As discussed in the forepart of this report, some of the information in this Annual Report on Form 10-K 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, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and statements related to the impact of the current COVID-19 Pandemic on our business and results, 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. The following discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto included elsewhere in this document. In the following discussion and analysis, the term net income refers to net income attributable toNCM, Inc. This section of this Form 10-K generally discusses fiscal 2022 and fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021. Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 30, 2021 .
Bankruptcy Filing and Going Concern
As a result of the commencement of the Chapter 11 Case onApril 11, 2023 discussed further within Item 1, 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-leverNCM LLC's balance sheet and reduce overall indebtedness. Additionally, as a debtor in possession, certain ofNCM LLC's activities are subject to review and approval by theBankruptcy 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 guaranteeNCM 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 theBankruptcy Court . We have concluded thatNCM LLC's financial condition and projected operating results, the defaults underNCM LLC's debt agreements subsequent toDecember 29, 2022 , and the risks and uncertainties surroundingNCM LLC's Chapter 11 Case raise substantial doubt as to our ability to continue as a going concern. See Note 16-Subsequent Events for further discussion.
Overview
We are America's Movie Network. As the largest cinema advertising network inNorth 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 theU.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 ofDecember 29, 2022 , theaters presenting the new Noovie show format with Post-Showtime Inventory made up approximately 59.3% of our network. All other NCM network theater circuits, which make up the remaining 40.7% 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. 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 ofDecember 29, 2022 , 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 374.4 million as ofDecember 29, 2022 . We have long-term ESAs (approximately 16.8 weighted average years) with the founding members and multi-year agreements with network affiliates, which expire at various dates betweenMay 29, 2023 andDecember 31, 2037 . The weighted average remaining term of the ESAs and the network affiliate agreements is 14.0 years as ofDecember 29, 2022 . The ESAs and network affiliate 45 --------------------------------------------------------------------------------
agreements grant
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, 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-OnSeptember 7, 2022 , Cineworld Group plc, the parent company of Regal, and certain of its subsidiaries, including Regal,Regal Cinemas, Inc. , a party to theESA withNCM LLC , andRegal CineMedia Holdings, LLC , a party to other agreements withNCM LLC andNCM, Inc. , filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in theSouthern District ofTexas . OnOctober 21, 2022 , Regal filed a motion to reject theESA 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 theESA by entering into a new agreement with a third-party or bringing any of the services performed byNCM LLC in-house. Although there can be no assurances thatNCM LLC's proceeding for declaratory relief will be successful, the Company believes these exclusivity rights will survive any attempted rejection of theESA by Regal in the bankruptcy proceeding. As of the filing date, the Company continues to negotiate with Regal regarding theESA andNCM LLC's provision of advertising services. In the event thatNCM LLC's orNCM, 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. COVID-19 Impact and Other Macroeconomic Factors-The impacts from the COVID-19 Pandemic have had and continue to have an effect on the world and our business. The movie slate for 2022 improved from prior years but continued to be limited by post-production delays and major motion picture release schedule changes. Attendance levels increased from the prior year, but have not met historical levels and has not been consistent throughout the year due to timing of major motion picture releases. In-theater advertising revenue for the year endedDecember 30, 2021 and the year endedDecember 29, 2022 also remained below historical levels due in part to a lag between the recovery of attendees and advertisers, as