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INVESTMENT IN NATIONAL CINEMEDIA LLC | 12 Months Ended
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Dec. 31, 2021
NCM |
INVESTMENT IN NATIONAL CINEMEDIA LLC | 8. INVESTMENT IN NATIONAL CINEMEDIA LLC Summary of Activity with NCM Below is a summary of activity with NCM included in the Company’s consolidated financial statements for the periods indicated. See Note 5 for discussion of related revenue recognition.
|  | Investment in NCM |  |  | NCM Screen Advertising Advances |  |  | Distributions from NCM (3) |  |  | Equity in (Earnings) Loss |  |  | Other Revenue |  |  | Interest Expense - NCM |  |  | Cash Received |
Balance as of January 1, 2019 |  | $ | 275,592 |  |  | $ | (350,242 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment |  |  | 1,552 |  |  |  | (1,552 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (13,782 | ) |  |  | — |  |  |  | 13,782 |
Interest accrued related to significant financing component |  |  | — |  |  |  | (28,624 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 28,624 |  |  |  | — |
Receipt of excess cash distributions |  |  | (23,452 | ) |  |  | — |  |  |  | (11,631 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 35,083 |
Receipt under tax receivable agreement |  |  | (2,492 | ) |  |  | — |  |  |  | (1,242 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,734 |
Equity in earnings |  |  | 14,592 |  |  |  | — |  |  |  | — |  |  |  | (14,592 | ) |  |  | — |  |  |  | — |  |  |  | — |
Amortization of screen advertising advances |  |  | — |  |  |  | 32,064 |  |  |  | — |  |  |  | — |  |  |  | (32,064 | ) |  |  | — |  |  |  | — |
Balance as of and for the year ended December 31, 2019 |  | $ | 265,792 |  |  | $ | (348,354 | ) |  | $ | (12,873 | ) |  | $ | (14,592 | ) |  | $ | (45,846 | ) |  | $ | 28,624.00 |  |  | $ | 52,599 |
Receipt of common units due to annual common unit adjustment |  |  | 3,620 |  |  |  | (3,620 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,689 | ) |  |  | — |  |  |  | 4,689 |
Interest accrued related to significant financing component |  |  | — |  |  |  | (23,595 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 23,595 |  |  |  | — |
Receipt of excess cash distributions |  |  | (12,022 | ) |  |  | — |  |  |  | (5,914 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 17,936 |
Receipt under tax receivable agreement |  |  | (2,146 | ) |  |  | — |  |  |  | (1,061 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,207 |
Equity in loss |  |  | (10,627 | ) |  |  | — |  |  |  | — |  |  |  | 10,627 |  |  |  | — |  |  |  | — |  |  |  | — |
Impairment of investment in NCM (2) |  |  | (92,655 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Amortization of screen advertising advances |  |  | — |  |  |  | 31,314 |  |  |  | — |  |  |  | — |  |  |  | (31,314 | ) |  |  | — |  |  |  | — |
Balance as of and for the year ended December 31, 2020 |  | $ | 151,962 |  |  | $ | (344,255 | ) |  | $ | (6,975 | ) |  | $ | 10,627 |  |  | $ | (36,003 | ) |  | $ | 23,595 |  |  | $ | 25,832 |
Receipt of common units due to annual common unit adjustment |  |  | 10,237 |  |  |  | (10,237 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (12,001 | ) |  |  | — |  |  |  | 12,001 |
Interest accrued related to significant financing component |  |  | — |  |  |  | (23,612 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 23,612 |  |  |  | — |
Receipt under tax receivable agreement |  |  | (156 | ) |  |  | — |  |  |  | (77 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 233 |
Equity in loss |  |  | (26,599 | ) |  |  | — |  |  |  | — |  |  |  | 26,599 |  |  |  | — |  |  |  | — |  |  |  | — |
Amortization of screen advertising advances |  |  | — |  |  |  | 32,078 |  |  |  | — |  |  |  | — |  |  |  | (32,078 | ) |  |  | — |  |  |  | — |
Balance as of and for the year ended December 31, 2021 |  | $ | 135,444 |  |  | $ | (346,026 | ) |  | $ | (77 | ) |  | $ | 26,599 |  |  | $ | (44,079 | ) |  | $ | 23,612 |  |  | $ | 12,234 |
(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. The amounts due to NCM for on-screen advertising time provided to the Company’s beverage concessionaire were approximately $11,478, $2,605 and $4,952 for the years ended December 31, 2019, 2020 and 2021, respectively. Amounts unpaid to the Company and recorded in accounts receivable on the consolidated balance sheets were $636 and $4,498 as of the years ended December 31, 2020 and 2021, respectively. (2) Recorded in impairment of long-lived and other assets on the consolidated income statement for the year ended December 31, 2020. See further discussion at Fair Value of Investment in NCM below. (3) Excess cash distributions from NCM decreased beginning in the second quarter of 2020 primarily as a result of the impact of the COVID-19 discussed at Note 3. Excess cash distributions will be restricted through December 2023 in accordance with the credit agreement amendment NCM recently entered into with its lenders. In addition to the activity in the table above, the Company made payments to NCM of approximately $61, $9 and $8 during the years ended December 31, 2019, 2020 and 2021, respectively, related to certain equipment used for digital advertising, which is included in theatre furniture and equipment on the consolidated balance sheets. Investment in National CineMedia NCM operates a digital in-theatre network in the U.S. for providing cinema advertising. The Company entered into an ESA with NCM, pursuant to which NCM primarily provides advertising to our theatres. 