National CineMedia, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, statements related to the impact of the Chapter 11 Case and the Cineworld Proceeding on our business and results of operations may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” below and in our annual report on Form 10-K for the Company’s fiscal year ended December 29, 2022. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. The following discussion and analysis is a supplement to and should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herein and the audited financial statements and other disclosure included in our annual report on Form 10-K for the Company’s fiscal year ended December 29, 2022. In the following discussion and analysis, the term net income refers to net income attributable to NCM, Inc. Bankruptcy Filing and Going Concern As a result of the commencement of the Chapter 11 Case on April 11, 2023, we are operating as the manager of the debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Case, we intend to de-lever NCM LLC’s balance sheet and reduce overall indebtedness. Additionally, as a debtor in possession, certain of NCM LLC’s activities are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee NCM LLC will successfully agree upon a viable plan of reorganization with the various stakeholders, or that any such agreement will be reached in the time frame that is acceptable to the Bankruptcy Court. We have concluded that NCM LLC’s financial condition and projected operating results, the defaults under NCM LLC’s debt agreements subsequent to March 30, 2023 and the risks and uncertainties surrounding NCM LLC’s Chapter 11 Case raise substantial doubt as to our ability to continue as a going concern. See Note 10 — Subsequent Events for further discussion. Delisting of our Common Stock from NASDAQ On April 19, 2023, the Company received a letter from Nasdaq indicating that as a result of NCM LLC filing a voluntary petition for reorganization with a prearranged Chapter 11 plan under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas on April 11, 2023, and in accordance with Nasdaq Listing Rule 5100, the Nasdaq Staff determined that the Company is a “public shell” and that continued listing of the Company’s common stock is no longer warranted. The letter advises that Nasdaq will suspend trading of the common stock on April 28, 2023 and that Nasdaq will file a Form 25-NSE with the Securities and Exchange Commission to effect the delisting of the common stock unless the Company requests an appeal of this determination. The Company filed such an appeal with the Nasdaq Hearings Panel (the “Panel”) on April 21, 2023 and the hearing has been scheduled for May 25, 2023. The suspension and delisting of the Company’s securities has been stayed pending the Panel’s decision. Overview We are America’s Movie Network. As the largest cinema advertising network in North America, we are a media company dedicated to uniting brands with young, diverse audiences through the power of movies and pop culture. We currently derive revenue principally from the sale of advertising to national, regional and local businesses in our Noovie® show, our cinema advertising and entertainment show seen on movie screens across the U.S. We present two different formats of our Noovie® show depending on the theater circuit in which it runs. In Regal and Cinemark and a portion of our network affiliates’ theaters, the Noovie show now includes Post-Showtime advertising inventory after the advertised showtime consisting of (1) the lights down segment that runs for five minutes after the advertised showtime with trailer lighting and (2) the 30- or 60-second Platinum Spot. As of March 30, 2023, theaters presenting the new Noovie show format with Post-Showtime Inventory made up approximately 60.4% of our network. All other NCM network theater circuits, which make up the remaining 39.6% of our network, present the Classic Noovie show, which ends approximately at the advertised movie showtime when the movie trailers begin. The movie trailers that run before the feature film are not part of our Noovie show. 25 We also sell advertising on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, we sell digital online and mobile advertising through our Noovie Audience Accelerator , across our suite of Noovie digital properties, including Noovie Shuffle and Name That Movie on third-party’s internet sites, as well as a variety of complementary out of home venues, including restaurants, convenience stores and college campuses, in order to reach entertainment audiences beyond the theater. As of March 30, 2023, approximately 7.3 million moviegoers have downloaded our mobile apps. These downloads and the acquisition of second- and third-party data have resulted in unique data records of approximately 409.6 million as of March 30, 2023. We have long-term ESAs (approximately 16.5 weighted average years) with the founding members and multi-year agreements with network affiliates, which expire at various dates between May 29, 2023 and December 31, 2037. The weighted average remaining term of the ESAs and the network affiliate agreements is 13.7 years as of March 30, 2023. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. Our Noovie show and LEN programming are distributed predominantly via satellite through our proprietary DCN. Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. We focus on many operating metrics including changes in revenue, Adjusted OIBDA and Adjusted OIBDA margin, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, national and regional advertising pricing (CPM), local advertising rate per theater per week, national, local and regional and total advertising revenue per attendee. We also monitor free cash flow, the dividend coverage ratio, financial leverage ratio (net debt divided by Adjusted OIBDA plus integration payments and other encumbered theater payments), cash balances and revolving credit facility availability to ensure financial debt covenant compliance and that there is adequate cash availability to fund our working capital needs and debt obligations and any future dividends declared by our Board of Directors. Recent Developments Cineworld Proceeding — On September 7, 2022, Cineworld Group plc, the parent company of Regal, and certain of its subsidiaries, including Regal, Regal Cinemas, Inc., a party to the ESA with NCM LLC, and Regal CineMedia Holdings, LLC, a party to other agreements with NCM LLC and NCM, Inc., filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Southern District of Texas. On October 21, 2022, Regal filed a motion to reject the ESA without specifying an effective date for the rejection and indicated that Regal currently plans on negotiating with the Company. NCM LLC has also filed an adversary proceeding against Regal seeking declaratory relief and an injunction prohibiting Regal from breaching certain exclusivity, non-compete, non-negotiate and confidentiality provisions in the ESA by entering into a new agreement with a third-party or bringing any of the services performed by NCM LLC in-house. On February 1, 2023, Cineworld filed a motion for summary judgment on NCM LLC’s adversary proceeding with a hearing scheduled during the second quarter of 2023. Although there can be no assurances that NCM LLC’s proceeding for declaratory relief will be successful, the Company believes these exclusivity rights will survive any attempted rejection of the ESA by Regal in the bankruptcy proceeding. On May 5, 2023, NCM LLC and Regal agreed to stay the ongoing litigation while the parties work towards the terms of a new arrangement for NCM LLC to provide advertising services to Regal. As of the filing date, the Company continues to negotiate with Regal regarding the ESA and NCM LLC's provision of advertising services. In the event that NCM LLC’s or NCM, Inc.’s agreements with Regal and its affiliates are rejected, it could have a materially negative impact on the Company’s operations or financial condition. Selected Historical and Operating Data You should read this information with the other information contained in this document, and our unaudited historical financial statements and the notes thereto included elsewhere in this document. Our Operating Data —The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data): 26 % Change Q1 2023 Q1 2022 Q1 2022 to Q1 2023 Revenue $ 34.9 $ 35.9 (2.8) % Operating expenses: Advertising operating costs 5.7 4.7 21.3 % Network costs 2.4 2.0 20.0 % Theater access fees and revenue share to founding members 19.6 17.9 9.5 % Selling and marketing costs 9.5 10.2 (6.9) % Administrative and other costs 20.8 9.7 114.4 % Impairment of long-lived assets — 5.8 (100.0) % Depreciation expense 1.3 2.0 (35.0) % Amortization of intangibles recorded for network theater screen leases 6.2 6.1 1.6 % Total operating expenses 65.5 58.4 12.2 % Operating loss (30.6) (22.5) 36.0 % Non-operating expenses 23.4 23.5 (0.4) % Income tax expense — — — % Net loss attributable to noncontrolling interests (8.5) (20.8) (59.1) % Net loss attributable to NCM, Inc. $ (45.5) $ (25.2) 80.6 % Net loss per NCM, Inc. basic share $ (0.31) $ (0.31) — % Net loss per NCM, Inc. diluted share $ (0.31) $ (0.31) — % Adjusted OIBDA $ (10.9) $ (6.8) 60.3 % Adjusted OIBDA margin (31.2) % (18.9) % (12.3) % Total theater attendance (in millions) (1) 90.0 76.0 18.4 % _________________________ (1) Represents the total attendance within our advertising network, excluding screens and attendance associated with certain AMC Carmike theaters that were part of another cinema advertising network during the periods presented. Refer to Note 4 to the unaudited Condensed Consolidated Financial Statements included elsewhere in this document. Non-GAAP Financial Measures Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States. Adjusted OIBDA represents operating income before depreciation and amortization expense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share-based compensation costs, impairment of long-lived assets and advisor fees related to involvement in the Cineworld Proceeding and Chapter 11 Case. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management uses these non-GAAP financial measures to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes these are important supplemental measures of operating performance because they eliminate items that have less bearing on its operating performance and highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, amounts of amortization of intangibles recorded for network theater screen leases, non-cash share-based compensation programs, impairment of long-lived assets and advisor fees related to involvement in the Cineworld Proceeding and Chapter 11 Case, interest rates, debt levels or income tax rates. A limitation of these measures, however, is that they exclude depreciation and amortization, which represent a proxy for the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s business. In addition, Adjusted OIBDA has the limitation of not reflecting the effect of the Company’s amortization of 27 intangibles recorded for network theater screen leases, share-based payment costs, impairments of long-lived assets and advisor fees related to involvement in the Cineworld Proceeding or Chapter 11 Case. Adjusted OIBDA should not be regarded as an alternative to operating income, net income or as indicators of operating performance, nor should it be considered in isolation of, or as substitutes for financial measures prepared in accordance with GAAP. The Company believes that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA. Because not all companies use identical calculations, these non-GAAP presentations may not be comparable to other similarly titled measures of other companies, or calculations in the Company’s debt agreement. The following table reconciles operating income to Adjusted OIBDA for the periods presented (dollars in millions): Q1 