Item 1A. Risk Factors
Item 1A. Risk Factors
Reference is made to Part I Item 1A. Risk Factors in our Annual Report on Form 10–K for the year ended December 31, 2021 and Part II Item 1A. in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, which sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. The Annual Report on Form 10-K for the year ended December 31, 2021, also includes the risk factor titled “The market prices and trading volume that our shares of Common Stock have recently experienced, and may continue to experience, extreme volatility, which could cause purchasers of our Common Stock could incur substantial losses”, which risk factor continues to apply to our Common Stock and may also apply to our AMC Preferred Equity Units. Except as set forth below and the updates to liquidity provided herein, there have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021 and Part II Item 1A. in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
Our business is subject to international economic, political and other risks that could negatively affect our business, results of operations and financial condition.
As a result of our international operations, 23.8% of our revenues were derived from countries outside the United States for the nine months ended September 30, 2022. The success of our international operations is subject to risks that are beyond our control. Accordingly, our business is subject to risks associated with doing business internationally, including:
● difficulties and costs of staffing and managing international operations among diverse geographies, languages and cultures;
● the impact of regional or country-specific business cycles and economic instability;
● the potential for political, social, or economic unrest, terrorism, hostilities, cyber-attacks or war, including the conflict between Russia and Ukraine and that Sweden and Finland (countries where we operate approximately 100 theatres) completed accession talks at NATO headquarters in Brussels on July 4, 2022 and NATO ambassadors signed the accession protocols on July 5, 2022, which could cause a deterioration in the relationship each country has with Russia, and the potential impact of financial and economic sanctions on the regional and global economy;
● fluctuations in foreign currency exchange rates which could lead to fluctuations in our reported results of operations or result in significant decreases in the value of our international investments as denominated in U.S. Dollars;
● increased foreign interest rates, foreign exchange fees and other bank charges as a result of financing our foreign operations;
● exposure to anti-corruption laws, including the Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act (the “Bribery Act”), and export-control regulations and economic sanctions regulations, including those promulgated by the Office of Foreign Assets Control, United States Department of Treasury (“OFAC”);
● exposure to local economic conditions and local laws and regulations;
● exposure to local labor and employment laws;
● relationships with local labor unions and works councils;
● limited borrowing capabilities relating to activities in non-U.S. countries;
● economic and/or credit conditions abroad;
● potential adverse changes in the political and/or economic stability of foreign countries or in their diplomatic relations with the United States;
● restrictions on the withdrawal of foreign investment and earnings;
● government policies against businesses owned by foreigners;
● investment restrictions or requirements;
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● diminished ability to legally enforce our contractual rights in foreign countries;
● difficulty in protecting our brand, reputation and intellectual property;
● restrictions on the ability to obtain or retain licenses required for operation;
● foreign exchange restrictions;
● adverse changes in regulatory or tax requirements;
● restrictions on foreign ownership of subsidiaries;
● data protection and privacy laws, including GDPR and other restrictions on transferring personally identifiable information outside of a jurisdiction; and
● tariffs and other trade barriers.
If we are unable to manage the complexity of our global operations successfully, it could have a material adverse effect on our business, financial condition and results of operations.
In the absence of significant increases in attendance from current levels, or obtaining significant additional sources of liquidity, an investment in our Common Stock is highly speculative; holders of our Common Stock could suffer a total loss of their investment.
To remain viable beyond the next twelve months, the Company will require additional sources of liquidity, reductions or abatements of its rent obligations and/or significant increases in attendance levels, see Liquidity and Capital Resources included in Part I, Item 2 of this Form 10-Q for further information regarding attendance assumptions. The required amounts of additional liquidity may be material. Although the Company believes that cash flow from operations and the liquidity under its borrowing facilities will be sufficient to meet its material cash requirements over the next twelve months, it is actively continuing to explore additional sources of liquidity. The Company is unable to determine at this time whether any additional sources of liquidity will be available to it or if available, individually or taken together, will be sufficient to address its potential liquidity needs. There is significant uncertainty as to whether these potential sources of liquidity will be realized or that they will be sufficient to generate the material amounts of additional liquidity that may be required until the Company is able to achieve more normalized levels of attendance and operating revenues. Any individual source of liquidity that the Company is pursuing may not be sufficient to address all the Company’s future liquidity requirements, and even if all of the potential sources of liquidity that the Company is pursuing are available, they may not be sufficient to address the Company’s liquidity requirements. Further, any relief provided by lenders, governmental agencies, and business partners may not be adequate and may include onerous terms, particularly if we face additional rounds of suspension of operations at our theatres, scheduled film releases fail to drive increased attendance, scheduled releases continue to be postponed or moved to the home video market, or if the attendance levels of, and revenues generated by, our reopened theatres normalize at a level that will not support our substantial amount of indebtedness, rent liabilities or other obligations. Additionally, our cash resources and needs will continue to be impacted during the fourth quarter by interest payments, deferred rent payments, and the cash used in part to repay in full the Odeon Term Loan Facility. If anticipated levels of attendance during the fourth quarter holiday season and beyond do not materialize, the rate of cash burn will be higher than expected. Due to these factors, if the Company is unable to obtain the necessary additional sources of liquidity, an investment in our Common Stock is highly speculative.