well as current macroeconomic factors, such as rising interest rates, inflationary pressures and any potential recession, and the respective impacts on advertisers. To ensure sufficient liquidity to endure the impacts of the COVID-19 Pandemic and other macroeconomic factors, we continued to manage our liquidity position through various cost control methods discussed further within the "Financial Condition and Liquidity" section below. Since the beginning of the COVID-19 Pandemic, the Company has significantly reduced payroll related costs through a combination of temporary furloughs and salary reductions and permanent layoffs. These changes have resulted in a headcount reduction of 39% as ofDecember 29, 2022 , as compared to headcount levels prior to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or in-theater advertising revenue, and therefore, were not incurred for the duration of time that the theaters were closed and attendance-based fees will continue to be reduced for the period of time that attendance is lower than historical levels. We are still required to pay these screen-based fees when theaters are open. We believe that the exhibition industry has historically fared well during periods of economic stress, and we remain optimistic that attendance figures will continue to benefit from increased major motion picture activity. There can be no assurance that studios will not reschedule movie releases; that post-production delays will not negatively impact network attendance, advertiser sentiment, and our business in general; social distancing, capacity restrictions, and other public safety measures will not be reintroduced; when or if theaters within our network will return to historic attendance levels; and that the theaters which have reopened will remain open; or if any of the changes in consumer behavior or changes to the theatrical window in response to the COVID-19 Pandemic will become permanent. Financing-OnJanuary 5, 2022 ,NCM LLC entered into the third amendment (the "Credit Agreement Third Amendment") to its Credit Agreement, dated as ofJune 20, 2018 , amongNCM LLC , the several banks and other financial institutions or entities from time to time parties thereto, andJPMorgan Chase Bank, N.A ., as administrative agent, as previously amended (the "Credit Agreement"). 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, including maintaining a total 46 -------------------------------------------------------------------------------- balance of$55.0 million of a combination of unrestricted cash on hand and availability underNCM LLC's revolving credit facility through the fourth quarter of 2023; (ii) the suspension of the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the fiscal quarter endingDecember 29, 2022 (the "Extended Covenant Waiver Holiday") 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 aboutMarch 30, 2023 , 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or aboutJune 29, 2023 , 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or aboutSeptember 28, 2023 , and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or aboutDecember 28, 2023 and each fiscal quarter thereafter. Also onJanuary 5, 2022 ,NCM LLC entered into a Revolving Credit Agreement (the "Revolving Credit Agreement 2022") amongNCM LLC , the lenders party thereto andWilmington Savings Fund Society , FSB, as administrative agent and collateral agent. The Revolving Credit Agreement 2022 provides for revolving loan commitments of$50.0 million of secured revolving loans, the entire amount of which was funded onJanuary 5, 2022 . The Revolving Credit Agreement 2022 provides for (i) a cash interest rate of term Secured Overnight Financing Rate ("SOFR") plus 8.0%, with a 1.0% floor, (ii) a maturity date ofJune 20, 2023 and (iii) a termination premium ifNCM LLC terminates the commitments under the Revolving Credit Agreement 2022 at any time before maturity. The Revolving Credit Agreement 2022 also contains covenants, representations and warranties and events of default that are substantially similar to the Credit Agreement.
Selected Historical and Operating Data