2023 Q1 2022 Operating loss $ (30.6) $ (22.5) Depreciation expense 1.3 2.0 Amortization of intangibles recorded for network theater screen leases (1) 6.2 6.1 Share-based compensation costs (2) 1.6 1.4 Impairment of long-lived assets (3) — 5.8 Sales force reorganization costs (4) — 0.4 Fees and expenses related to the Cineworld Proceeding and Chapter 11 Case (5) 10.6 — Adjusted OIBDA $ (10.9) $ (6.8) Total revenue $ 34.9 $ 35.9 Adjusted OIBDA margin (31.2) % (18.9) % ____________________________________________ (1) Following the adoption of ASC 842, as discussed within Note 8 to the unaudited Condensed Consolidated Financial Statements included elsewhere in this document, amortization of the ESA and affiliate intangible balances is considered a form of lease expense and has been reclassified to this account as of the adoption date, December 28, 2018. The Company adopted ASC 842 prospectively and thus, prior period balances remain within amortization expense. (2) Share-based compensation costs are included in network operations, selling and marketing and administrative expense in the accompanying unaudited Condensed Consolidated Financial Statements. (3) The impairment of long-lived assets primarily relates to the write down of certain internally developed software no longer in use. (4) Sales force reorganization costs represents redundancy costs associated with changes to the Company’s sales force implemented during the first quarter of 2022. (5) Advisor and legal fees and expenses incurred in connection with the Company’s involvement in the Cineworld Proceeding and Chapter 11 Case during the first quarter of 2023, as well as retention related expenses and retainers to the members of the special and restructuring committees of the Company’s Board of Directors. Our Network —The change in the number of screens in our network by the founding members and network affiliates during the three months ended March 30, 2023 was as follows. Number of screens Founding Members Network Affiliates Total Balance as of December 29, 2022 16,062 4,033 20,095 Lost affiliates (1) — (154) (154) Closures, net of openings (2) (277) (22) (299) Balance as of March 30, 2023 15,785 3,857 19,642 ______________________________________ (1) Represents the loss of three of our affiliates resulting in a reduction of 154 affiliate screens to our network as of March 30, 2023. (2) Represents the closure of 299 screens, net of new screens added, across our founding members and network affiliates. Our founding member and network affiliate agreements allow us to sell cinema advertising across the largest network of digitally equipped theaters in the U.S. We believe that our market coverage strengthens our selling proposition and competitive positioning against other national, regional and local video advertising platforms, including television, online and mobile video 28 platforms and other out-of-home video advertising platforms by allowing advertisers the broad reach and national scale that they need to effectively reach their target audiences. Basis of Presentation The results of operations data for the three months ended March 30, 2023 (first quarter of 2023) and March 31, 2022 (first quarter of 2022) was derived from the unaudited Condensed Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the accompanying notes. Results of Operations First Quarter of 2023 and First Quarter of 2022 Revenue. Total revenue decreased 2.8%, from $35.9 million for the first quarter of 2022 to $34.9 million for the first quarter of 2023. The following is a summary of revenue by category (in millions): $ Change % Change Q1 2023 Q1 2022 Q1 2022 to Q1 2023 Q1 2022 to Q1 2023 National advertising revenue $ 22.5 $ 26.3 $ (3.8) (14.4) % Local and regional advertising revenue 8.0 6.1 1.9 31.1 % Founding member advertising revenue from beverage concessionaire agreements 4.4 3.5 0.9 25.7 % Total revenue $ 34.9 $ 35.9 $ (1.0) (2.8) % The following table shows data on theater attendance and revenue per attendee for the three months ended March 30, 2023 and March 31, 2022: % Change Q1 2023 Q1 2022 Q1 2022 to Q1 2023 National advertising revenue per attendee $ 0.250 $ 0.346 (27.7) % Local and regional advertising revenue per attendee $ 0.089 $ 0.080 11.3 % Total advertising revenue (excluding founding member beverage revenue) per attendee $ 0.339 $ 0.426 (20.4) % Total revenue per attendee $ 0.388 $ 0.472 (17.8) % Total theater attendance (in millions) (1) 90.0 76.0 18.4 % ________________________________________________________ (1) Represents the total attendance within our advertising network, excluding screens and attendance associated with certain AMC Carmike theaters that were part of another cinema advertising network during the periods presented. National advertising revenue. National advertising revenue decreased by $3.8 million, or 14.4%, from $26.3 million for the first quarter of 2022 to $22.5 million for the first quarter of 2023. The decrease in national advertising revenue was primarily due to a 4.9% decrease in national advertising CPMs driven by a shift in the mix of customers with upfront commitments with lower CPMs choosing to place their advertisements in the first quarter of 2023, compared to the first quarter of 2022, and a 12.2% decrease in national advertising utilization in the first quarter of 2023, as compared to the first quarter of 2022. Inventory utilization is calculated as utilized impressions divided by total advertising impressions, which is based on eleven 30-second salable national advertising units in our Noovie show, which can be expanded, should market demand dictate. Local and regional advertising revenue. Local and regional advertising revenue increased by $1.9 million, or 31.1%, from $6.1 million for the first quarter of 2022 to $8.0 million for the first quarter of 2023. The increase in local and regional advertising revenue was due to an increase in contract activity and size within the government, retail, education, healthcare