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Investment in National CineMedia LLC | 9 Months Ended
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Sep. 30, 2021
NCM |
Investment in National CineMedia LLC | 9. Investment in National CineMedia LLC 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 Loss |  | Other Revenue |  | Interest Expense - NCM |  | Cash Received |
Balance as of January 1, 2021 |  | $ | 151,962 |  | $ | (344,255 | ) |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment ("CUA") |  |  | 10,237 |  |  | (10,237 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Screen rental revenues earned under ESA (1) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,516 | ) |  | — |  |  | 7,516 |
Interest accrued related to significant financing component |  |  | — |  |  | (17,723 | ) |  | — |  |  | — |  |  | — |  |  | 17,723 |  |  | — |
Receipt under tax receivable agreement |  |  | (156 | ) |  | — |  |  | (77 | ) |  | — |  |  | — |  |  | — |  |  | 233 |
Equity in loss |  |  | (22,046 | ) |  | — |  |  | — |  |  | 22,046 |  |  | — |  |  | — |  |  | — |
Amortization of screen advertising advances |  |  | — |  |  | 24,003 |  |  | — |  |  | — |  |  | (24,003 | ) |  | — |  |  | — |
Balance as of and for the nine months ended September 30, 2021 |  | $ | 139,997 |  | $ | (348,212 | ) | $ | (77 | ) | $ | 22,046 |  | $ | (31,519 | ) | $ | 17,723 |  | $ | 7,749 |
(1) Amounts include the per patron and per digital screen theatre access fees due to the Company, net of amounts due to NCM for on-screen advertising time provided to the Company’s beverage concessionaire of approximately $2,850. 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. 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. Common Unit Adjustments The Company also periodically receives consideration in the form of common units from NCM. 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. The common units received are recorded at estimated fair value as an increase in the Company’s investment in NCM with an offset to NCM screen advertising advances. During March 2021, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, the Company received an additional 2,311,482 common units of NCM, on April 14, 2021. The Company recorded these additional common units at an estimated fair value of $10,237 with a corresponding adjustment to NCM screen advertising advances. The fair value of the common units received was estimated based on the market price of NCMI common stock (Level 1 input as defined in FASB ASC Topic 820) 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. As of September 30, 2021, the Company owned a total of 43,161,550 common units of NCM representing an ownership interest of approximately 26%. Each of the Company’s common units in NCM is convertible into one share of NCM, Inc. common stock. As of September 30, 2021, the estimated fair value of the Company’s investment in NCM was approximately $153,655 based on NCM, Inc.’s stock price as of September 30, 2021 of $3.56 per share (Level 1 input as defined in FASB ASC Topic 820). Exhibitor Services Agreement As discussed above, the Company’s domestic theatres are part of the in-theatre digital network operated by NCM under the ESA. NCM provides advertising to the Company’s theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for our theatres. The Company receives monthly theatre access fees for participation in the NCM network for participation in the NCM network generally on a per patron and per screen basis. These fees earned under the ESA are reflected in other revenue on the condensed consolidated income statement. Prior to September 17, 2019, the ESA was accounted for under ASC Topic 606, Revenue from Contracts with Customers. 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, both before and after the amendment, are reflected in other revenue on the consolidated income statement. The recognition of revenue related to the NCM screen advertising advances are recorded through February 2041.
|  | Twelve Months Ended September 30, |  |  |  |  |  |  |
Remaining Maturity |  | 2022 |  |  | 2023 |  |  | 2024 |  |  | 2025 |  |  | 2026 |  |  | Thereafter |  |  | Total |
NCM screen advertising advances (1) |  | $ | 8,968 |  |  | $ | 9,587 |  |  | $ | 10,251 |  |  | $ | 10,962 |  |  | $ | 11,724 |  |  | $ | 296,720 |  |  | $ | 348,212 |
(1) Amounts are net of the estimated interest to be accrued for the periods presented. See discussion of significant financing component below. Significant Financing Component In connection with the completion of the NCMI initial public offering, the Company amended and restated its ESA with NCM and received approximately $174,000 in cash consideration from NCM. The proceeds were recorded as deferred revenue and are being amortized over the term of the modified ESA, or through February 2041. In addition to the consideration received upon the ESA modification during 2007, the Company also receives consideration in the form of common units from NCM, at each annual common unit adjustment settlement, in exchange for exclusive access to the Company’s newly opened domestic screens under the ESA. Due to the significant length of time between receiving the consideration from NCM and fulfillment of the related performance obligation, the ESA includes an implied significant financing component, as per the guidance in ASC Topic 606. As a result of the significant financing component, the Company recognized incremental screen rental revenue and interest expense of $24,003 and $17,723, respectively, during the nine months ended September 30, 2021 and incremental screen rental revenue and interest expense of $23,464 and $17,726, respectively, during the nine months ended September 30, 2020. The interest expense was calculated using the Company’s incremental borrowing rates at the time when the cash was received from the NCMI IPO and each tranche of common units was received from NCM, which ranged from 4.4% to 8.3%. 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 apply the significant financing component guidance from ASC Topic 606 by analogy as the economic substance of the agreement represents a financing arrangement. NCM Financial Information Below is summary financial information for NCM for the periods indicated:
|  | Three Months Ended |  |  | Three Months ended |  |  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, 2021 |  |  | September 24, 2020 |  |  | September 30, 2021 |  |  | September 24, 2020 |
Gross revenues |  | $ | 31,677 |  |  | $ | 6,000 |  |  | $ | 51,080 |  |  | $ | 74,700 |
Operating income (loss) |  | $ | (18,669 | ) |  | $ | (20,073 | ) |  | $ | (76,607 | ) |  | $ | (38,973 | )
Net loss |  | $ | (35,335 | ) |  | $ | (34,950 | ) |  | $ | (125,699 | ) |  | $ | (81,350 | )
|  | As of |  |  | As of |
|  | September 30, 2021 |  |  | December 31, 2020 |
Current assets |  | $ | 97,064 |  |  | $ | 142,566 |
Noncurrent assets |  | $ | 665,570 |  |  | $ | 685,643 |
Current liabilities |  | $ | 48,761 |  |  | $ | 46,872 |
Noncurrent liabilities |  | $ | 1,114,599 |  |  | $ | 1,072,207 |
Members deficit |  | $ | (400,726 | ) |  | $ | (290,870 | )

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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 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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