty programs. We are currently evaluating the Odeon loyalty programs to determine how best to reward our European movie-goers and heighten guest loyalty to drive additional attendance to Odeon theatres.
Our marketing efforts are not limited to our loyalty program as we continue to improve our customer connections through our website and mobile apps and expand our online and movie offerings. We continued to roll out our upgraded mobile applications across the U.S. circuit with the ability to order food and beverage offerings via our mobile applications while ordering tickets ahead of scheduled showtimes. Our mobile applications also include AMC Theatres On Demand, a service for members of the AMC Stubs® loyalty program that allows them to rent or buy movies.
In response to the COVID-19 pandemic, AMC’s robust online and mobile platforms in our U.S. markets offer customers the safety and convenience of enhanced social distancing by allowing them to purchase tickets and concession items online, avoid the ticket line, and limit other high-touch interactions with AMC employees and other guests. Online and mobile platforms are also available in our International markets.
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Critical Accounting Policies and Estimates
Long-lived assets impairments. We evaluate indefinite-lived intangible assets for impairment annually or more frequently as specific events or circumstances dictate. We operate in a very competitive business environment and our revenues are highly dependent on movie content supplied by film producers. In addition, it is common for us to closely monitor certain locations where operating performance may not meet our expectations.
We review long-lived assets, including definite-lived intangible assets and theatre assets (including operating lease right-of-use assets) whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. We identify impairments related to internal use software when management determines that the remaining carrying value of the software will not be realized through future use. We evaluate events or circumstances, including competition in the markets where we operate that would indicate the carrying value of theatre assets may not be fully recoverable. We evaluate theatres using historical and projected data of theatre level cash flow as our primary indicator of potential impairment and consider the seasonality of our business when making these evaluations. If an event or circumstance is identified indicating carrying value may not be recoverable, the sum of future undiscounted cash flows is compared to the carrying value. If carrying value exceeds the future undiscounted cash flows, the carrying value of the asset is reduced to fair value. Assets are evaluated for impairment on an individual theatre basis, which management believes is the lowest level for which there are identifiable cash flows. The fair value of assets is determined as either the expected selling price less selling costs (where appropriate) or the present value of the estimated future cash flows, adjusted as necessary for market participant factors.
We recorded impairment charges primarily related to long-lived assets and definite lived intangible assets of $106.5 million during the three months ended March 31, 2020. No impairment charges were recorded during the three months ended March 31, 2021. There are a number of estimates and significant judgments that are made by management in performing these impairment evaluations. Such judgments and estimates include estimates of future attendance, revenues, rent relief, cost savings, cash flows, capital expenditures, and the cost of capital, among others. Attendance is expected to be significantly below historical levels for the first several months following reopening but is expected to increase as customers become more comfortable with the experience. We believe we have used reasonable and appropriate business judgments. There is considerable management judgment with respect to cash flow estimates and appropriate discount rates to be used in determining fair value, and, accordingly, actual results could vary significantly from such estimates, which fall under Level 3 within the fair value measurement hierarchy. These estimates determine whether impairments have been incurred, and quantify the amount of any related impairment charge. Given the nature of our business and our recent history, future impairments are possible and they may be material, based upon business conditions that are constantly changing and the competitive business environment in which we operate.
During the three months ended March 31, 2020, we recorded non-cash impairment of long-lived assets of $81.4 million on 57 theatres in the U.S. markets with 658 screens (in Alabama, Arkansas, California, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming) and $9.9 million on 23 theatres in the International markets with 213 screens (in Germany, Italy, Spain, UK and Sweden). During the three months ended March 31, 2020, we recorded impairment losses related to definite-lived intangible assets of $8.0 million. In addition, we recorded an impairment loss of $7.2 million within investment expense (income), related to equity interest investments without a readily determinable fair value accounted for under the cost method. No non-cash impairment charges of long-lived assets were recorded during the three months ended March 31, 2021.
During the three months ended March 31, 2020, we performed a quantitative impairment evaluation of our indefinite-lived intangible assets related to the AMC, Odeon and Nordic trade names and recorded impairment charges of $5.9 million related to Odeon trade names and $2.4 million related to Nordic trade names during the three months ended March 31, 2020. To estimate fair value of our indefinite-lived trade names, we employed a derivation of the Income Approach known as the Royalty Savings Method. The Royalty Savings Method values an intangible asset by estimating the royalties saved through ownership of the asset. We applied royalty rates of 0.5% for AMC and Odeon trade names and 1.0% for Nordic to the related theatre revenues on an after-tax basis using effective tax rates. Related cash flows were discounted at 12.5% for AMC and 14.0% for Odeon and Nordic. No impairment charges related to our indefinite-lived trade names were recorded during the three months ended March 31, 2021.
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Goodwill. We evaluate the goodwill recorded at our two reporting units (Domestic Theatres and International Theatres) for impairment annually as of the beginning of the fourth fiscal quarter or more frequently as specific events or circumstances dictate. In accordance with ASC 350-20-35-30, we performed an assessment to determine whether there were any events or changes in circumstances that would warrant an interim ASC 350 impairment analysis as of March 31, 2021. Based on increases in our enterprise market capitalization from December 31, 2020 to March 31, 2021, we performed a qualitative impairment test to evaluate whether it is more likely than not that the fair value of our two reporting units is less than their respective carrying amounts as of March 31, 2021. We concluded that it is not more likely than not that the fair value of our two reporting units have been reduced below their respective carrying amounts. As a result, we concluded that an interim quantitative impairment test as of March 31, 2021 was not required.
At March 31, 2020, we performed the Step 1 quantitative goodwill impairment test and used an enterprise value approach to measure fair value of the reporting units. The enterprise fair values of the Domestic Theatres and International Theatres reporting units were less than their carrying values and goodwill impairment charges of $1,124.9 million and $619.4 million, respectively, was recorded as of March 31, 2020 for our Domestic Theatres and International Theatres reporting units.
Based on the suspension of operations at all of our theatres on or before March 17, 2020 due to the COVID-19 pandemic during the first quarter of 2020, the suspension of operations during the second and third quarters of 2020, the temporary suspension of operations of certain of our International Theatres during the fourth quarter of 2020 again after operations had previously been resumed, and the further delay or cancellation of film releases than originally estimated, we performed the Step 1 quantitative goodwill impairment test as of December 31, 2020. The impairment test for goodwill involves estimating the fair value of the reporting unit and comparing that value to our carrying value. If the estimated fair value of the reporting unit is less than our carrying value, the difference is recorded as a goodwill impairment charge, not to exceed the total amount of goodwill allocated to that reporting unit. In performing the Step 1 quantitative goodwill impairment test as of December 31, 2020, we used an enterprise value approach to measure fair value of the reporting units. The enterprise fair value of the Domestic Theatres and International Theatres reporting units were less than their carrying values as of March 31, 2020 and September 30, 2020, and the fair value of the International Theatres reporting unit was less than its fair value as of December 31, 2020 and goodwill impairment charges of $1,276.1 million and $1,030.3 million, were recorded during the year ended December 31, 2020 for our Domestic Theatres and International Theatres reporting units, respectively.
Significant Events
Additional equity financing. On December 11, 2020, we entered into an equity distribution agreement with Goldman Sachs & Co. LLC and B. Riley Securities, Inc., as sales agents to sell up to 178.0 million shares of our Class A common stock, par value $0.01 per share, through an “at-the-market” offering program. On January 25, 2021, we entered into equity distribution agreements with Goldman Sachs & Co. LLC and B. Riley Securities, Inc., as sales agents to sell up to 50.0 million shares of our Class A common stock, par value $0.01 per share, through an “at-the-market” offering program. During the three months ended March 31, 2021, we raised gross proceeds of approximately $596.9 million through our at-the-market offering for the remaining available shares under the equity distribution agreement of 187,066,293 shares of our Class A common stock and paid fees to the sales agents of approximately $14.9 million and other fees of $0.4 million. We intend to use the net proceeds from the sale of the Class A common stock pursuant to the equity distribution agreement for general corporate purposes, which may include the repayment, refinancing, redemption or repurchase of existing indebtedness or working capital, capital expenditures and other investments. See Note 13—Subsequent Event in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for information regarding the additional at-the-market offerings of 43 million shares of the Company’s Class A common stock.