and professional services categories in the first quarter of 2023, as compared to the first quarter of 2022. Founding member beverage revenue. National advertising revenue from the founding members’ beverage concessionaire agreement increased $0.9 million, or 25.7%, from $3.5 million for the first quarter of 2022 to $4.4 million for the first quarter of 2023. The increase was due to a 19.8% increase in founding member attendance for the first quarter of 2023, as compared to the first quarter of 2022. The increase was also due to the increase in the beverage 29 revenue CPM due to the fixed annual increase for Cinemark and Regal following the 2019 ESA Amendments and the increase in the CPM during segment one from 2022 to 2023 for AMC. Operating expenses. Total operating expenses increased $7.1 million, or 12.2%, from $58.4 million for the first quarter of 2022 to $65.5 million for the first quarter of 2023. The following table shows the changes in operating expense for the first quarter of 2023 and the first quarter of 2022 (in millions): $ Change % Change Q1 2023 Q1 2022 Q1 2022 to Q1 2023 Q1 2022 to Q1 2023 Advertising operating costs $ 5.7 $ 4.7 $ 1.0 21.3 % Network costs 2.4 2.0 0.4 20.0 % Theater access fees and revenue share—founding members 19.6 17.9 1.7 9.5 % Selling and marketing costs 9.5 10.2 (0.7) (6.9) % Administrative and other costs 20.8 9.7 11.1 114.4 % Impairment of long-lived assets — 5.8 (5.8) (100.0) % Depreciation expense 1.3 2.0 (0.7) (35.0) % Amortization of intangibles recorded for network theater screen leases 6.2 6.1 0.1 1.6 % Total operating expenses $ 65.5 $ 58.4 $ 7.1 12.2 % Advertising operating costs. Advertising operating costs increased $1.0 million, or 21.3%, from $4.7 million for the first quarter of 2022 to $5.7 million for the first quarter of 2023. The increase was due primarily to a $0.7 million increase in advertising affiliate and partner expense was primarily related to higher attendance for the first quarter of 2023, as compared to the first quarter of 2022. Network costs. Network costs increased $0.4 million, or 20.0%, from $2.0 million for the first quarter of 2022 to $2.4 million for the first quarter of 2023. The increase was primarily due to a $0.4 million increase in personnel related costs for the first quarter of 2023, as compared to the first quarter of 2022. Theater access fees and revenue share—founding members. Theater access fees and revenue share increased by $1.7 million, or 9.5%, from $17.9 million for the first quarter of 2022 to $19.6 million for the first quarter of 2023. This increase consisted of a $1.4 million increase due to the 19.8% increase in founding member theater attendance in the first quarter of 2023, as compared to the first quarter of 2022, and a $0.6 million increase due to the rate increases in the first quarter of 2023, as compared to the first quarter of 2022. These increases were offset by a $0.3 million decrease due to a reduction in average active screens in the first quarter of 2023, as compared to the first quarter of 2022. Selling and marketing costs. Selling and marketing costs decreased $0.7 million, or 6.9%, from $10.2 million for the first quarter of 2022 to $9.5 million for the first quarter of 2023. This decrease was primarily due to a $0.9 million decrease in expenses related to our digital offerings due to less revenue in the first quarter of 2023, as compared to the first quarter of 2022, and a $0.4 million decrease in sales training expenses. These decreases were partially offset by a $0.5 million increase in personnel related costs for the first quarter of 2023, as compared to the first quarter of 2022. Administrative and other costs. Administrative and other costs increased $11.1 million, or 114.4%, from $9.7 million for the first quarter of 2022 to $20.8 million for the first quarter of 2023. This increase was primarily due to an increase of $9.8 million in legal and professional fees incurred related to the Chapter 11 Case and Cineworld Proceeding in the first quarter of 2023. The increase was also due to a $1.4 million increase in personnel related costs primarily due to retention related expenses and retainers to the members of the special and restructuring committees of the Company’s Board of Directors in the first quarter of 2023, as compared to the first quarter of 2022. Depreciation expense. Depreciation expense decreased $0.7 million, or 35.0%, from $2.0 million for the first quarter of 2022 to $1.3 million in the first quarter of 2023, primarily due to the write-off of internally developed software in the first quarter of 2022. Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen increased $0.1 million, or 1.6%, from $6.1 million for the first quarter of 2022 to $6.2 million for the first quarter of 2023. 30 Non-operating expenses. Total non-operating expenses decreased $0.1 million, or 0.4%, from $23.5 million for the first quarter of 2022 to $23.4 million for the first quarter of 2023. The following table shows the changes in non-operating expense for the first quarter of 2023 and the first quarter of 2022 (in millions): $ Change % Change Q1 2023 Q1 2022 Q1 2022 to Q1 2023 Q1 2022 to Q1 2023 Interest on borrowings $ 24.0 $ 17.2 $ 6.8 39.5 % Loss on modification of debt 0.4 — 0.4 100.0 % (Gain) loss on the re-measurement of the payable to founding members under the tax receivable agreement (0.6) 6.4 (7.0) (109.4) % Gain on sale of asset (0.3) — (0.3) (100.0) % Other non-operating income (0.1) (0.1) — (100.0) % Total non-operating expenses $ 23.4 $ 23.5 $ (0.1) (0.4) % The decrease in non-operating expense was primarily due to a $7.0 million increase in the gain on the re-measurement of the payable to founding members under the tax receivable agreement and a $0.3 million increase in the gain on sale of assets for the first quarter of 2023, as compared to the first quarter of 2022. These decreases were partially offset by a $6.8 million increase in interest on