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 were being amortized over the term of the Amended and Restated ESA, or through February 2041. 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. 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 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. Below is a summary of common units received by the Company under the Common Unit Adjustment (“CUA”) Agreement during the years ended December 31, 2019, 2020 and 2021:
Event |  | Date Common Units Received |  | Number of Common Units Received |  |  | Fair Value of Common Units Received |
2019 annual common unit adjustment |  | 3/31/2019 |  |  | 219,056 |  |  | $ | 1,552 |
2020 annual common unit adjustment |  | 3/31/2020 |  |  | 1,112,368 |  |  | $ | 3,620 |
2021 annual common unit adjustment |  | 4/14/2021 |  |  | 2,311,482 |  |  | $ | 10,237 |
Fair Value of Investment in NCM As of December 31, 2021, the Company owned a total of 43,161,550 common units of NCM, which represented an interest of approximately 26%. The estimated fair value of the Company’s investment in NCM was approximately $121,284 based on NCMI’s stock price as of December 31, 2021 of $2.81 per share (Level 1 input as defined in FASB ASC Topic 820), which was below the Company's carrying value of $135,444. NCM, Inc.’s stock price may vary due to the performance of the business, industry trends, general and economic conditions and other factors, including those resulting from the impact of the COVID-19 pandemic (see Note 3). The Company does not believe that the decline in NCM, Inc.’s stock price is other than temporary as the share price was only below the Company's carrying value of NCM for less than one month at the end of 2021. Therefore, no impairment of the Company’s investment in NCM was recorded during the year ended December 31, 2021. During the year ended December 31, 2020, the Company's investment in NCM was written down by $92,655, with a corresponding charge to impairment expense, in accordance with ASC 323-10-35 based on the NCM, Inc's stock price as of December 31, 2020. The write-down was due to the prolonged period of time, approximately ten months, which the share price of NCM, Inc.'s stock was below the Company’s carrying value per common unit of its investment in NCM through December 31, 2020. Exhibitor Services Agreement As previously discussed, the Company’s domestic theatres are part of the in-theatre digital network operated by NCM, the terms of which are defined in the ESA. NCM provides advertising to its theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for our theatres. The Company receives a monthly theatre access fee for participation in the NCM network and also earns screen advertising or screen rental 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. 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 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 through February 2041.
|  | Year Ended December 31, |  |  |  |  |  |  |
Remaining Maturity |  | 2022 |  |  | 2023 |  |  | 2024 |  |  | 2025 |  |  | 2026 |  |  | Thereafter |  |  | Total |
NCM screen advertising advances (1) |  | $ | 9,119 |  |  |  | 9,749 |  |  |  | 10,424 |  |  |  | 11,147 |  |  |  | 11,922 |  |  |  | 293,665 |  |  | $ | 346,026 |
(1) Amounts are net of the estimated interest to be accrued for the periods presented. Significant Financing Component As noted above, the Company received approximately $174,000 in cash consideration from NCM at the time of NCMI’s IPO and also periodically receives consideration in the form of common units (discussed at Common Unit Adjustments above) from NCM 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. The interest expense was calculated using the Company’s incremental borrowing rates at the time the cash and each tranche of common units were 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. Summary Financial Information for NCM The tables below present summary financial information for NCM for its fiscal periods indicated:
|  | Year Ended |  |  | Year Ended |  |  | Year Ended |
|  | December 26, 2019 |  |  | December 31, 2020 |  |  | December 30, 2021 |
Revenues |  | $ | 444,800 |  |  | $ | 89,887 |  |  | $ | 114,639 |
Operating income (loss) |  | $ | 155,700 |  |  | $ | (59,671 | ) |  | $ | (68,576 | )
Net income (loss) |  | $ | 98,800 |  |  | $ | (115,753 | ) |  | $ | (134,562 | )
|  | As of |  |  | As of |
|  | December 31, 2020 |  |  | December 30, 2021 |
Current assets |  | $ | 142,566 |  |  | $ | 114,620 |
Noncurrent assets |  | $ | 685,643 |  |  | $ | 658,438 |
Current liabilities |  | $ | 46,872 |  |  | $ | 66,806 |
Noncurrent liabilities |  | $ | 1,072,207 |  |  | $ | 1,114,712 |
Members' deficit |  | $ | (290,870 | ) |  | $ | (408,460 | )

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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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