Baltics’ theatre sale agreement. On August 28, 2020, we entered into an agreement to sell our equity interest in Forum Cinemas OU, which consists of nine theatres located in the Baltics’ region (Latvia, Lithuania and Estonia) and was included in our International markets reportable segment, for total consideration of approximately €77.25 million, including cash of approximately €64.35 million or $76.6 million prior to any transaction costs. This transaction was undertaken by us to further increase our liquidity and strengthen our balance sheet at a transaction multiple that demonstrates that market participants ascribe positive value to the business. The completion of the sale will take place in several steps and is contingent upon clearance from each regulatory competition council in each country. We received $37.5 million (€31.53 million) cash consideration upon entering into the sale agreement on August 28, 2020, transferred an equity interest of 49% in Forum Cinemas OU to the purchaser and recorded an initial noncontrolling interest of $34.9 million in total equity (deficit). During the three months ended March 31, 2021 and the three months ended December 31, 2020, we received cash consideration for the remaining interest in Estonia and Latvia of $4.1
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million (€3.4 million) and $6.4 million (€5.4 million), respectively. Transaction costs of $1.4 million and net gain of $1.2 million related to the sale of 49% equity interest of Lithuania and Estonia and the 100% disposal of Latvia were recorded in additional paid-in capital during the six months ended December 31, 2020. Additional transaction costs of $0.1 million and net gain of $0.3 million related to the sale of 51% equity interest of Estonia were recorded in additional paid-in capital during the three months ended March 31, 2021. The transaction costs and net gain recorded in additional paid-in capital will be recognized in earnings when the remaining 51% interest in Lithuania is disposed. At March 31, 2021, the carrying amounts of the major classes of assets and liabilities included as part of the disposal group that were previously included in the International markets reportable segment were; goodwill of $36.3 million, property, net, of $9.1 million, operating lease right-of-use assets, net of $12.4 million, and current and long-term operating lease liabilities of $1.2 million and $11.4 million, respectively. The remaining cash consideration of approximately $31.9 million (€26.3 million) was paid upon completion of the sale of the remaining 51% equity interest in Lithuania on May 6, 2021. At March 31, 2021, our noncontrolling interest of 49% in Lithuania was $22.4 million in net assets.
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Operating Results
The following table sets forth our consolidated revenues, operating costs and expenses.
Three Months Ended
March 31,
March 31,
(In millions)
2021
2020
% Change
Revenues
Admissions
$
69.5
$
568.0
(87.8)
%
Food and beverage
50.1
288.1
(82.6)
%
Other theatre
28.7
85.4
(66.4)
%
Total revenues
148.3
941.5
(84.2)
%
Operating Costs and Expenses
Film exhibition costs
22.0
271.7
(91.9)
%
Food and beverage costs
9.7
53.4
(81.8)
%
Operating expense, excluding depreciation and amortization below
179.7
356.9
(49.6)
%
Rent
192.1
237.8
(19.2)
%
General and administrative:
Merger, acquisition and other costs
6.7
0.2
*
%
Other, excluding depreciation and amortization below
51.8
33.2
56.0
%
Depreciation and amortization
114.1
122.5
(6.9)
%
Impairment of long-lived assets, definite and indefinite-lived intangible assets and goodwill
—
1,851.9
(100.0)
%
Operating costs and expenses
576.1
2,927.6
(80.3)
%
Operating loss
(427.8)
(1,986.1)
(78.5)
%
Other expense (income):
Other expense (income)
(17.4)
26.9
*
%
Interest expense:
Corporate borrowings
151.5
71.3
*
%
Finance lease obligations
1.4
1.6
(12.5)
%
Non-cash NCM exhibitor service agreement
9.9
9.9
—
%
Equity in loss of non-consolidated entities
2.8
2.9
(3.4)
%
Investment expense (income)
(2.0)
9.4
*
%
Total other expense, net
146.2
122.0
19.8
%
Net loss before income taxes
(574.0)
(2,108.1)
(72.8)
%
Income tax provision (benefit)
(6.8)
68.2
*
%
Net loss
(567.2)
(2,176.3)
(73.9)
%
Less: Net loss attributable to noncontrolling interests
(0.3)
—
*
%
Net loss attributable to AMC Entertainment Holdings, Inc.
$
(566.9)
$
(2,176.3)
(74.0)
%
* Percentage change in excess of 100%
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Three Months Ended
March 31,
March 31,
Operating Data:
2021
2020
Screen additions
32
13
Screen dispositions
63
74
Construction openings (closures), net
6
(7)
Average screens (1)
6,724
8,873
Number of screens operated
8,329
—
Number of theatres operated
682
—
Total number of circuit screens
10,518
10,973
Total number of circuit theatres
945
996
Screens per theatre
11.1
11.0
Attendance (in thousands) (1)
6,797
60,495
(1) Includes consolidated theatres only and excludes screens offline due to construction and temporary suspension of operations as consequence of the COVID-19 pandemic.
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Segment Operating Results
The following table sets forth our revenues, operating costs and expenses by reportable segment.
U.S. Markets
International Markets
Consolidated
Three Months Ended
Three Months Ended
Three Months Ended
March 31,
March 31,
March 31,
(In millions)
2021
2020
2021
2020
2021
2020
Revenues
Admissions
$
64.9
$
389.1
$
4.6
$
178.9
$
69.5
$
568.0
Food and beverage
47.6
216.6
2.5
71.5
50.1
288.1
Other theatre
24.7
55.6
4.0
29.8
28.7
85.4
Total revenues
137.2
661.3
11.1
280.2
148.3
941.5
Operating Costs and Expenses
Film exhibition costs
20.2
198.9
1.8
72.8
22.0
271.7
Food and beverage costs
8.5
34.9
1.2
18.5
9.7
53.4
Operating expense
142.0
251.9
37.7
105.0
179.7
356.9
Rent
136.5
174.4
55.6
63.4
192.1
237.8
General and administrative expense:
Merger, acquisition and other costs
3.7
0.3
3.0
(0.1)
6.7
0.2
Other, excluding depreciation and amortization below
36.0
17.3
15.8
15.9
51.8
33.2
Depreciation and amortization
86.4
92.4
27.7
30.1
114.1
122.5
Impairment of long-lived assets, definite and indefinite-lived intangible assets and goodwill
—
1,214.3
—
637.6
—
1,851.9
Operating costs and expenses
433.3
1,984.4
142.8
943.2
576.1
2,927.6
Operating loss
(296.1)
(1,323.1)
(131.7)
(663.0)
(427.8)
(1,986.1)
Other expense (income):
Other expense (income)
(3.5)
25.5
(13.9)
1.4
(17.4)
26.9
Interest expense:
Corporate borrowings
143.0
70.5
8.5
0.8
151.5
71.3
Finance lease obligations
0.2
0.4
1.2
1.2
1.4
1.6
Non-cash NCM exhibitor service agreement
9.9
9.9
—
—
9.9
9.9
Equity in loss of non-consolidated entities
0.9
1.9
1.9
1.0
2.8
2.9
Investment expense (income)
(2.0)
9.4
—
—
(2.0)
9.4
Total other expense, net
148.5
117.6
(2.3)
4.4
146.2
122.0
Net loss before income taxes
(444.6)
(1,440.7)
(129.4)
(667.4)
(574.0)
(2,108.1)
Income tax provision (benefit)
(4.5)
(2.9)
(2.3)
71.1
(6.8)
68.2
Net loss
(440.1)
(1,437.8)
(127.1)
(738.5)
(567.2)
(2,176.3)
Less: net loss attributable to noncontrolling interests
—
—
(0.3)
—
(0.3)
—
Net loss attributable to AMC Entertainment Holdings, Inc.
$
(440.1)
$
(1,437.8)
$
(126.8)
$
(738.5)
$
(566.9)
$
(2,176.3)
U.S. Markets
International Markets
Consolidated
Three Months Ended
Three Months Ended
Three Months Ended
March 31,
March 31,
March 31,
2021
2020
2021
2020
2021
2020
Segment Operating Data:
Screen additions
31
11
1
2
32
13
Screen dispositions
23
57
40
17
63
74
Construction openings (closures), net
6
—
—
(7)
6
(7)
Average screens (1)
6,390
6,665
334
2,208
6,724
8,873
Number of screens operated
7,609
—
720
—
8,329
—
Number of theatres operated
585
—
97
—
682
—
Total number of circuit screens
7,682
8,048
2,836
2,925
10,518
10,973
Total number of circuit theatres
590
630
355
366
945
996
Screens per theatre
13.0
12.8
8.0
8.0
11.1
11.0
Attendance (in thousands) (1)
6,239
39,669
558
20,826
6,797
60,495
(1) Includes consolidated theatres only and excludes screens offline due to construction and temporary suspension of operations as consequence of the COVID-19 pandemic.