borrowings primarily related to the increase in the weighted average interest rate from 5.7% in 2022 to 7.5% in 2023, and a $0.4 million increase in a loss on the modification of debt related to the Fourth Credit Agreement Amendment and First Supplemental Indenture. Known Trends and Uncertainties COVID-19 and Other Macroeconomic Factors —Due to the COVID-19 Pandemic, Q1 2022 and Q1 2023 attendance levels increased but remained below historical levels due to post-production delays and changes in major motion picture release schedules. We are currently unable to fully determine the extent of the impact of the COVID-19 Pandemic and other current macroeconomic factors on our business in future periods due to the lingering impacts on our business environment and related market volatility, as well as other current macroeconomic factors, such as rising interest rates, inflationary pressures and any potential recession and the respective impacts on advertisers. However, we continue to monitor the situation and its potential impacts on our financial position, results of operations, liquidity and cash flows. Chapter 11 Case —We are unable to predict when NCM LLC will emerge from Chapter 11 because it is contingent upon numerous factors, many of which are out of the Company’s control. Major factors include obtaining the Bankruptcy Court’s approval of a Chapter 11 plan of reorganization, which will enable NCM LLC to transition from Chapter 11 into ordinary course operations outside of bankruptcy. NCM LLC also may need to obtain a new credit facility, or “exit financing.” NCM LLC’s ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Chapter 11 Case as well as the general global macroeconomic factors. The plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which such plan is confirmed. Cineworld Proceeding —As discussed within the ‘ Recent Developments ’ section, on September 7, 2022, Cineworld Group plc, the parent company of Regal, and certain of its subsidiaries, including Regal, Regal Cinemas, Inc., a party to the ESA, and Regal CineMedia Holdings, LLC, a party to other agreements with NCM LLC and NCM, Inc., filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Southern District of Texas. On October 21, 2022, Regal filed a motion to reject the ESA without specifying an effective date for the rejection and indicated that Regal planned on negotiating with the Company. NCM LLC has also filed an adversary proceeding against Regal seeking declaratory relief and an injunction prohibiting Regal from breaching certain exclusivity, non-compete, non-negotiate and confidentiality provisions in the ESA by entering into a new agreement with a third-party or bringing any of the services performed by NCM LLC in-house. On February 1, 2023, Cineworld filed a motion for summary judgment on NCM LLC’s adversary proceeding with a hearing scheduled during the second quarter of 2023. On May 5, 2023, NCM LLC and Regal agreed to stay the ongoing litigation while the parties work towards the terms of a new arrangement for NCM LLC to provide advertising services to Regal. Although there can be no assurances that NCM LLC’s proceeding for declaratory relief will be successful, the Company believes these exclusivity rights will survive any attempted rejection of the ESA by Regal in the bankruptcy proceeding. As of the filing date, the Company continues to negotiate with Regal regarding the ESA and NCM LLC's provision of advertising services. In the event that NCM LLC’s or NCM, Inc.’s agreements with Regal and its affiliates are rejected, it could have a materially negative impact on the Company’s operations or financial condition. 31 Beverage Revenue —Under the ESAs, up to 90 seconds of the Noovie® show program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. For the first three months of 2023 and 2022, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds to satisfy their obligations under their beverage concessionaire agreements. The founding members’ current long-term contracts with their beverage suppliers require the 30 or 60 seconds of beverage advertising, although such commitments could change in the future. Per the ESA with AMC, the time sold to the founding member beverage supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of the Noovie show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers now increases at a fixed rate of 2.0% each year. Theater Access Fees —In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron and a fixed payment per digital screen (connected to the DCN). The payment per theater patron increased by 4% on November 1, 2022 and will increase by 8% every five years, with the next increase occurring in 2027. Pursuant to the ESAs, the payment per digital screen increases annually by 5%. Pursuant to the 2019 ESA Amendments, Cinemark and Regal each receive an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron of $0.052 per patron beginning on November 1, 2022 and increasing 8% every five years beginning November 1, 2027. Platinum Spot —In consideration for the utilization of the theaters post-showtime for Platinum Spots, Cinemark and Regal receive a percentage of all revenue generated for the actual display of Platinum Spots in their applicable theaters, subject to a specified minimum. If NCM LLC runs advertising in more than one concurrent advertisers’ Platinum Spot for any portion of the network over a period of time, then NCM LLC will be required to satisfy a minimum average CPM for that period of time. Financial Condition and Liquidity Liquidity and Capital Resources As a result of the commencement of the Chapter 11 Case on April 11, 2023, we are operating as the manager of a debtor in possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 filings, we intend to de-lever NCM LLC’s balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of NCM LLC’s and NCM, Inc.’s activity, as its manager, are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee NCM LLC will