National CineMedia, Inc. 10-Q

Item 1A. Risk Factors Excluding the risk factors outlined below, there have been no material changes from risk factors as previously disclosed in our annual report on Form 10-K filed with the SEC on February 20, 2020 for the fiscal year ended December 26, 2019 and updated in our quarterly report on Form 10-Q filed with the SEC on May 5, 2020 for the quarter ended March 26, 2020. Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (COVID-19 virus), have disrupted and are continuing to disrupt our business and the business of our founding members and network affiliates, which has and could continue to materially affect our operations, liquidity and results of operations. Pandemics or disease outbreaks such as the novel coronavirus (COVID-19 virus) have and are continuing to disrupt our business and the business of our founding member and network affiliates’ theaters. Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic, the United States’ government and other state and local governments issued 38 precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. The Company generated no in-theater advertising revenue for the approximate six months that the theaters were closed. As of the date of this filing, approximately 53% of theaters within our network are open, with 47% remaining closed due to local government mandates or the lack of major motion picture releases. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance has not returned to historical levels. A number of major motion picture releases were delayed until later in 2020 or 2021 and a few studios shortened the “release window” between the release of motion pictures in theaters and an alternative delivery method or released motion pictures directly to alternative delivery methods bypassing the theater entirely and this may continue during the COVID-19 Pandemic and after it has subsided. As a result of the impact of the COVID-19 Pandemic, the Company may not be able to meet certain of its financial covenants within the next twelve months. The Company is actively pursuing and expects to obtain an amendment to its Senior Secured Credit Facility to obtain a waiver to its financial covenants. Until an amendment is obtained, substantial doubt exists about the Company’s ability to continue as a going concern during the next twelve months. If the amendment is not finalized before the completion of the Company’s 2020 annual audit in the first quarter of 2021 and a qualified audit opinion is issued by the Company’s independent auditors at that time, a majority of the lenders could choose to accelerate the debt, which could also result in a cross-default under NCM LLC’s senior notes. Management expects to complete the amendment during the next several months. However, there can be no assurance that NCM LLC will be able to amend the Credit Agreement before the completion of the Company’s 2020 annual audit, or at all. In response to the COVID-19 Pandemic, we implemented a number of cost-saving measures, described elsewhere in this filing. To prepare for the reopening of theaters and resumption of in theater advertising we began to ease certain of these measures, but as of the date of this filing the revenue generated by our operations has not reached historical levels and 47% of the theaters within our network remain closed. We may not generate sufficient revenue in the short term to cover these increased costs. The impact, extent and duration of the government-imposed restrictions on travel, public gatherings, other events and business generally, as well as the overall effect of the COVID-19 virus is currently unknown but has had and is continuing to have a material adverse impact on our business, liquidity, financial conditions and/or results of operations. Even when the COVID-19 Pandemic subsides, we cannot guarantee that we will recover as rapidly as other industries as advertising expenditures may remain decreased due to an economic slowdown, consumers may be hesitant to return to theaters or other long-term changes may have impacted the advertising or exhibition industries. We cannot predict when the effects of the COVID-19 Pandemic will subside when all of our theaters will reopen and patrons are comfortable attending, or when our business will return to normal levels. The longer and more severe the pandemic, including repeat or cyclical outbreaks or increases in rates of infection, the more severe the adverse effects will be on our business, liquidity, financial conditions and/or results of operations. Significant impacts on our business caused by the COVID-19 Pandemic and other pandemics include and are likely to continue to include among others: • decreased attendance in theaters after they reopen, including due to (i) continued safety and health concerns and social distancing requirements or (ii) a change in consumer behavior in favor of alternative forms of entertainment; • advertisers’ perception of cinema advertising may change based on future attendance, shortened theatrical windows, and potential impacts of film production; • due to adverse business impacts, advertisers may be less willing to invest in advertising and may prioritize other types of investment during the COVID-19 Pandemic; • advertisers may be unwilling to enter into upfront advertising arrangements with us or commit to allocate budgets to cinema advertising due to uncertainty regarding the opening of cinemas, upcoming film releases, and the availability of other advertising options; • the bankruptcy or restructuring of our founding members or other network affiliates in which the agreement with that party may be rejected, renegotiated or deemed unenforceable; • increased operating costs without associated revenues during periods where theaters are open but attendance has not reached historical levels; • an inability to collect accounts receivable from small business advertisers that have been temporarily or permanently closed; • reductions and delays associated with planned operating and capital expenditures; • increased risk related to employee matters, including increased turnover and litigation and claims relating to furloughs or pay reductions; 39 • potential impairment charges and additional deferred tax expense related to the increase of valuation allowances on our deferred tax assets; • our ability to implement business continuity plans in a fast-moving emergency, which could have an adverse effect on our internal controls (potentially giving rise to significant deficiencies or material weaknesses) and also increase our vulnerability to information technology and other systems disruptions; • our inability to generate significant cash flow from operations, which could lead to a substantial increase in indebtedness and negatively affect our ability to comply with the financial covenants, if applicable, in our debt agreements; • our inability to access lending, capital markets and other sources of liquidity, if needed, on reasonable terms, or at all, or obtain amendments, extensions and waivers; • our inability to effectively meet our short- and long-term obligations; and • our inability to service our existing and future indebtedness. The spread of COVID-19 has developed into a worldwide health crisis and may have broader macro-economic implications. The United States has experienced significantly increased rates of unemployment and these deteriorating economic conditions, including reduced levels of economic growth and possibly a recession, may extend well beyond the time the spread of infection is contained. Consumers and advertisers may also change their long-term behavior related to perceived risk of infection or health risk, other pandemic fears, quarantines and other restrictions. Many of our clients and prospective clients have experienced significant negative impacts from the COVID-19 Pandemic and have decreased advertising budgets during the COVID-19 Pandemic. Additionally, a significant number of small businesses have temporarily or permanently closed, which may reduce local advertising revenue. The perceived risk of infection or health risk may adversely affect our business, liquidity, financial condition and results of operations even after the COVID-19 Pandemic subsides. To the extent the COVID-19 Pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described herein and in the “Risk Factors” section of our annual report on Form 10-K for the fiscal year ended December 26, 2019 and our quarterly report on Form 10-Q for the quarter ended March 26, 2020, including but not limited to those relating to NCM LLC’s high level of indebtedness, the risks associated with the loss of major content partners or advertising clients, and reductions in spending on advertising.