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Adjusted EBITDA
We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings (loss) plus (i) income tax provision (benefit), (ii) interest expense and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance and to include attributable EBITDA from equity investments in theatre operations in International markets and any cash distributions of earnings from other equity method investees. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Adjusted EBITDA decreased $297.8 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Adjusted EBITDA in U.S. markets decreased $196.6 million, primarily due to the decrease in attendance largely attributable to the limited or temporary suspension of operations as consequence of the COVID-19 pandemic, the increase in general and administrative expense: other and the decrease in cash distributions from equity method investees, partially offset by decreases in operating expenses due to the decrease in attendance, rent, and increases in governmental assistance for COVID-19. Adjusted EBITDA in International markets decreased $101.2 million primarily due to the decreases in attendance largely attributable to the limited or temporary suspension of operations as consequence of the COVID-19 pandemic, partially offset by decreases in operating expenses due to the decrease in attendance, decreases in rent, and increases in governmental assistance for COVID-19.
The following tables set forth our Adjusted EBITDA by reportable operating segment and our reconciliation of Adjusted EBITDA:
Three Months Ended
Adjusted EBITDA (In millions)
March 31, 2021
March 31, 2020
U.S. markets
$
(200.4)
$
(3.8)
International markets
(94.3)
6.9
Total Adjusted EBITDA
$
(294.7)
$
3.1
Three Months Ended
(In millions)
March 31, 2021
March 31, 2020
Net loss
$
(567.2)
$
(2,176.3)
Plus:
Income tax provision (benefit)
(6.8)
68.2
Interest expense
162.8
82.8
Depreciation and amortization
114.1
122.5
Impairment of long-lived assets, definite and indefinite-lived intangible assets and goodwill (1)
—
1,851.9
Certain operating expense (2)
2.3
2.1
Equity in loss of non-consolidated entities
2.8
2.9
Cash distributions from non-consolidated entities (3)
0.3
7.6
Attributable EBITDA (4)
(0.8)
(0.1)
Investment expense (income)
(2.0)
9.4
Other expense (income) (5)
(4.8)
26.9
Other non-cash rent expense (benefit) (6)
(7.5)
2.3
General and administrative — unallocated:
Merger, acquisition and other costs (7)
6.7
0.2
Stock-based compensation expense (8)
5.4
2.7
Adjusted EBITDA
$
(294.7)
$
3.1
(1) During the three months ended March 31, 2020, we recorded non-cash impairment charges of $1,124.9 million and $619.4 million related to the enterprise fair values of our Domestic Theatres and International Theatres reporting units, respectively. We recorded non-cash impairment charges related to our long-lived assets of $81.4 million on 57 theatres in the U.S. markets with 658 screens which were related to property, net, operating lease right-of-use assets, net and other long-term assets and $9.9 million on 23 theatres in the
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International markets with 213 screens which were related to property, net and operating lease right-of-use assets, net, during the three months ended March 31, 2020. We recorded non-cash impairment charges related to our indefinite-lived intangible assets of $5.9 million and $2.4 million related to the Odeon and Nordic trade names, respectively, during the three months ended March 31, 2020. We also recorded non-cash impairment charges of $8.0 million related to our definite-lived intangible assets.
(2) Amounts represent preopening expense related to temporarily closed screens under renovation, theatre and other closure expense for the permanent closure of screens including the related accretion of interest, non-cash deferred digital equipment rent expense, and disposition of assets and other non-operating gains or losses included in operating expenses. We have excluded these items as they are non-cash in nature or are non-operating in nature.
(3) Includes U.S. non-theatre distributions from equity method investments and International non- theatre distributions from equity method investments to the extent received. We believe including cash distributions is an appropriate reflection of the contribution of these investments to our operations.
(4) Attributable EBITDA includes the EBITDA from equity investments in theatre operators in certain International markets. See below for a reconciliation of our equity in (earnings) loss of non-consolidated entities to attributable EBITDA. Because these equity investments are in theatre operators in regions where we hold a significant market share, we believe attributable EBITDA is more indicative of the performance of these equity investments and management uses this measure to monitor and evaluate these equity investments. We also provide services to these theatre operators including information technology systems, certain on-screen advertising services and our gift card and package ticket program.
Three Months Ended
(In millions)
March 31, 2021
March 31, 2020
Equity in loss of non-consolidated entities
$
2.8
$
2.9
Less:
Equity in loss of non-consolidated entities excluding International theatre joint ventures
1.2
2.1
Equity in loss of International theatre joint ventures
(1.6)
(0.8)
Income tax benefit
(0.2)
(0.1)
Investment income
—
(0.2)
Depreciation and amortization
0.9
0.8
Other expense
0.1
0.2
Attributable EBITDA
$
(0.8)
$
(0.1)
(5) Other expense (income) for the three months ended March 31, 2021 included foreign currency transaction gains of $3.8 million and income related to contingent lease guarantees of $2.0 million, partially offset by financing fees of $1.0 million primarily related to deferred financing cost write-off for the Odeon revolving credit facility.
During the three months ended March 31, 2020, we recorded a loss of $20.1 million for the fair value adjustment of the derivative asset related to the Convertible Notes due 2026, credit losses related to contingent lease guarantees of $5.3 million, and foreign currency transaction losses of $2.0 million, partially offset by a gain of $0.5 million for the fair value adjustment of the derivative liability related to the Convertible Notes due 2026.
(6) Reflects amortization expense for certain intangible assets reclassified from depreciation and amortization to rent expense due to the adoption of ASC 842, Leases and deferred rent benefit related to the impairment of right-of-use operating lease assets.
(7) Merger, acquisition and other costs are excluded as they are non-operating in nature.
(8) Non-cash expense included in general and administrative: other.
Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net earnings (loss) as an indicator of operating performance (as determined in accordance with U.S. GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance and estimate our value.
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Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA:
● does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;
● does not reflect changes in, or cash requirements for, our working capital needs;
● does not reflect the significant interest expenses, or the cash requirements necessary to service interest or principal payments on our debt;
● excludes income tax payments that represent a reduction in cash available to us; and
● does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future.
Segment Information
Our historical results of operations for the three months ended March 31, 2021 and March 31, 2020 reflect the results of operations for our two Theatrical Exhibition reportable segments, U.S. markets and International markets.
Results of Operations— For the Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Condensed Consolidated Results of Operations
Revenues. Total revenues decreased 84.2%, or $793.2 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Admissions revenues decreased 87.8%, or $498.5 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an 88.8% decrease in attendance, partially offset by an 8.9% increase in average ticket price. The decrease in attendance was primarily due to the COVID-19 pandemic which prompted film distributors to delay or alternatively distribute films, deterred customers from attending our theatres and resulted in the temporary suspension of operations at our theatres in U.S. markets and International markets. The increase in average ticket price was primarily due to strategic pricing initiatives put in place over the prior year, an increase in foreign currency translation rates and lower frequency on our A-List subscription program, partially offset by decreases in attendance for 3D premium content.
Food and beverage revenues decreased 82.6%, or $238.0 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in attendance. Food and beverage per patron increased 54.8% from $4.76 to $7.37 due to several contributing factors including increases in units sold per transaction and increases in the percentage of patrons making purchases due to higher child percentages, private theatre rentals, an increase in dine-in percentages, mobile orders along with price increases, reduced loyalty program penetration and the increase in foreign currency translation rates.
Total other theatre revenues decreased 66.4%, or $56.7 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to decreases in ticket fees, income from gift cards and package tickets and screen advertising due to the decrease in attendance, partially offset by increases in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses decreased $2,351.5 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to declines in the impairment of long-lived assets of $1,851.9 million and declines in operating expenses due to the decrease in attendance and a decrease in average screens operated, partially offset by an increase in foreign currency translation rates. Film exhibition costs decreased 91.9%, or $249.7 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 31.7% for the three months ended March 31, 2021 and 47.8% for the three months ended March 31, 2020. The decrease in film exhibition cost percentage is primarily due to the concentration of box office revenues in lower grossing films in the current year which typically results in lower film exhibition costs and library content.