successfully agree upon a viable plan of reorganization with various stakeholders or reach any such agreement in the time frame that is acceptable to the Bankruptcy Court. See Note 10 — Subsequent Events for additional information. Our normal operating cash flows are providing liquidity for the Company to operate as usual and fulfill ongoing commitments to stakeholders. We have concluded that our financial condition and projected operating results, the defaults under NCM LLC’s debt agreements subsequent to March 30, 2023, and the risks and uncertainties surrounding NCM LLC’s Chapter 11 Case raise substantial doubt as to the Company’s ability to continue as a going concern. As a result of the substantial doubt about the Company’s ability to continue as a going concern for the next twelve months, and the associated steps that have been undertaken to restructure NCM LLC’s balance sheet, NCM LLC’s expected cash outflows related to interest payments on NCM LLC’s debt in the remainder of 2023 are difficult to predict at this time. NCM LLC does not expect to make interest payments on any of its debt. NCM LLC plans to fund its ongoing operations through cash generated from operations. NCM LLC is a highly leveraged company. NCM, Inc.’s current primary source of liquidity is cash flow generated from the Management Services Agreement of NCM LLC. Payments under the Management Service Agreement are expected to continue throughout the bankruptcy process. NCM LLC’s primary source of liquidity are cash flows generated from operations. Subsequent to and during pendency of the Chapter 11 Case, we expect that NCM LLC’s primary liquidity requirements will be sufficient to fund operations. Based on current financial projections, we expect to be able to continue to generate cash flows from operations in amounts sufficient to fund our operations and pay administrative expenses including professional fees while under Chapter 11. However, should the Chapter 11 Case take longer than anticipated or should our financial results be materially and negatively 32 impacted by general global macroeconomic factors, we may be required to seek additional sources of liquidity. There can be no assurance that we will be able to obtain such liquidity on terms favorable to us, if at all. Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as available cash payments as defined in the NCM LLC operating agreement, interest or principal payments on our term loans and the Notes due 2026 and Notes due 2028, income tax payments, TRA payments to the founding members and amount of dividends to NCM, Inc.’s common stockholders. Due to the COVID-19 Pandemic and other macroeconomic factors, the Company’s ability to advertise within theaters in 2022 and the first quarter of 2023 was limited, driven by lower than historical levels of attendance due in part to the timing and frequency of major motion picture releases as compared to prior years due to post-production delays related to the COVID-19 Pandemic. The Company’s attendance levels have continued to improve but still remain below historic levels, which continues to impact cash receipts and advertising revenue. Further, there is a lag between when revenue is generated and when the Company ultimately collects the associated accounts receivable b alance. The Company also had reduced cash payments during the period when theaters within the Company ’ s network were closed or attendance levels were low as expenses related to theater attendance (i.e., theater access fees, Platinum Spot revenue share and network affiliate revenue share payments) were either not incurred or incurred at lower levels. As all of the theaters within our network were open during 2022 and the first quarter of 2023, the screen-based portion of these expenses returned to historical levels and the attendance-based portion of these e xpenses is expected to continue to increase as attendance returns to historical levels. The Company also implemented the following cost-saving measures in order to preserve cash at the start of the COVID-19 Pandemic, and those measures remain in place as of the filing date: • Curtailed certain non-essential operating expenditures, including marketing, research and consulting services; • Temporarily suspended the 401K employee match program; • Terminated or deferred certain non-essential capital expenditures; • Strategically worked with our vendors, and other business partners to manage, defer, and/or abate certain costs during the disruptions caused by the COVID-19 Pandemic; • Decreased our quarterly dividend beginning in the second quarter of 2020 through the second quarter of 2022 and suspended our quarterly dividend in the third and fourth quarter of 2022 and first quarter of 2023, which results in cash savings of $33.1 million in the first quarter of 2023 and cash savings of $157.4 million for NCM, Inc. since the beginning of the COVID-19 Pandemic; and • Introduced an active cash management process, which, among other things, requires CEO or CFO approval of all outgoing payments. In March 2020, we drew down an additional $110.0 million on our revolving credit facility, in March 2021, we received $43.0 million in net proceeds under incremental term loans that mature on December 20, 2024, and in January 2022 we received $43.3 million in net proceeds under an incremental revolving credit facility that matures on June 20, 2023. The $54.7 million of cash at NCM LLC as of March 30, 2023 will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. stockholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations. On January 5, 2022, NCM LLC entered into the Credit Agreement Third Amendment. Among other things, the Credit Agreement Third Amendment provides for: (i) certain modifications to and extensions to modifications of the affirmative and negative covenants therein; (ii) the suspension of the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the fiscal quarter ending December 28, 2023 and (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 9.25 to 1.00 and 7.25 to 1.00, respectively, for the fiscal quarter ending on or about March 30, 2023, 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or about June 29, 2023, 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or about September 28, 2023, and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or about December 28, 2023 and each fiscal quarter thereafter. Also on January 5, 2022, NCM LLC also entered into the Revolving Credit Agreement 2022 among NCM LLC, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent. The Revolving Credit Agreement 2022 provides for revolving loan commitments of $50.0 million of secured revolving loans, the entire amount of which was funded on January 5, 2022. The Revolving Credit Agreement 2022 provides for (i) a cash interest rate of term SOFR plus 8.00%, with a 1.00% floor, (ii) a maturity date of June 20, 2023 and (iii) a termination premium if NCM LLC terminates the commitments under the Revolving Credit Agreement 2022 at any time before maturity. The Revolving Credit Agreement 2022 also contains covenants, representations and warranties and events of default that are substantially similar to the Credit Agreement. In accordance with the Revolving Credit Agreement 2022 and the Credit Agreement Third Amendment, 33 for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the fourth quarter of 2023, NCM LLC must maintain a minimum liquidity balance of $55.0 million consisting of a combination of unrestricted cash on hand and availability under NCM LLC's revolving credit facility (the “Minimum Liquidity Requirement”). As of March 30, 2023, NCM LLC was in compliance with the requirements of the Credit Agreement, as amended, and the Revolving Credit Agreement 2022. Subsequent to March 30, 2023, the commencement of the Chapter 11 Case constituted an event of default and caused the automatic and immediate acceleration of all debt outstanding under or in respect of, NCM LLC’s Credit Agreements and senior notes. On January 17, 2023, NCM LLC entered into (i) Credit Agreement Fourth Amendment to its Credit Agreement, dated as of June 20, 2018, among NCM LLC, the several banks and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as previously amended and (ii) Revolving Credit Agreement Amendment. The Credit Agreement Fourth Amendment and Revolving Credit Agreement Amendment provide for the addback of specified professional fees paid by NCM LLC during the period of January 6, 2023 through the date NCM LLC delivers a compliance certificate for the quarter ending on or about December 28, 2023, when calculating the sum of unrestricted cash on hand at NCM LLC and revolving credit facility availability under the Credit Agreement and Revolving Credit Agreement required to be maintained under each respective agreement. On February 15, 2023, NCM LLC elected to enter into a 30-day grace period for the interest payment in the amount of $6.6 million under the Senior Notes due 2026 under the indenture governing the Senior Notes due 2026. On March 15, 2023, NCM LLC entered into a First Supplemental Indenture to the Indenture, dated as of August 19, 2016 (the “Indenture”) relating to NCM LLC’s 5.75% Senior Notes due 2026 with Computershare Trust Company, N.A., as Trustee. The First Supplemental Indenture was approved by holders of the Senior Notes due 2026 holding at least a majority of the aggregate principal amount of the Senior Notes due 2026. The First Supplemental Indenture amends Section 6.01(a) of the Indenture by extending the grace period for payment of interest due on the Senior Notes due 2026 from 30 days to 47 days. A summary of our financial liquidity is as follows (in millions): As of $ Change $ Change March 30, 2023 December 29, 2022 March 31, 2022 YE 2022 to Q1 2023 Q1 2022 to Q1 2023 Cash, cash equivalents and marketable securities (1) $ 70.0 $ 62.7 $ 115.1 $ 7.3 $ (45.1) NCM LLC revolving credit facility availability (2) 7.2 7.2 6.8 — 0.4 Total liquidity $ 77.2 $ 69.9 $ 121.9 $ 7.3 $ (44.7) _________________________ (1) Included in cash, cash equivalents and marketable securities as of March 30, 2023, December 29, 2022 and March 31, 2022, was $54.7 million, $59.4 million and $76.2 million, respectively, of cash held by NCM LLC that is not available to satisfy dividends declared by NCM, Inc., income tax, tax receivable payments to NCM LLC’s founding members and other obligations. (2) The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility pursuant to the Credit Agreement was $175.0 million as of March 30, 2023, December 29, 2022 and March 31, 2022. As of March 30, 2023, December 29, 2022 and March 31, 2022, the amount available under the NCM LLC revolving credit facility pursuant to the Credit Agreement in the table above was net of the amount outstanding under the revolving credit facility of $167.0 million, $167.0 million and $167.0 million, respectively, and net letters of credit of $0.8 million, $0.8 million and $1.2 million, respectively. Subsequent to quarter-end, on March 31, 2023, NCM LLC as the Borrower, entered into the fifth amendment to the Credit Agreement (the “Credit Agreement Fifth Amendment”), dated as of June 20, 2018, among the Borrower, the several banks and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as previously amended (the “Credit Agreement”). The Credit Agreement Fifth Amendment extends the grace period available for certain payments under the Credit Agreement for nine business days. Additionally, NCM LLC entered into a Second Supplemental Indenture to the Indenture, relating to NCM LLC’s 5.75% Senior Notes due 2026 with Computershare Trust Company, N.A., as Trustee. The Second Supplemental Indenture was approved by holders of the Senior Notes due 2026 holding at least a majority of the aggregate principal amount of the Senior Notes due 2026. The Second Supplemental Indenture amends Section 6.01(a) of the Indenture by extending the grace period for payment