In the event the Company’s attendance levels do not continue to increase significantly compared to aggregate 2021 and the combined first, second and third quarter of 2022 and achieve levels in line with pre COVID-19 attendance, we would seek to negotiate with creditors changes to our balance sheet liabilities and continue to take steps to reach agreements with our landlords to reduce or abate our rent obligations. Ultimately, if attendance levels do not normalize and we are unsuccessful in restructuring our liabilities, we would face the risk of a future liquidation or bankruptcy proceeding, in which case holders of the Company’s Common Stock and AMC Preferred Equity Units would likely suffer a total loss of their investment.
Our substantial level of indebtedness and our current liquidity constraints could adversely affect our financial condition and our ability to service our indebtedness, which could negatively impact your ability to recover your investment in the Common Stock.
We have a substantial amount of indebtedness, which requires significant interest payments. As of
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September 30, 2022, we had outstanding approximately $5,381.5 million carrying value of indebtedness (5,075.6 million aggregate principal amount) including $56.2 million of existing finance lease obligations. As of September 30, 2022, we also had approximately $4.8 billion of discounted rental payments under operating leases (with a weighted average remaining lease term of 9.5 years). Subsequent to September 30, 2022, our indebtedness has decreased due to the complete repayment of the Odeon Term Loan Facility, partially offset by the issuance of $400.0 million aggregate principal amount of 12.75% Odeon Senior Secured Notes due 2027 that were issued on October 20, 2022.
Including repayments of deferred lease amounts, the Company’s cash expenditures for rent increased significantly during the nine months ended September 30, 2022 as previously deferred rent payments and landlord concessions started to become current obligations. The Company received rent concessions provided by the lessors that aided in mitigating the economic effects of COVID-19 during the pandemic. These concessions primarily consisted of rent abatements and the deferral of rent payments. As a result, deferred lease amounts were approximately $195.8 million as of September 30, 2022. See Note 2 — Leases in the Notes to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q, for a summary of the estimated future repayment terms for the deferred lease amounts due to COVID-19.
Our substantial level of indebtedness and the current constraints on our liquidity could have important consequences, including the following:
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we entered into the Ninth Amendment (as defined in Note 6 — Corporate Borrowings and Finance Lease Obligations in the Notes to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q) , 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, which was further extended by the Eleventh Amendment (as defined in Note 6 — Corporate Borrowings and Finance Lease Obligations in the Notes to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q) from March 31, 2022 to March 31, 2023, as described, and on the terms and conditions specified, therein, including a minimum liquidity requirement of $100 million during the covenant suspension period. A breach of any condition to the financial covenant suspension set forth in the Credit Agreement may result in an event of default under the Credit Agreement or resume testing of the financial covenant;
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we must use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which reduces or will reduce funds available to us for other purposes such as working capital, capital expenditures, other general corporate purposes and potential acquisitions;
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our ability to refinance such indebtedness or to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
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we are exposed to fluctuations in interest rates because our senior credit facilities have variable rates of interest;
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our leverage may be greater than that of some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in responding to current and changing industry and financial market conditions;
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the loss of tax attributes resulting from the cancellation of indebtedness that occurred in connection with the exchange offers that closed on July 31, 2020, coupled with the inability to deduct all or significant portions of our interest expense for tax purposes, will ultimately increase the need to generate revenues to support our capital structure;
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there are significant constraints on our ability to generate liquidity through incurring additional debt; and
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we may be more vulnerable to economic downturn and adverse developments in our business, including
potential economic recession, inflation, and other risks that may negatively impact discretionary income
and attendance levels.
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We and our subsidiaries may be able to incur additional indebtedness in the future, subject to the restrictions contained in the agreements governing our indebtedness. To the extent new indebtedness is added to our debt levels, including as a result of satisfying interest payment obligations on certain of our indebtedness with payments-in-kind, the related risks that we now face could intensify. Our ability to access funding under our revolving credit facilities will depend upon, among other things, the absence of an event of default under such indebtedness, including any event of default arising from a failure to comply with the related covenants. If we are unable to comply with our covenants under our indebtedness, our liquidity may be further adversely affected.
Our ability to meet our expenses, to remain in compliance with our covenants under our debt instruments and to make future principal and interest payments in respect of our debt depends on, among other factors, our operating performance, competitive developments and financial market conditions, all of which are significantly affected by financial, business, economic and other factors. We are not able to control many of these factors. Given current industry and economic conditions, our cash flow may not be sufficient to allow us to pay principal and interest on our debt and meet our other obligations.
To the extent our relationship with lenders is negatively affected by disputes that may arise from time to time, it may be more difficult to seek covenant relief, if needed, or to raise additional funds in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
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.