Food and beverage costs decreased 81.8%, or $43.7 million, during the three months ended March 31, 2021
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compared to the three months ended March 31, 2020. The decrease in food and beverage costs was primarily due to the decrease in food and beverage revenues. As a percentage of food and beverage revenues, food and beverage costs were 19.4% for the three months ended March 31, 2021 and 18.5% for the three months ended March 31, 2020. Food and beverage costs included $1.3 million and $2.7 million of charges for obsolete inventory during the three months ended March 31, 2021 and 2020 respectively, due to the suspension of theatre operations.
As a percentage of revenues, operating expense was 121.2% for the three months ended March 31, 2021 and 37.9% for the three months ended March 31, 2020. Rent expense decreased 19.2%, or $45.7 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due primarily to cash rent abatements from landlords, declines in deferred rent expense due to the impairment of right-of-use assets in calendar 2019 and 2020, and theatre closures, partially offset by the increase in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further information on the impact of COVID-19 on leases and rent obligations of approximately $473 million that have been deferred to 2021 and future years as of March 31, 2021.
Merger, acquisition and other costs. Merger, acquisition and other costs were $6.7 million during the three months ended March 31, 2021 compared to $0.2 million during the three months ended March 31, 2020, primarily due to increases in legal and professional costs related to strategic contingent planning.
Other. Other general and administrative expense increased 56.0% or $18.6 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to increases in bonus expense, stock-based compensation expense as a result of the modification and acceleration of vesting of awards during the current and prior year and increases in non-qualified deferred compensation expense due to increases in the fair values of related investments. See Note 7—Stockholders’ Equity in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about stock-based compensation expense.
Depreciation and amortization. Depreciation and amortization decreased 6.9% or $8.4 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to lower depreciation expense on theatres impaired in calendar 2019 and 2020, partially offset by the increase in foreign currency translation rates.
Impairment of long-lived assets, indefinite-lived intangible assets and goodwill. During the three months ended March 31, 2020, we recognized non-cash impairment losses of $81.4 million on 57 theatres in the U.S. markets with 658 screens (in Alabama, Arkansas, California, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming) which were related to property, net, operating lease right-of-use assets, net and other long-term assets and $9.9 million on 23 theatres in the International markets with 213 screens (in Germany, Italy, Spain, Sweden, and UK), which were related to property, net and operating lease right-of-use assets, net. No non-cash impairment charges of long-lived assets were recorded during the three months ended March 31, 2021.
We performed quantitative impairment evaluations of our indefinite-lived intangible assets as of March 31, 2020 related to the AMC, Odeon and Nordic trade names and recorded impairment charges of $8.3 million related to the Odeon and Nordic trade names during the three months ended March 31, 2020. In addition, we performed quantitative impairment evaluations of our definite-lived intangible assets as of March 31, 2020 and recorded impairment charges of $8.0 million in U.S. markets. No impairment charges related to our indefinite-lived intangible assets were recorded during the three months ended March 31, 2021.
We performed quantitative impairment evaluations of our goodwill as of March 31, 2020 and recorded impairment charges of $1,124.9 million and $619.4 million during the three months ended March 31, 2020 for our Domestic Theatres and International Theatres reporting units, respectively. No goodwill impairment charges were recorded during the three months ended March 31, 2021.
Other expense (income). Other income of $17.4 million during the three months ended March 31, 2021 was primarily due to $12.4 million in government assistance related to COVID-19, foreign currency transaction gains of $3.8 million, and estimated credit income of $2.0 million related to contingent lease guarantees, partially offset by $1.0 million of financing fees related to the write-off of unamortized deferred charges on the Odeon revolver. Other expense of $26.9 million during the three months ended March 31, 2020 was primarily due to the decrease in fair value of our
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derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $20.1 million and estimated credit losses related to contingent lease guarantees of $5.3 million, partially offset by income due to a decrease in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 of $0.5 million. See Note 1—Basis of Presentation in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about the components of other expense.
Interest expense. Interest expense increased $80.0 million to $162.8 million for the three months ended March 31, 2021 compared to $82.8 million during the three months ended March 31, 2020 primarily due to:
● the issuance of $500 million of 10.5% First Lien Notes due 2025 on April 24, 2020;
● borrowings under revolving credit facilities of approximately $325.1 million during the three months ended March 31, 2020 that remained outstanding until February and March 2021;
● the issuance of $300 million of 10.5% First Lien Notes due 2026 on July 31, 2020;
● the issuance of $100 million of 15%/17% Cash/PIK/Toggle First Lien Notes due 2026 on January 15, 2021;
● the conversion of $600.0 million 2.95% Convertible Notes due 2026 to 44,422,860 Class A common shares on January 27, 2021 that resulted in the write-off to interest expense of $70.0 million of unamortized discount and deferred charges at the date of conversion following the guidance in ASC 815-15-40-1: and
● the issuance of £140.0 million and €296.0 million 10.75%/11.25%/PIK Term Loans due 2023 on February 19, 2021,
partially offset by:
● a reduction in the effective interest rate from 6.37% to 4.46% on $2,017.5 million aggregate principal amount of our senior subordinated notes exchanged for $1,462.3 million aggregate principal amount of second lien notes on July 31, 2020;
● the extinguishment of $104.5 million of Second Lien Notes due 2026 on December 14, 2020 in exchange for common shares;
● the repayment of £89.7 million and €12.8 million outstanding amounts under the Odeon revolver on February 19, 2021;
● a decline in interest rates related to borrowings under the Senior Secured Term Loan due 2026; and
● the repayment in March 2021 of $212.2 million under the Senior Secured Revolving Credit Facility.
See Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about our indebtedness.
Equity in loss of non-consolidated entities. Equity in loss of non-consolidated entities was $2.8 million for the three months ended March 31, 2021 compared to $2.9 million for the three months ended March 31, 2020. The decrease in equity in loss of $0.1 million was primarily due to decreases in equity in losses from DCIP of $1.9 million partially offset by increases in equity losses on other investments of $1.8 million.
Investment (income) expense. Investment income was ($2.0) million for the three months ended March 31, 2021 compared to investment expense of $9.4 million for the three months ended March 31, 2020. Investment income includes increases in our non-qualified deferred compensation plan investments during the three months ended March 31, 2021. Investment expense includes impairment charges of $7.2 million related to investments and declines in our non-qualified deferred compensation plan investments during the three months ended March 31, 2020.
Income tax provision (benefit). The income tax provision (benefit) was ($6.8) million and $68.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The decrease in income tax expense is primarily due to the recording of International valuation allowances against deferred tax assets held in Spain of $40.1 million and Germany of $33.1 million during the three months ended March 31, 2020. See Note 8 — Income Taxes in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further information.
Net loss. Net loss was $567.2 million and $2,176.3 million during the three months ended March 31, 2021 and
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March 31, 2020, respectively. Net loss during the three months ended March 31, 2021 compared to net loss for the three months ended March 31, 2020 was positively impacted by the decline in impairment charges related to long-lived assets, definite and indefinite-lived intangible assets and goodwill, decreased depreciation expense, lower amounts of rent expense, increases in other income, increases in investment income and decreases in income tax provision, partially offset by the decrease in attendance as a result of the COVID-19 pandemic, higher interest expense and general and administrative costs, and increases in foreign currency translation rates.
Theatrical Exhibition–U.S. Markets
Revenues. Total revenues decreased 79.3%, or $524.1 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Admissions revenues decreased 83.3%, or $324.2 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an 84.3% decrease in attendance, partially offset by a 6.0% increase in average ticket price. The decrease in attendance was primarily due to the COVID-19 pandemic which prompted film distributors to delay or alternatively distribute films, deterred customers from attending our theatres and resulted in the temporary suspension of operations at our theatres in U.S. markets. Our average screens operated during the three months ended March 31, 2021 declined by 4.1% from the prior year. The increase in average ticket price was primarily due to strategic pricing initiatives put in place over the prior year and lower frequency on our A-List subscription program, partially offset by decreases in attendance for 3D premium content.
Food and beverage revenues decreased 78.0%, or $169.0 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in attendance. Food and beverage per patron increased 39.7% from $5.46 to $7.63 due to several contributing factors including increases in units sold per transaction and increases in the percentage of patrons making purchases due to higher child percentages, private theatre rentals, an increase in dine-in percentages, mobile orders along with price increases and reduced loyalty program penetration.
Total other theatre revenues decreased 55.6%, or $30.9 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to decreases in ticket fees, income from gift cards and package tickets and screen advertising due to the decrease in attendance.