of interest due on the Senior Notes due 2026 from 47 days to 57 days. We have used and generated cash as follows (in millions): 34 Three Months Ended March 30, 2023 March 31, 2022 Operating cash flow $ 10.4 $ (23.6) Investing cash flow $ (0.7) $ (0.7) Financing cash flow $ (2.4) $ 36.9 • Operating Activitie s. The $34.0 million increase in cash provided in operating activities for the first quarter of 2023, as compared to the first quarter of 2022, was primarily due to 1) a $42.7 million increase in account receivable collections during the first quarter of 2023, as compared to the first quarter of 2022, 2) a $10.5 million decrease in payments of accounts payable and accrued expenses due in part to the cash preservation actions taken by the Company, 3) a $4.2 million decrease in deferred revenue and 4) a $2.7 million increase in integration and other encumbered theaters payments driven by higher revenue and AOIBDA in the fourth quarter of 2022, as compared to the fourth quarter of 2021 as the payments are made one month in arrears. The increases in cash provided were partially offset by 1) a $20.7 million increase in net loss adjusted for non-cash items during the first quarter of 2023, as compared to the first quarter of 2022, 2) a $3.5 million increase in the other assets, net of liabilities and 3) a $1.9 million greater decrease in amounts due to founding members in the first quarter of 2023, as compared to the first quarter of 2022. • Investing Activities. There were no meaningful changes in cash used in investing activities for the first quarter of 2023, as compared to the first quarter of 2022. • Financing Activities. The $39.3 million decrease in cash provided by financing activities for the first quarter of 2023, as compared to the first quarter of 2022, was primarily due to the issuance of the $50.0 million Revolving Credit Facility 2022 in the first quarter of 2022, partially offset by a $5.6 million decrease in payments of debt issuance costs in the first quarter of 2022 as there were no debt issuances in the first quarter of 2023. The decrease was also partially offset by a $4.1 million decrease in dividend payments following the suspension of the dividend in the third quarter of 2022 and a $0.8 million decrease in debt amortization costs paid in the first quarter of 2023, as compared to the first quarter of 2022. Sources of Capital and Capital Requirements NCM, Inc.’s primary source of liquidity and capital resources is the quarterly available cash distributions from NCM LLC as well as its existing cash balances and marketable securities, which as of March 30, 2023 were $70.0 million (including $54.7 million of cash held by NCM LLC). NCM LLC’s primary sources of liquidity and capital resources are its cash provided by operating activities and cash on hand. NCM LLC drew down an additional $110.0 million of its revolving credit facility in March 2020 in order to supplement the decrease in cash provided by operating activities during the period our network theaters were closed. On January 5, 2022, NCM LLC entered in the Revolving Credit Agreement 2022 and drew down upon the revolving credit facility of $50.0 million. Cash at NCM, Inc. is used to fund income taxes, payments associated with the TRA with the founding members, payments of NCM, Inc. specific expenses, purchases of low risk investments and for future payment of dividends to NCM, Inc. shareholders. Cash flows generated by NCM LLC’s distributions to NCM, Inc. and the founding members have been impacted by the COVID-19 Pandemic and will be deferred during the Chapter 11 Case. NCM LLC is required pursuant to the terms of the NCM LLC Operating Agreement to distribute its available cash, as defined in the operating agreement, unless prohibited by NCM LLC's Credit Agreement, quarterly to its members (only NCM, Inc. as of March 30, 2023). The available cash distribution to the members of NCM LLC for the three months ended March 30, 2023 was calculated as approximately negative $31.6 million, of which NCM, Inc.'s share is approximately negative $31.6 million. Pursuant to the NCM LLC Operating Agreement and the Credit Agreement Amendment, there were no available cash distributions made for the first quarter of 2023. The net negative available cash distributions for 2020, 2021 and 2022 can be used to offset a positive available cash distribution in the second quarter of 2023 in accordance with the NCM LLC Operating Agreement after the Extended Covenant Waiver Holiday. NCM, Inc. expects to use its cash balances and cash received from future available cash distributions to fund payments associated with the TRA with the founding members and future dividends as declared by the Board of Directors or make other strategic investments as approved by the Board of Directors. The Company will owe an estimated $0.3 million TRA payment for the 2022 tax year. Distributions from NCM LLC and NCM, Inc. cash balances should be sufficient to fund payments associated with the TRA with the founding members, income taxes and any declared dividends for the foreseeable future at the discretion of the Board of Directors. The Company intends to revisit its dividend policy upon emergence from the Chapter 11 Case. Critical Accounting Policies 35 For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our unaudited Condensed Consolidated Financial Statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” contained in our annual report on Form 10-K filed for the fiscal year ended December 29, 2022 and incorporated by reference herein. As of March 30, 2023, there were no significant changes in those critical accounting policies. Recent Accounting Pronouncements For a discussion of the recent accounting pronouncements relevant to our business operations, refer to the information provided under Note 1 to the unaudited Condensed Consolidated Financial Statements included elsewhere in this document. The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.