The following table sets forth our historical selected financial and operating data for the periods indicated. The selected financial and operating data should be read in conjunction with the other information contained in this document, including "Item 1. Business," the audited historical Consolidated Financial Statements and the notes thereto included elsewhere in this document, and historical audited Consolidated Financial Statements, which have not been included in this document. The results of operations data for the years endedDecember 29, 2022 andDecember 30, 2021 and the balance sheet data as ofDecember 29, 2022 andDecember 30, 2021 are derived from the audited Consolidated Financial Statements ofNCM, Inc. included elsewhere in this document. The results of operations data for the years endedDecember 31, 2020 ,December 26, 2019 andDecember 27, 2018 and the balance sheet data as ofDecember 31, 2020 ,December 26, 2019 andDecember 27, 2018 are derived from the audited Consolidated Financial Statements ofNCM, Inc. that are not included in this document. 47 -------------------------------------------------------------------------------- Results of Operations Data
Years Ended
Dec. 29 ,Dec. 30 ,
2021 2020 2019 2018 Revenue$ 249.2 $ 114.6 $ 90.4 $ 444.8 $ 441.4 OPERATING EXPENSES: Advertising operating costs 27.2 18.4 10.3 38.3 37.4 Network costs 8.4 7.4 8.6 13.5 13.3 Theater access fees and revenue share to founding members 82.3 51.1 24.6 82.7 81.7 Selling and marketing costs 42.8 34.7 37.6 64.9 66.5 Administrative and other costs 44.3 36.0 30.9 43.8 48.3 Impairment of long-lived assets 5.8 - 1.7 - - Depreciation expense 6.5 10.9 13.1 13.6 12.6 Amortization expense - - - - 27.3 Amortization of intangibles recorded for network theater screen leases 25.0 24.7 24.6 26.7 - Total 242.3 183.2 151.4 283.5 287.1 OPERATING INCOME (LOSS) 6.9 (68.6) (61.0) 161.3 154.3 NON-OPERATING EXPENSE (INCOME) 73.1 49.8 (96.9) 62.2 50.6 (LOSS) INCOME BEFORE INCOME TAXES (66.2) (118.4) 35.9 99.1 103.7 Provision for income taxes - - 162.2 12.4 23.5 CONSOLIDATED NET (LOSS) INCOME (66.2) (118.4) (126.3) 86.7 80.2 Less: Net (loss) income attributable to noncontrolling interests (37.5) (69.7) (60.9) 50.6 50.4
$ (65.4) $ 36.1 $ 29.8 (LOSS) EARNINGS PER NCM, INC. COMMON SHARE: Basic$ (0.35) $ (0.61) $ (0.84) $ 0.47 $ 0.39 Diluted$ (0.35) $ (0.61) $ (0.84) $ 0.46 $ 0.37 Other Financial and Operating Data Years Ended (in millions, except cash dividend declared per common share and Dec. 29, Dec. 30, Dec. 31, Dec. 26, Dec. 27, screen data) 2022 2021 2020 2019 2018 Adjusted OIBDA (1)$ 57.3 $ (24.7) $ (19.4) $ 207.5 $ 205.4 Adjusted OIBDA margin (1) 23.0 % (21.6) % (21.5) % 46.7 % 46.5 % Capital expenditures$ 4.2 $ 6.5 $ 11.2 $ 15.3 $ 15.4 Cash dividend declared per common share$ 0.11 $ 0.20 $ 0.40 $ 0.68 $ 0.68 Founding member screens at period end (2) (5) 16,062 16,436 16,515 16,880 16,768 Total screens at period end (3) (5) 20,095 20,740 20,450 21,208 21,172 Total attendance for period (4) (5) 394.8 250.7 138.2 651.4 705.1
Notes to the Selected Historical Financial and Operating Data
(1)Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP inthe 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, executive officer transition costs, legal fees related to abandoned financing transactions, costs related to the reorganization of the sales force, advisor fees related to involvement in the Cineworld Proceeding and impairments of long-lived assets. 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 48 -------------------------------------------------------------------------------- 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, executive officer turnover, legal fees related to abandoned financing transactions, costs related to the reorganization of the sales force, advisor fees related to involvement in the Cineworld Proceeding, impairments of long-lived assets, 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 intangibles recorded for network theater screen leases, share-based payment costs, costs associated with the resignation and hiring of the Company's executive officers, legal fees related to abandoned financing transactions, costs related to the reorganization of the sales force, advisor fees related to involvement in the Cineworld Proceeding or impairments of long-lived assets. 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. Adjusted OIBDA does not reflect integration and other encumbered theater payments as they are recorded as a reduction to intangible assets. Integration payments and other encumbered theater payments received are added to Adjusted OIBDA to determine our compliance with financial covenants under our senior secured credit facility and included in available cash distributions toNCM LLC's founding members. During the years endedDecember 29, 2022 ,December 30, 2021 ,December 31, 2020 ,December 26, 2019 andDecember 27, 2018 , the Company recorded integration and other encumbered theater payments of$5.4 million ,$1.6 million ,$1.4 million ,$22.3 million , and$21.4 million , respectively, fromNCM LLC's founding members.
