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National CineMedia | 9 Months Ended
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Sep. 30, 2019
NCM |
National CineMedia |
8. | National CineMedia
Below is a summary of activity with NCM included in the Company’s condensed consolidated financial statements:
|  | Investment in NCM |  | NCM Screen Advertising Advances |  | Distributions from NCM |  | Equity in Earnings |  | Other Revenue |  | Interest Expense - NCM (2) |  | Cash Received |
Balance as of January 1, 2019 |  | $ | 275,592 |  | $ | (287,349 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment ("CUA") |  |  | 1,552 |  |  | (1,552 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Revenues earned under ESA (1)(2) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (22,151 | ) |  | 13,392 |  |  | 8,759 |
Revenues earned under amendment to ESA(2)(3) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,482 | ) |  | 788 |  |  | 694 |
Receipt of excess cash distributions |  |  | (16,126 | ) |  | — |  |  | (8,009 | ) |  | — |  |  | — |  |  | — |  |  | 24,135 |
Receipt of cash under tax receivable agreement |  |  | (2,324 | ) |  | — |  |  | (1,159 | ) |  | — |  |  | — |  |  | — |  |  | 3,483 |
Equity in earnings |  |  | 14,062 |  |  | — |  |  | — |  |  | (14,062 | ) |  | — |  |  | — |  |  | — |
Amortization of deferred revenue |  |  | — |  |  | 11,916 |  |  | — |  |  | — |  |  | (11,916 | ) |  | — |  |  | — |
Balance as of and for the nine months ended September 30, 2019 |  | $ | 272,756 |  | $ | (276,985 | ) | $ | (9,168 | ) | $ | (14,062 | ) | $ | (35,549 | ) | $ | 14,180 |  | $ | 37,071 |
(1) | Amount includes the per patron and per digital screen theatre access fees due to the Company prior to the first amendment to the Amended and Restated ESA, net of amounts paid to NCM for on-screen advertising time provided to the Company’s beverage concessionaire of approximately $8,808.
(2) | Reflects impact of significant financing component related to amounts received in advance under the ESA and CUA agreements. See also Notes 3 and 4.
(3) | Reflects screen rental revenues earned after the amendment to the ESA.
Investment in National CineMedia NCM operates a digital in-theatre network in the U.S. for providing cinema advertising. The Company entered into an Exhibitor Services Agreement with NCM (“ESA”), pursuant to which NCM primarily provides advertising to our theatres. As described in Note 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, on February 13, 2007, National Cinemedia, Inc. (“NCMI”), an entity that serves as the sole manager of NCM, completed an initial public offering (“IPO”) of its common stock. In connection with the NCMI initial public offering, the Company amended its operating agreement and the ESA. At the time of the NCMI IPO and as a result of amending the ESA, the Company received approximately $174,000 in cash consideration from NCM. The proceeds were recorded as deferred revenue or NCM screen advertising advances and was being amortized over the term of the Amended and Restated ESA, or through February 2037. Following the NCMI IPO, the Company does not recognize undistributed equity in the earnings on its original NCM membership units (referred to herein as the Company’s Tranche 1 Investment) until NCM’s future net earnings, less distributions received, surpass the amount of the excess distribution. The Company recognizes equity in earnings on its Tranche 1 Investment only to the extent it receives cash distributions from NCM. The Company recognizes cash distributions it receives from NCM on its Tranche 1 Investment as a component of earnings as Distributions from NCM. The Company believes that the accounting model provided by ASC Topic 323-10-35-22 for recognition of equity investee losses in excess of an investor’s basis is analogous to the accounting for equity income subsequent to recognizing an excess distribution. During the three months ended September 30, 2019 and 2018, the Company recorded equity in earnings of $9,050 and $6,830, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded equity in earnings of $14,062 and $11,341, respectively. Common Unit Adjustments In addition to the consideration received upon the NCMI IPO and ESA modification in 2007, the Company also periodically receives consideration in the form of common units from NCM. Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCMI and the Company, annual adjustments to the common membership units are made primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated by each Founding Member. As discussed in Note 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, the common units received (collectively referred to as the Company’s “Tranche 2 Investment”) are recorded at estimated fair value as an increase in the Company’s investment in NCM with an offset to deferred revenue or NCM screen advertising advances. The Company’s Tranche 2 Investment is accounted for following the equity method, with undistributed equity earnings related to its Tranche 2 Investment included as a component of earnings in equity in income of affiliates and distributions received related to its Tranche 2 Investment are recorded as a reduction of investment basis During March 2019, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, on March 29, 2019, the Company received an additional 219,056 common units of NCM, each of which is convertible into one share of NCMI common stock. The Company recorded the additional common units received at estimated fair value with a corresponding adjustment