Operating costs and expenses. Operating costs and expenses decreased $1,551.1 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to declines in the impairment of long-lived assets of $1,214.3 million and declines in operating expenses due to the decrease in attendance and a decrease in average screens operated. Film exhibition costs decreased 89.8%, or $178.7 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 31.1% for the three months ended March 31, 2021 and 51.1% for the three months ended March 31, 2020. The decrease in film exhibition cost percentage is primarily due to the concentration of box office revenues in lower grossing films in the current year which typically results in lower film exhibition costs and library content.
Food and beverage costs decreased 75.6%, or $26.4 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in food and beverage costs was primarily due to the decrease in food and beverage revenues. As a percentage of food and beverage revenues, food and beverage costs were 17.9% for the three months ended March 31, 2021 and 16.1% for the three months ended March 31, 2020. Food and beverage costs included $0.5 million and $0.7 million of charges for obsolete inventory during the three months ended March 31, 2021 and 2020 respectively, due to the suspension of theatre operations.
As a percentage of revenues, operating expense was 103.5% for the three months ended March 31, 2021 and 38.1% for the three months ended March 31, 2020. Rent expense decreased 21.7%, or $37.9 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due primarily to cash rent abatements from landlords, declines in deferred rent expense due to the impairment of right-of-use assets in calendar 2019 and 2020 and theatre closures. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1of Part I of this Form 10-Q for further information on the impact of COVID-19 on leases and rent obligations of approximately $370 million that have been deferred to 2021 and future years as of March 31, 2021.
Merger, acquisition and other costs. Merger, acquisition and other costs were $3.7 million during the three months ended March 31, 2021 compared to $0.3 million during the three months ended March 31, 2020, primarily due to increases in legal and professional costs related to strategic contingent planning.
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Other. Other general and administrative expense increased $18.7 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to increases in bonus expense, stock-based compensation expense as a result of the modification and acceleration of vesting of awards during the current and prior year and increases in non-qualified deferred compensation expense due to increases in the fair values of related investments. See Note 7—Stockholders’ Equity in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about stock-based compensation expense.
Depreciation and amortization. Depreciation and amortization decreased 6.5% or $6.0 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to lower depreciation expense on theatres impaired in calendar 2019 and 2020.
Impairment of long-lived assets, indefinite-lived intangible assets and goodwill. During the three months ended March 31, 2020, we recognized non-cash impairment losses of $81.4 million on 57 theatres in the U.S. markets with 658 screens (in Alabama, Arkansas, California, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming) which were related to property, net, operating lease right-of-use assets, net and other long-term assets.
We performed quantitative impairment evaluations of our definite-lived intangible assets as of March 31, 2020 and recorded impairment charges of $8.0 million in U.S. markets.
We performed quantitative impairment evaluations of our goodwill as of March 31, 2020 and recorded impairment charges of $1,124.9 million during the three months ended March 31, 2020 for our Domestic Theatres reporting unit.
Other expense (income). Other income of $3.5 million during the three months ended March 31, 2021 was primarily due to $4.2 million in government assistance related to COVID-19 and foreign currency transaction loss of $0.9 million. Other expense of $25.5 million during the three months ended March 31, 2020 was primarily due to the decrease in fair value of our derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $20.1 million and estimated credit losses related to contingent lease guarantees of $5.3 million, partially offset by income due to a decrease in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 of $0.5 million. See Note 1—Basis of Presentation in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about the components of other expense.
Interest expense. Interest expense increased $72.3 million to $153.1 million for the three months ended March 31, 2021 compared to $80.8 million during the three months ended March 31, 2020 primarily due to:
● the issuance of $500 million of 10.5% First Lien Notes due 2025 on April 24, 2020;
● borrowings under revolving credit facilities of approximately $212.2 million during the three months ended March 31, 2020 that remained outstanding until February and March 2021;
● the issuance of $300 million of 10.5% First Lien Notes due 2026 on July 31, 2020;
● the issuance of $100 million of 15%/17% Cash/PIK/Toggle First Lien Notes due 2026 on January 15, 2021; and
● the conversion of $600.0 million 2.95% Convertible Notes due 2026 to 44,422,860 Class A common shares on January 27, 2021 that resulted in the write-off to interest expense of $70.0 million of unamortized discount and deferred charges at the date of conversion following the guidance in ASC 815-15-40-1,
partially offset by:
● a reduction in the effective interest rate from 6.37% to 4.46% on $2,017.5 million aggregate principal amount of our senior subordinated notes exchanged for $1,462.3 million aggregate principal amount of second lien notes on July 31, 2020;
● the extinguishment of $104.5 million of Second Lien Notes due 2026 on December 14, 2020 in exchange for common shares;
● a decline in interest rates related to borrowings under the Senior Secured Term Loan due 2026; and
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● the repayment in March 2021 of $212.2 million under the Senior Secured Revolving Credit Facility.
See Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about our indebtedness.
Equity in loss of non-consolidated entities. Equity in loss of non-consolidated entities was $0.9 million for the three months ended March 31, 2021 compared to $1.9 million for the three months ended March 31, 2020. The decrease in equity in loss of 1.0 million was primarily due to decreases in equity in losses from DCIP of $1.9 million partially offset by increases in equity losses on other investments of $0.9 million.
Investment (income) expense. Investment income was $2.0 million for the three months ended March 31, 2021 compared to investment expense of $9.4 million for the three months ended March 31, 2020. Investment income includes increases in our non-qualified deferred compensation plan investments during the three months ended March 31, 2021. Investment expense includes impairment charges of $7.2 million related to investments and declines in our non-qualified deferred compensation plan investments during the three months ended March 31, 2020.
Income tax benefit. The income tax (benefit) was $(4.5) million and $(2.9) million for the three months ended March 31, 2021 and March 31, 2020, respectively. See Note 8 — Income Taxes in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further information.
Net loss. Net loss was $440.1 million and $1,437.8 million during the three months ended March 31, 2021 and March 31, 2020, respectively. Net loss during the three months ended March 31, 2021 compared to net loss for the three months ended March 31, 2020 was positively impacted by the decline in impairment charges related to long-lived assets, definite and indefinite-lived intangible assets and goodwill, decreased depreciation expense, lower amounts of rent expense, increases in other income, increases in investment income and increases in income tax benefit, partially offset by the decrease in attendance as a result of the COVID-19 pandemic and higher interest expense and general and administrative costs.
Theatrical Exhibition - International Markets
Revenues. Total revenues decreased 96.0%, or $269.1 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Admissions revenues decreased 97.4%, or $174.3 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to a 97.3% decrease in attendance and a 4.1% decrease in average ticket price. The decrease in attendance was primarily due to the COVID-19 pandemic which prompted film distributors to delay or alternatively distribute films, deterred customers from attending our theatres and resulted in the temporary suspension of operations at our theatres International markets. Our average screens operated during the three months ended March 31, 2021 declined by 84.9% from the prior year. The decrease in average ticket price includes the impact of an increase in foreign currency translation rates and reflects minimal volumes of attendance.
Food and beverage revenues decreased 96.5%, or $69.0 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in attendance. Food and beverage per patron increased 30.6% from $3.43 to $4.48 due to minimal volumes of attendance and the increase in foreign currency translation rates.
Total other theatre revenues decreased 86.6%, or $25.8 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to decreases in ticket fees, income from gift cards and package tickets and screen advertising due to the decrease in attendance, partially offset by increases in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses decreased $800.4 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to declines in the impairment of long-lived assets of $637.6 million and declines in operating expenses due to the decrease in attendance and a decrease in average screens operated, partially offset by an increase in foreign currency translation rates. Film exhibition costs decreased 97.5%, or $71.0 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 39.1% for the three months ended March 31, 2021 and 40.7% for the three months ended March 31, 2020.
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Food and beverage costs decreased 93.5%, or $17.3 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in food and beverage costs was primarily due to the decrease in food and beverage revenues. As a percentage of food and beverage revenues, food and beverage costs were 48.0% for the three months ended March 31, 2021 and 25.9% for the three months ended March 31, 2020. Food and beverage costs included $0.8 million and $2.0 million of charges for obsolete inventory during the three months ended March 31, 2021 and 2020 respectively, due to the suspension of theatre operations.
As a percentage of revenues, operating expense was not meaningful for the three months ended March 31, 2021 due to the low levels of revenues and 37.5% for the three months ended March 31, 2020. Rent expense decreased 12.3%, or $7.8 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due primarily to cash rent abatements from landlords, declines in deferred rent expense due to the impairment of right-of-use assets in calendar 2019 and 2020, and theatre closures, partially offset by the increase in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further information on the impact of COVID-19 on leases and rent obligations of approximately $103 million that have been deferred to 2021 and future years as of March 31, 2021.