(2)Represents the total number of screens within
(3)Represents the total screens within
(4)Represents the total attendance within
(5)Excludes screens and attendance associated with certainAMC Carmike Cinemas, Inc. ("Carmike") theaters for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
The following table reconciles operating income to Adjusted OIBDA for the periods presented (dollars in millions):
49 -------------------------------------------------------------------------------- Years Ended Dec. 29, Dec. 30, Dec. 31, Dec. 26, Dec. 27, 2022 2021 2020 2019 2018 Operating income (loss)$ 6.9 $ (68.6) $ (61.0) $ 161.3 $ 154.3 Depreciation expense 6.5 10.9 13.1 13.6 12.6 Amortization expense (1) - - - - 27.3 Amortization of intangibles recorded for network theater screen leases 25.0 24.7 24.6 26.7 - Share-based compensation costs (2) 7.1 8.1 2.2 5.5 7.8 Advisor fees related to abandoned financing transactions (3) 0.5 0.1 - - - Executive transition costs (4) - 0.1 - 0.4 3.4 Impairment of long-lived assets (5) 5.8 - 1.7 - - Sales force reorganization costs (6) 0.4 - - - - Advisor fees related to the Cineworld Proceeding (7) 5.1 - - - - Adjusted OIBDA$ 57.3 $ (24.7) $ (19.4) $ 207.5 $ 205.4 Total revenue$ 249.2 $ 114.6 $ 90.4 $ 444.8 $ 441.4 Adjusted OIBDA margin 23.0 % (21.6) % (21.5) % 46.7 % 46.5 % (1)Following the adoption of ASC 842, as discussed within Note 13 to the audited Consolidated Financial Statements included elsewhere in this document, amortization of theESA 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 Consolidated Financial Statements.
(3)These fees relate to advisor and legal costs incurred for advice pertaining to an alternative debt transaction that was abandoned in the fourth quarter of 2021 and an alternative equity transaction that was abandoned in the fourth quarter of 2022. (4)Executive transition costs represent costs associated with the search for the Company's new CFO during the third quarter of 2021, the search for the company's CEO in 2019, and CEO transitions costs incurred in 2018.
(5)The impairment of long-lived assets primarily relates to the write down of certain internally developed software no longer in use.
(6)Sales force reorganization costs represents redundancy costs associated with changes to the Company's sales force implemented during the first quarter of 2022.
(7)Advisor and legal fees incurred in connection with the Company's involvement in the Cineworld Proceeding during the third and fourth quarter of 2022.
Summary Operating Data
Our Operating Data-The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data).
50 --------------------------------------------------------------------------------
Years Ended % Change Dec. 29, Dec. 30, ($ in millions) 2022 2021 2022 to 2021 Revenue$ 249.2 $ 114.6 117.5 % Operating expenses: Advertising operating costs 27.2 18.4 47.8 % Network costs 8.4 7.4 13.5 %
Theater access fees and revenue share to founding members 82.3
51.1 61.1 % Selling and marketing costs 42.8 34.7 23.3 % Administrative and other costs 44.3 36.0 23.1 % Impairment of long-lived assets 5.8 0.0 100.0 % Depreciation expense 6.5 10.9 (40.4) % Amortization of intangibles recorded for network theater screen leases 25.0 24.7 1.2 % Total operating expenses 242.3 183.2 32.3 % Operating income (loss) 6.9 (68.6) (110.1) % Non-operating expense 73.1 49.8 46.8 % Income tax expense - - - % Net loss attributable to noncontrolling interests (37.5) (69.7) (46.2) % Net loss attributable to NCM, Inc.$ (28.7) $ (48.7) (41.1) % Net loss per NCM, Inc. basic share$ (0.35) $ (0.61) (42.6) % Net loss per NCM, Inc. diluted share$ (0.35) $ (0.61) (42.6) % Adjusted OIBDA$ 57.3 $ (24.7) (332.0) % Adjusted OIBDA margin 23.0 % (21.6) % 44.6 % Total theater attendance (in millions) (1) 394.8 250.7 57.5 % (1)Represents the total attendance withinNCM LLC's advertising network, excluding screens and attendance associated with AMC Carmike theaters that are currently part of another cinema advertising network for each of the periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
Our Network-The net screens added to our network by the founding members and network affiliates during 2022 were as follows.