to deferred revenue of approximately $1,552. The fair value of the common units received was estimated based on the market price of NCMI common stock at the time the common units were determined, adjusted for volatility associated with the estimated time period it would take to convert the common units and register the respective shares. The deferred revenue is recognized on a straight-line basis over the remaining term of the first amendment to the Amended and Restated ESA. As of September 30, 2019, the Company owned a total of 39,737,700 common units of NCM, representing an ownership interest of approximately 25%. The estimated fair value of the Company’s investment in NCM was approximately $325,849 based on the price of NCMI common stock as of September 30, 2019 of $8.20 per share (Level 1 input as defined in FASB ASC Topic 820). Exhibitor Service Agreement As previously discussed, our domestic theatres are part of the in-theatre digital network operated by NCM under the ESA. NCM provides advertising to our theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for our theatres. We receive a monthly theatre access fee for participation in the NCM network and also earn screen advertising revenue on a per patron basis. Prior to September 17, 2019, the ESA was accounted for under ASC Topic 606, Revenue from Contracts with Customers. See Note 3 and Note 4. Effective September 17, 2019, the Company signed an amendment to the ESA, under which the Company will provide incremental advertising time to NCM and has extended the term through February 2041. Since the agreement was amended, the Company was required to evaluate the revised contract under ASC Topic 842, Leases, and as a result, determined that the ESA met the definition of a lease. The Company leases nonconsecutive periods of use of its domestic theatre screens to NCM for purposes of showing third party advertising content. The lease, which is classified as an operating lease, generally requires variable lease payments based on the number of patrons attending the showtimes during which such advertising is shown. The lease agreement is considered short-term due to the fact that the nonconsecutive periods of use, or advertising time slots, are set on a weekly basis. The revenues earned under the ESA screen advertising revenues, both before and after the amendment, are reflected in other revenue on the condensed consolidated income statement. The recognition of revenue related to the deferred revenue or NCM screen advertising advances will continue to be recorded on a straight-line basis over the new term of the amended ESA or February 2041.
|  | Twelve Months Ended September 30, |  |  |  |  |  |  |  |  |
Remaining Maturity |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | 2023 |  |  | 2024 |  |  | Thereafter |  |  | Total |
NCM screen advertising advances |  |  | 15,912 |  |  |  | 15,917 |  |  |  | 15,917 |  |  |  | 15,917 |  |  |  | 15,917 |  |  |  | 197,405 |  |  |  | 276,985 |
Significant Financing Component Prior to the September 17, 2019 amendment of the ESA, the Company applied a significant financing component, as required by ASC Topic 606, due to the significant length of time between receiving the NCM screen advertising advances (the $174 million received at the NCMI IPO and the periodic common unit adjustments) and completion of the performance obligation. Effective September 17, 2019, upon the Company’s evaluation and determination that ASC Topic 842 applies to the amended ESA, the Company determined it acceptable to retain the accounting for the significant financing component as the economic substance of the arrangement represents a financing, consistent with the guidance in ASC Topic 606. As a result of the significant financing component, the Company recognized incremental screen advertising revenue and an offsetting interest expense of $4,666 and $4,983 during the three months ended September 30, 2019 and 2018, respectively, and $14,180 and $14,875 for the nine months ended September 30, 2019 and 2018, respectively. The interest expense was calculated using the Company’s incremental borrowing rates at the time when the cash and each tranche of common units were received from NCM, which ranged from 4.4% to 8.0%. NCM Financial Information Below is summary financial information for NCM for the periods indicated (financial information as of and for the three months ended September 27, 2019 is not yet available).
|  | Three Months Ended |  |  | Six Months ended |  |  | Three Months Ended |  |  | Nine Months Ended |
|  | June 27, 2019 |  |  | June 27, 2019 |  |  | September 27, 2018 |  |  | September 27, 2018 |
Gross revenues |  | $ | 110,200 |  |  | $ | 187,100 |  |  | $ | 110,100 |  |  | $ | 304,000 |
Operating income |  | $ | 37,700 |  |  | $ | 48,600 |  |  | $ | 42,300 |  |  | $ | 93,500 |
Net income |  | $ | 23,500 |  |  | $ | 20,600 |  |  | $ | 28,500 |  |  | $ | 50,500 |
|  | As of |  |  | As of |
|  | June 27, 2019 |  |  | December 27, 2018 |
Current assets |  | $ | 141,100 |  |  | $ | 172,700 |
Noncurrent assets |  | $ | 732,900 |  |  | $ | 726,800 |
Current liabilities |  | $ | 88,400 |  |  | $ | 115,200 |
Noncurrent liabilities |  | $ | 939,300 |  |  | $ | 924,900 |
Members deficit |  | $ | (153,700 | ) |  | $ | (140,600 | )

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section S99 -Paragraph 4 -Subparagraph (SX 210.3A-04) -URI http://asc.fasb.org/extlink&oid=116822174&loc=d3e355119-122828 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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