Merger, acquisition and other costs. Merger, acquisition and other costs were $3.0 million during the three months ended March 31, 2021 compared to ($0.1) million during the three months ended March 31, 2020, primarily due to increases in legal and professional costs related to strategic contingent planning.
Other. Other general and administrative expense decreased 0.6% or $0.1 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Depreciation and amortization. Depreciation and amortization decreased 8.0% or $2.4 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to lower depreciation expense on theatres impaired in calendar 2019 and 2020 partially offset by the increase in foreign currency translation rates.
Impairment of long-lived assets, indefinite-lived intangible assets and goodwill. During the three months ended March 31, 2020, we recognized non-cash impairment losses of $9.9 million on 23 theatres in the International markets with 213 screens (in Germany, Italy, Spain, Sweden, and UK), which were related to property, net and operating lease right-of-use assets, net.
We performed quantitative impairment evaluations of our indefinite-lived intangible assets as of March 31, 2020 related to the Odeon and Nordic trade names and recorded impairment charges of $8.3 million related to the Odeon and Nordic trade names during the three months ended March 31, 2020.
We performed quantitative impairment evaluations of our goodwill as of March 31, 2020 and recorded impairment charges of $619.4 million during the three months ended March 31, 2020 for our International Theatres reporting unit.
Other expense (income). Other income of $13.9 million during the three months ended March 31, 2021 was primarily due to $8.2 million in government assistance related to COVID-19, foreign currency transaction gains of $4.7 million, and estimated credit income of $2.0 million related to contingent lease guarantees, partially offset by $1.0 million of financing fees related to the write-off of unamortized deferred charges on the Odeon revolver. See Note 1—Basis of Presentation in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about the components of other expense.
Interest expense. Interest expense increased $7.7 million to $9.7 million for the three months ended March 31, 2021 compared to $2.0 million during the three months ended March 31, 2020 primarily due to:
● the issuance of £140.0 million and €296.0 million 10.75%/11.25%/PIK Term Loans due 2023 on February 19, 2021,
partially offset by:
● the repayment of £89.7 million and €12.8 million outstanding amounts under the Odeon revolver on February 19, 2021.
See Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for additional information about our
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indebtedness.
Equity in loss of non-consolidated entities. Equity in loss of non-consolidated entities was $1.9 million for the three months ended March 31, 2021 compared to $1.0 million for the three months ended March 31, 2020.
Investment (income) expense. Investment income was $0 million for the three months ended March 31, 2021 and March 31, 2020.
Income tax provision (benefit). The income tax provision (benefit) was ($2.3) million and $71.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The decrease in income tax expense is primarily due to the recording of International valuation allowances against deferred tax assets held in Spain of $40.1 million and Germany of $33.1 million during the three months ended March 31, 2020. See Note 8 — Income Taxes in the Notes to the Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for further information.
Net loss. Net loss was $127.1 million and $738.5 million during the three months ended March 31, 2021 and March 31, 2020, respectively. Net loss during the three months ended March 31, 2021 compared to net loss for the three months ended March 31, 2020 was positively impacted by the decline in impairment charges related to long-lived assets, definite and indefinite-lived intangible assets and goodwill, decreased depreciation expense, lower amounts of rent expense, increases in other income and decreases in income tax provision, partially offset by the decrease in attendance as a result of the COVID-19 pandemic, higher interest expense and general and administrative costs, and increases in foreign currency translation rates.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated revenues are primarily collected in cash, principally through box office admissions and food and beverage sales. Prior to the impact of COVID-19 on our business, we had an operating “float” which partially financed our operations and which generally permitted us to maintain a smaller amount of working capital capacity. This float existed because admissions revenues are received in cash, while exhibition costs (primarily film rentals) are ordinarily paid to distributors from 20 to 45 days following receipt of box office admissions revenues. Film distributors generally release the films which they anticipate will be the most successful during the summer and year-end holiday seasons. Consequently, we typically generate higher revenues during such periods.
We had working capital deficits (excluding restricted cash) as of March 31, 2021 and December 31, 2020 of $597.5 million and $1,104.6 million, respectively. As of March 31, 2021 and December 31, 2020, working capital included operating lease liabilities of $591.1 million and $583.6 million, respectively, and deferred revenues of $404.3 million and $405.4 million, respectively. At March 31, 2021, we had $211.9 million available for borrowing, net of letters of credit, under our $225.0 million Senior Secured Revolving Credit Facility. At December 31, 2020, we had borrowed all available amounts under our Senior Secured Revolving Credit Facility. We had borrowed $212.2 million (the full availability net of standby letters of credit) under our $225.0 million Senior Secured Revolving Credit Facility as of December 31, 2020. We also maintained a revolving credit facility due February 14, 2022 at our Odeon subsidiary (the “Odeon Revolver”). This facility was replaced on February 15, 2021 by the Odeon Term Loan Facility. Reference is made to Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements thereof under Item 1 of Part I of this Form 10-Q for further information about the Odeon Term Loan Facility. As of December 31, 2020, we had borrowed $120.8 million (the full availability net of standby letters of credit) under our £100.0 million Odeon Revolver ($136.3 million based on the foreign currency translation rate of 1.3628 on December 31, 2020).
In response to the COVID-19 pandemic, we adjusted certain elements of our business strategy and took and continue to take significant steps to preserve cash by eliminating non-essential costs, including reductions to our variable costs and elements of our fixed cost structure, including, but not limited to:
● Suspended non-essential operating expenditures, including some marketing and promotional and travel and entertainment expenses, and where possible, utilities and reduced essential operating expenditures to minimum levels necessary while theatres are closed;
● Terminated or deferred all non-essential capital expenditures to minimum levels necessary while theatres are operating for limited hours or closed;
● Implemented measures to reduce corporate-level employment costs while closed, including full or partial furloughs of all corporate-level Company employees for a period of time, including senior executives, with individual work load and salary reductions ranging from 20% to 100%; cancellation of pending annual merit
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pay increases; and elimination or reduction of non-healthcare benefits. With the resumption of operations, we eliminated the full and partial furloughs and employment costs increased. The increase in employment costs during the three months ended March 31, 2021 was primarily due to increases in bonus expense, stock-based compensation expense as a result of the modification and acceleration of vesting of awards during the current and prior year and increases in non-qualified deferred compensation expense due to increases in the fair values of related investments;
● All domestic theatre-level crew members were fully furloughed and theatre-level managements’ hours were reduced to the minimum levels necessary to begin resumption of operations when permitted. Similar efforts to reduce theatre-level and corporate employment costs were undertaken internationally consistent with applicable laws across the jurisdictions in which we operate. As we resumed limited operations, employment costs increased;
● Working with our landlords, vendors, and other business partners to manage, defer, and/or abate the related rent expenses and operating expenses;
● Introduced an active cash management process, which, among other things, requires senior management approval of all outgoing payments;
● Since April 24, 2020, we have been prohibited from making dividend payments in accordance with the covenant suspension conditions in our Senior Secured Credit Facility Agreement. We had also previously elected to decrease the dividend paid in the first quarter of 2020 by $0.17 per share. The cash savings as a result of the prior decrease and current prohibition on making dividend payments was $4.3 million during the three months ended March 31, 2021 in comparison to the three months ended March 31, 2020; and
● We are prohibited from making purchases under our stock repurchase program in accordance with the covenant suspension conditions in our Senior Secured Credit Facility Agreement.
We intend to seek any available potential benefits, including loans, investments or guarantees, under future government programs for which we qualify domestically and internationally. We have taken advantage of many forms of governmental assistance in the U.S. and internationally including but not limited to revenue and fixed cost reimbursements, payroll subsidies, rent support programs, direct grants, and property tax holidays. We cannot predict the manner in which such benefits will be allocated or administered, and we cannot assure that it will be able to access such benefits in a timely manner or at all.
In addition to preserving cash, we enhanced liquidity through debt issuances, debt exchanges and equity sales as follows. See Note 6 — Corporate Borrowings and Finance Lease Obligations and Note 7 — Stockholders’ Equity in the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I in this Form 10-Q for further information.
● The April 2020 issuance of $500 million of First Lien Notes due 2025.