Number of screens Founding Members Network Affiliates Total Balance as of December 30, 2021 16,436 4,304 20,740 Lost affiliates, net of new affiliates (1) - (291) (291) Closures, net of openings (2) (374) 20 (354) Balance as of December 29, 2022 16,062 4,033 20,095 (1)Represents the loss of four of our affiliates, partially offset by the gain of one affiliate during 2022 resulting in a net reduction of 291 affiliate screens to our network as ofDecember 29, 2022 . (2)Represents the closure of 354 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 theU.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 51 --------------------------------------------------------------------------------
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
Prior to the completion of our IPO,NCM LLC was wholly-owned by its founding members. In connection with the offering,NCM, Inc. purchased newly issued common membership units fromNCM LLC and common membership units fromNCM LLC's founding members and became a member of and the sole manager ofNCM LLC . We entered into several agreements to effect the reorganization and the financing transaction and certain amendments were made to the existing ESAs to govern the relationships amongNCM LLC and NCM LLC's founding members after the completion of these transactions. The results of operations data discussed herein were derived from the audited Consolidated Financial Statements and accounting records ofNCM, Inc. and should be read in conjunction with the notes thereto. We have a 52-week or 53-week fiscal year ending on the first Thursday afterDecember 25 . Fiscal year 2022 contained 52 weeks and fiscal year 2021 contained 52 weeks. Our 2023 fiscal year will contain 52 weeks. Throughout this document, we refer to our fiscal years as set forth below: Reference in Fiscal Year Ended this Document December 29, 2022 2022 December 30, 2021 2021 Results of Operations Fiscal Years 2022 and 2021 Revenue. Total revenue increased$134.6 million , or 117.5%, from$114.6 million for 2021 to$249.2 million for 2022. The following is a summary of revenue by category (in millions): Fiscal Year $ Change % Change 2022 2021 2021 to 2022 2021 to 2022 National advertising revenue$ 187.1 $ 84.2 $ 102.9 122.2 % Local and regional advertising revenue 43.5 19.3 24.2 125.4 %
Founding member advertising revenue from beverage
concessionaire agreements 18.6 11.1 7.5 67.6 % Total revenue$ 249.2 $ 114.6 $ 134.6 117.5 %
The following table shows data on revenue per attendee for 2022 and 2021:
Fiscal Year
% Change
2022 2021 2021 to 2022 National advertising revenue per attendee$ 0.474 $ 0.336 41.1 %
Local and regional advertising revenue per attendee
43.1 %
Total advertising revenue (excluding founding member
beverage revenue) per attendee$ 0.584 $ 0.413 41.5 % Total advertising revenue per attendee$ 0.631 $ 0.457 38.1 % Total theater attendance (in millions) (1) 394.8 250.7 57.5 %
(1)Represents the total attendance within
National advertising revenue. National advertising revenue increased by$102.9 million , or 122.2%, from$84.2 million in 2021 to$187.1 million in 2022. The increase was due to a significant increase in impressions sold and a 15.4% increase in national advertising CPMs during 2022, compared to 2021. The increase in impressions sold was primarily due to a 57.5% increase in network attendance and a 42.5% increase in national advertising utilization due in part to the Company's ability to participate in the 2022 upfront marketplace, as compared to 2021 when the theaters were closed, and the return of advertisers to the network for the full year of 2022. 52 -------------------------------------------------------------------------------- Local and regional advertising revenue. Local and regional advertising revenue increased by$24.2 million , or 125.4%, from$19.3 million in 2021 to$43.5 million in 2022. The increase in local and regional advertising revenue was due primarily to the closure of approximately 40% of our network for three of months in 2021 due to the COVID-19 Pandemic. The increase was also driven by an increase in advertiser demand in 2022, compared to 2021, following a significant increase in network attendance primarily due to an improved movie slate. Founding member beverage revenue. National advertising revenue from the founding members' beverage concessionaire agreement increased$7.5 million , or$67 .6%, from$11.1 million for 2021 to$18.6 million for 2022. The increase was due to a 59.4% increase in founding member attendance in 2022, compared to 2021. The increase was also due to contractual increases in the beverage revenue CPMs in 2022, compared to 2021. Operating expenses. Total operating expenses increased$59.1 million , or 32.3%, from$183.2 million for 2021 to$242.3 million for 2022. The following table shows the changes in operating expense for 2021 and 2022 (in millions): Fiscal Year $ Change % Change 2022 2021 2021 to 2022 2021 to 2022 Advertising operating costs$ 27.2 $ 18.4 $ 8.8 47.8 % Network costs 8.4 7.4 1.0 13.5 % Theater access fees and revenue share-founding members 82.3 51.1 31.2 61.1 % Selling and marketing costs 42.8 34.7 8.1 23.3 % Administrative and other costs 44.3 36.0 8.3 23.1 % Impairment of long-lived assets 5.8 - 5.8 100.0 % Depreciation expense 6.5 10.9 (4.4) (40.4) % Amortization of intangibles recorded for network theater screen leases 25.0 24.7 0.3 1.2 % Total operating expenses$ 242.3 $ 183.2 $ 59.1 32.3 % Advertising operating costs. Advertising operating costs increased$8.8 million , or 47.8%, from$18.4 million in 2021 to$27.2 million in 2022. The increase was due primarily to an$8.9 million increase in advertising affiliate and partner expense in 2022, as compared to 2021, and a$0.4 million increase in personnel related costs due to the reinstatement of full salaries to all employees in the first quarter of 2022, as compared to 2021 when temporary salary and wage reductions were in place for the full year. Network costs. Network costs increased$1.0 million , or 13.5%, from$7.4 million in 2021 to$8.4 million in 2022. The increase was primarily related to a$1.0 million increase in personnel related costs primarily due to the reinstatement of full salaries to all employees in the first quarter of 2022, as compared to 2021 when temporary salary and wage reductions were in place for the full year. Theater access fees and revenue share-founding members. Theater access fees and revenue share increased$31.2 million , or 61.1%, from$51.1 million in 2021 to$82.3 million in 2022. This increase consisted of a$16.9 million increase due to the 59.4% increase in founding member theater attendance in 2022, as compared to 2021, and a$11.3 million increase due to the 25.8% increase in average active screens in 2022, as compared to 2021. This increase was also due to a$1.7 million increase in Platinum Spot revenue share for 2022, as compared to 2021. Selling and marketing costs. Selling and marketing costs increased$8.1 million , or 23.3%, from$34.7 million in 2021 to$42.8 million in 2022. This increase was primarily related to a$4.9 million increase in personnel related costs due primarily to an increase in performance based compensation expense due to higher revenue in 2022, as compared to 2021, and an increase due to the reinstatement of full salaries to all employees in the first quarter of 2022, as compared to 2021 when temporary salary and wage reductions were in place for the full year. The increase was also due to a$2.2 million increase in selling related expenses driven by increased marketing activity, a$1.1 million increase in bad debt expense driven by the increase in revenue and a$0.5 increase in software costs. These increases were partially offset by a$0.7 million decrease in non-cash barter expense in 2022, as compared to 2021. 53 -------------------------------------------------------------------------------- Administrative and other costs. Administrative and other costs increased$8.3 million , or 23.1%, from$36.0 million in 2021 to$44.3 million in 2022. This increase was primarily due to a$5.1 million increase in legal and professional fees incurred related to the Cineworld Proceeding in 2022. Administrative and other costs also increased$1.3 million due to a decrease in capitalized labor due to the nature of the work performed by our technology department in 2022, as compared to 2021, and the reinstatement of full salaries to all employees in the first quarter of 2022, as compared to 2021 when temporary salary and wage reductions were in place for the full year. The increase was also due to a$0.8 million increase in corporate expenses, a$0.4 million increase in cloud computing expense related to our cinema advertising management system, a$0.4 million increase in other business taxes due to changes in state tax laws in 2022, as compared to 2021, and a$0.3 million increase in legal and professional fees due to an abandoned equity transaction in 2022. Impairment of long-lived assets. Impairment of long-lived assets increased$5.8 million , or 100.0%, from$0.0 million in 2021 to$5.8 million in 2022. This increase in impairment expense consisted of the write-off of certain long-lived assets during the first quarter of 2022.