● The July 2020 completion of a debt exchange offer in which we issued approximately $1.46 billion aggregate principal amount of Second Lien Notes due 2026 in exchange for approximately $2.02 billion principal amount of our senior subordinated notes, reducing the principal amounts of our debt by approximately $555 million and extending maturities on approximately $1.7 billion of debt to 2026, most of which was maturing in 2024 and 2025 previously. Interest on the Second Lien Notes due 2026 for the first three six-month interest periods after the issue date is expected to be paid all or in part on an in-kind basis pursuant to the terms of the Second Lien Notes due 2026.
● The July 2020 issuance of the First Lien Notes due 2026 in which we received proceeds of $270.0 million, net of discounts and deferred charges.
● The launch of several “at-the-market” equity offerings to raise capital through the sale of our Class A common stock. During the year ended December 31, 2020, we sold 91.0 million shares, generating $272.8 million in gross proceeds and paid fees to sales agents of $6.8 million. In January 2021, we sold 187.1 million shares, generating $596.9 million in gross proceeds and paid fees to sales agents of $14.9 million and other fees of $0.4 million. See Note 13 — Subsequent Event in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for information regarding the additional at-the-market offerings of 43 million shares related to our remaining authorized shares of Class A common stock.
● The December 2020 issuance of 21,978,022 shares of Class A common stock to Mudrick Capital Management, LP (“Mudrick”) in exchange for $104.5 million aggregate principal amount of the Second Lien Notes due 2026 and a commitment from Mudrick to purchase $100 million aggregate principal amount of 15%/17%
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Cash/PIK Toggle First Lien Secured Notes due 2026 (“First Lien Toggle Notes due 2026”) which we issued to Mudrick in January 2021 for cash.
● The January 2021 conversion by holders of all $600 million of our 2.95% Convertible Senior Secured Notes due 2026 into shares of our Class A common stock at a conversion price of $13.51 which resulted in the issuance of 44,422,860 shares of our Class A Common Stock and reduced annual cash interest expense by $17.7 million.
● The February 2021 entry into a new £140.0 million and €296.0 million term loan facility agreement (the “Odeon Term Loan Facility”) by Odeon Cinemas Group Limited (“Odeon”). Approximately £89.7 million and €12.8 million of the net proceeds from the Odeon Term Loan Facility was used to repay in full Odeon’s obligations (including principal, interest, fees and cash collateralized letters of credit) under our existing revolving credit facility and the remaining net proceeds will be used for general corporate purposes .
If attendance levels increase consistent with our assumptions described below, we currently estimate that our existing cash and cash equivalents will be sufficient to comply with minimum liquidity requirements under our debt covenants, fund operations, and satisfy obligations including cash outflows for increased rent and planned capital expenditures currently and through early May of 2022. This requires that we achieve significant increases in attendance levels beginning in the third quarter of 2021 and ultimately reaching 85% of pre COVID-19 attendance levels by the fourth quarter of 2021 and through the first and second quarters of 2022 as the vaccine rollout continues and more Hollywood product is released in our theatres. We entered into the Ninth Amendment, pursuant to which the requisite revolving lenders party thereto agreed to extend the suspension period for the financial covenant applicable to the Senior Secured Revolving Credit Facility from March 31, 2021 to March 31, 2022, as described, and on the terms and conditions specified, therein. As a result, we will be subject to the financial covenant beginning with the quarter ending June 30, 2022. We are subject to minimum liquidity requirements of approximately $145 million of which $100 million is required under the conditions for the Extended Covenant Suspension Period under the Senior Secured Revolving Credit Facility during the Extended Covenant Suspension Period, as amended, and £32.5 million (approximately $45 million) required under the Odeon Term Loan Facility. Our liquidity needs thereafter will depend, among other things, on the timing of a full resumption of operations, the timing of movie releases and our ability to generate cash from operations.
We continue to explore potential sources of additional liquidity, including:
● Additional equity financing. On April 27, 2021, the Board of Directors (the “Board”) determined not to seek stockholder approval of the proposal to approve an amendment to our Third Amended and Restated Certificate of Incorporation to increase the total number of shares of Class A common stock (par value $0.01 per share) we shall have the authority to issue by 500,000,000 shares to a total of 1,024,173,073 shares of Class A common stock (“Proposal 1”), and has withdrawn Proposal 1 from the agenda for the 2021 annual meeting of stockholders (the “Annual Meeting”). The Board reserves the right to propose an amendment of the Certificate of Incorporation to increase the authorized shares or for other items at any point in the future.
We plan to pursue equity issuances for our remaining authorized shares. See Note 13 — Subsequent Event in the Notes to the Condensed Consolidated Financial Statements under Item 1 of Part I of this Form 10-Q for information regarding the additional at-the-market offerings of 43 million shares related to our remaining authorized shares of Class A common stock. The amount of liquidity we might generate will primarily depend on the market price of our Class A common stock, trading volumes, which impact the number of shares we are able to sell, and the available periods during which sales may be made. Because our market price and trading volumes are volatile, there is no guarantee as to the amounts of liquidity we might generate or that our prior experience accurately predicts the results we will achieve.
● Landlord negotiations . Commencing in 2021, our cash expenditures for rent are scheduled to increase significantly as a result of rent obligations that had been deferred to 2021 and future years that were approximately $473.0 million as of March 31, 2021. In light of our liquidity challenges, and in order to establish our long-term viability, we believe we must continue to reach accommodations with our landlords to abate or defer a substantial portion of our rent obligations, in addition to generating sufficient amounts of liquidity through equity issuances and the other potential financing arrangements discussed below. Accordingly, we entered into additional landlord negotiations to seek material reductions, abatements and deferrals in our rent obligations. In connection with these negotiations, we have finalized agreements or agreements in principle with the landlords for a majority of leases where we have entered into negotiations. To
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the extent we achieve substantial deferrals but not abatements, our cash requirements will increase substantially in the future.
● Other creditor discussions . While the liquidity we have raised has substantially extended our liquidity runway, the new debt we have issued or that has been committed, together with the higher interest rate payments that will be required in the future but have largely been deferred, will substantially increase our leverage and future cash requirements. These future cash requirements, like our deferred rent obligations, will present a challenge to our long-term viability if our operating income does not return to pre-COVID levels. Even then, we believe we will need to engage in discussions with our creditors to substantially reduce our leverage. We expect to continue to explore alternatives that include new-money financing and may involve converting debt to equity, which would help manage our leverage but could be dilutive to holders of our common stock. These discussions may not result in any agreement on commercially acceptable terms.
● Covenant suspension. We entered into the Ninth Amendment, pursuant to which the requisite revolving lenders party thereto agreed to extend the suspension period for the financial covenant applicable to the Senior Secured Revolving Credit Facility from March 31, 2021 to March 31, 2022, as described, and on the terms and conditions specified, therein. See Note 6 — Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Item 1 of the Part I thereof for further information.
● Joint-venture or other arrangements with existing business partners and minority investments in our capital stock. We continue to explore other potential arrangements, including equity investments, to generate additional liquidity.
It is very difficult to estimate our liquidity requirements, future cash burn rates and future attendance levels. Depending on our assumptions regarding the timing and ability to achieve more normalized levels of operating revenue, the estimates of amounts of required liquidity vary significantly. Similarly, it is very difficult to predict when theatre attendance levels will normalize, which we expect will depend on the widespread availability and use of effective vaccines for the coronavirus. However, our current cash burn rates are not sustainable. Further, we cannot accurately predict what future changes may occur to the supply or release date of movie titles available for theatrical exhibition once moviegoers are prepared to return in large numbers. Nor can we know with certainty the impact on consumer movie-going behavior of Warner Bros.’s decision to release its entire 2021 slate of movies on HBO Max at the same time as the movies debut in theatres, or the potential attendance impact of other studio decisions to accelerate in home availability of their theatrical movies. Studio negotiations regarding evolving theatrical release models and film licensing terms are ongoing. There can be no assurance that the attendance levels and other assumptions used to estimate our liquidity requirements and future cash burn rates will be correct, and our ability to be predictive is uncertain due to the unknown magnitude and duration of the COVID-19 pandemic. Further, there can be no assurances that we will be successful in generating the additional liquidity necessary to meet our obligations beyond twelve months from the issuance of these financial statements on terms acceptable to us or at all. If we are unable to maintain or renegotiate our minimum liquidity covenant requirements, it could have a significant adverse effect on our business, financial condition and operating results.
We also realized significant cancellation of debt income (“CODI”) in connection with our debt restructuring. As a result of such CODI, we estimate a significant portion of our net operating losses will be eliminated as a result of tax attribute reductions. Any loss of tax attributes as a result of such CODI may adversely affect our cash flows and therefore our ability to service our indebtedness.
Cash Flows from Operating Activities
Cash flows used in operating activities, as reflected in the condensed consolidated statements of cash flows, were $312.9 million and $184.0 million during the three months ended March 31, 2021 and March 31, 2020, respectively. The increase in cash flows used in operating activities was primarily due to decreased attendance levels and temporary suspension of operations at all of our theatres on or before March 17, 2020, which resulted in lower operating results during the three months ended March 31, 2021.
Cash Flows from Investing Activities
Cash flows used in investing activities, as reflected in the condensed consolidated statements of cash flows, were $16.0 million and $87.4 million during the three months ended March 31, 2020 and March 31, 2020, respectively. Cash outflows from investing activities include capital expenditures of $11.9 million and $91.7 million during the three months ended March 31, 2021 and March 31, 2020, respectively. In 2020, as a result of the COVID-19 pandemic, we
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significantly reduced capital expenditures to maintenance levels and with the exception of prior commitments, have temporarily suspended growth capital expenditures at this time. During the three months ended March 31, 2021, cash flows used in investing activities included proceeds from the disposition of assets of $5.2 million, primarily related to the sale of our remaining interest in one of the Baltic’s theatres located in Estonia of $3.8 million and proceeds received from the disposition of one property of $1.4 million. During the three months ended March 31, 2021, we made an additional investment of $9.3 million in Saudi Cinema Company LLC. During the three months ended March 31, 2020, cash flows used in investing activities included the proceeds from the disposition of long-term assets of $3.4 million related to one property.
We fund the costs of constructing, maintaining and remodeling our theatres through existing cash balances, cash generated from operations, landlord contributions, or borrowed funds, as necessary. We generally lease our theatres pursuant to long-term non-cancelable operating leases which may require the developer, who owns the property, to reimburse us for the construction costs. We expect capital expenditures (net of landlord contributions) to be between $100 million and $120 million for year ended December 31, 2021, primarily to maintain operations.
Cash Flows from Financing Activities
Cash flows provided by financing activities, as reflected in the condensed consolidated statements of cash flows, were $854.7 million and $312.4 million during the three months ended March 31, 2021 and March 31, 2020, respectively. The increase in cash flows from financing activities during the three months ended March 31, 2021 was primarily due to the borrowings under the Odeon Term Loan Facility of $534.3 million, the issuance of First Lien Toggle Notes due 2026 of $100.0 million, and net proceeds from the sale of Class A common stock of $581.6 million, partially offset by the repayments under the revolving credit facilities of $335.0 million, payment for deferred financing costs of $19.0 million, and principal payments under the Term Loan due 2026 of $5.0 million.
During the three months ended March 31, 2020, cash inflows from financing activities included borrowings under our revolving credit facilities were $325.1 million, partially offset by principal payments under the Term Loan due 2026 of $5.0 million. During the three months ended March 31, 2020, we paid dividends and dividend equivalents of $4.3 million. The following is a summary of dividends declared to stockholders:
Amount per
Total Amount
Share of
Declared
Declaration Date
Record Date
Date Paid
Common Stock
(In millions)
February 26, 2020
March 9, 2020
March 23, 2020
$
0.03
$
3.2
Senior Secured Credit Facilities (Senior Secured Revolving Credit Facility and Senior Secured Term Loan due 2026). On March 8, 2021, we entered into the Ninth Amendment, pursuant to which the requisite revolving lenders party thereto agreed to extend the suspension period for the financial covenant under our Credit Agreement from a period ending on March 31, 2021 to a period ending on March 31, 2022 (the “Extended Covenant Suspension Period”). As an ongoing condition to the suspension of the financial covenant, we also agreed to (i) a minimum liquidity test of $100 million, (ii) an anti-cash hoarding test at any time Revolving Loans are outstanding and (iii) additional reporting obligations. On March 8, 2021, we entered into the Tenth Amendment, pursuant to which we agreed not to consent to certain modifications to the Credit Agreement described in the Tenth Amendment without the consent of the majority of the revolving lenders party to the Tenth Amendment.
Odeon Term Loan Facility. On February 15, 2021, Odeon Cinemas Group Limited (“Odeon”), a wholly-owned subsidiary of the Company entered into a new £140.0 million and €296.0 million term loan facility agreement (the “Odeon Term Loan Facility”), by and among Odeon, the subsidiaries of Odeon party thereto, the lenders and other loan parties thereto and Lucid Agency Services Limited as agent and Lucid Trustee Services Limited as security agent. Approximately £89.7 million and €12.8 million of the net proceeds from the Odeon Term Loan Facility were used to repay in full Odeon’s obligations (including principal, interest, fees and cash collateralized letters of credit) under its existing revolving credit facility and the remaining net proceeds will be used for general corporate purposes. The Odeon Term Loan Facility has a maturity of 2.5 years from the date on which it is first drawn. Borrowings under the Odeon Term Loan Facility bear interest at a rate equal to 10.75% per annum during the first year and 11.25% thereafter. The interest is capitalized on the last day of each interest period and added to the outstanding principal amount, however Odeon has the option to elect to pay interest in cash. All obligations under the Odeon Term Loan Facility are guaranteed by certain subsidiaries of Odeon. We are subject to minimum liquidity requirements of £32.5 million (approximately $45 million) required under the Odeon Term Loan Facility, measured at each quarter end date.
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First Lien Toggle Notes due 2026. On January 15, 2021, we issued $100.0 million aggregate principal amount of our First Lien Toggle Notes due 2026 as contemplated by the previously disclosed commitment letter with Mudrick Capital Management, LP, dated as of December 10, 2020. The First Lien Toggle Notes due 2026 were issued pursuant to an indenture dated as of January 15, 2021 among us, the guarantors named therein and the U.S. Bank National Association, as trustee and collateral agent. The First Lien Toggle Notes due 2026 bear cash interest at a rate of 15% per annum payable semi-annually in arrears on January 15 and July 15, beginning on July 15, 2021. Interest for the first three interest periods after the issue date may, at our option, be paid in PIK interest at a rate of 17% per annum, and thereafter interest shall be payable solely in cash. The First Lien Toggle Notes due 2026 will mature on April 24, 2026. The indenture provides that the First Lien Toggle Notes due 2026 are general senior secured obligations of the Company and are secured on a pari passu basis with the Senior Credit Facilities, the First Lien Notes due 2026, the First Lien Notes due 2025, and the Convertible Notes due 2026.
Convertible Notes. On January 27, 2021, affiliates of Silver Lake and certain co-investors (collectively, the “Noteholders”) elected to convert (the “Conversion”) all $600.0 million principal amount of our Convertible Notes due 2026 into shares of our Class A common stock at a conversion price of $13.51 per share. The Conversion settled on January 29, 2021 and resulted in the issuance of 44,422,860 shares of our Class A common stock to the Noteholders. The Conversion reduced our first-lien indebtedness by $600.0 million. Pursuant to the Stock Repurchase and Cancellation Agreement with Dalian Wanda Group Co., Ltd. (“Wanda”) dated as of September 14, 2018, 5,666,000 shares of our Class B common stock held by Wanda were forfeited and cancelled in connection with the Conversion.
See Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information regarding the above.
Contractual Obligations, Commitments and Contingencies
We have commitments and contingencies for finance leases, corporate borrowings, operating leases, capital related betterments and pension funding that were summarized in a table in our Annual Report on Form 10–K for the year ended December 31, 2020. Except as set forth above and below with respect to corporate borrowings and leases, since December 31, 2020, there have been no material changes to the commitments and contingencies outside of the ordinary course of business.
We borrowed under our Odeon Term Loan Facility, issued First Lien Toggle Notes due 2026, and Silver Lake and certain co-investors elected to convert all of our Convertible Notes due 2026 into shares of our Class A common stock. See Note 6—Corporate Borrowings and Finance Lease Obligations in the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information, including a table that provides the principal payments required and maturities of corporate borrowings as of March 31, 2021.
We received rent concessions provided by the lessors that aided or will aid, in mitigating the economic effects of COVID-19. These concessions primarily consist of deferral of rent payments and rent abatements. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information, including a table of the minimum annual payments required under existing operating and finance lease liabilities (net present value thereof) as of March 31, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.