Depreciation expense. Depreciation expense decreased
Amortization of intangibles recorded for network theater screen leases.
Amortization of intangibles recorded for network theater screen leases increased
Non-operating expense. Total non-operating expense increased
Fiscal Year $ Change % Change 2022 2021 2021 to 2022 2021 to 2022 Interest on borrowings$ 79.7 $ 64.8 $ 14.9 23.0 %
(Gain) Loss on modification and retirement of debt, net
(5.9) 1.2 (7.1) (591.7) %
Loss (Gain) on re-measurement of the payable to
founding members under the tax receivable
agreement 2.2 (16.1) 18.3 (113.7) % Gain on sale of asset (2.2) - (2.2) 100.0 % Other non-operating income (0.7) (0.1) (0.6) 600.0 % Total non-operating expense$ 73.1 $ 49.8 $ 23.3 46.8 % The increase in non-operating expense was primarily due to a$14.9 million increase in interest on borrowings primarily related to the increase in the weighted average interest rate from 5.6% in 2021 to 7.3% in 2022. It is also due to the issuance of the Revolving Credit Agreement 2022 in January of 2022 and a$16.1 million gain compared to a$2.2 million loss for the re-measurement of the payable to founding members under the tax receivable agreement for 2021 and 2022, respectively. These increases were partially offset by a$7.1 million increase in the gain on the modification and retirement debt driven byNCM, Inc.'s purchase of$25.8 million of the Notes due 2028 on the open market in the second quarter of 2022, a$2.2 million increase in the gain on sale of assets and a$0.6 increase in other non-operating income in 2022, as compared to 2021.
Known Trends and Uncertainties
COVID-19 and Other Macroeconomic Factors-As discussed within the 'Recent Developments' section, due to the COVID-19 Pandemic certain theaters within the Company's network were temporarily closed during a portion of 2021. The Company's ability to advertise within theaters once opened in 2021 was limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of new major motion picture releases as compared to prior years due to the COVID-19 Pandemic. In 2022, attendance levels increased but remained below historical levels due to post-production delays and changes in major motion picture release schedules. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or revenue, and therefore, were not incurred when theaters were closed and attendance-based fees were reduced for the period of time that attendance was lower than historical levels. 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. However, we continue to monitor the situation and its potential impacts on our financial position, results of operations, liquidity and cash flows. 54 -------------------------------------------------------------------------------- Cineworld Proceeding-As discussed within the 'Recent Developments' section, onSeptember 7, 2022 , Cineworld Group plc, the parent company of Regal, and certain of its subsidiaries, including Regal,Regal Cinemas, Inc. , a party to theESA , andRegal CineMedia Holdings, LLC , a party to other agreements withNCM LLC andNCM, Inc. , filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in theSouthern District ofTexas . OnOctober 21, 2022 , Regal filed a motion to reject theESA 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 theESA by entering into a new agreement with a third-party or bringing any of the services performed byNCM LLC in-house. OnFebruary 1, 2023 , Cineworld filed a motion for summary judgment onNCM LLC's adversary proceeding with a hearing scheduled during the second quarter of 2023. The timing of the hearing could be impacted by the Chapter 11 Case. Although there can be no assurances thatNCM LLC's proceeding for declaratory relief will be successful, the Company believes these exclusivity rights will survive any attempted rejection of theESA by Regal in the bankruptcy proceeding. As of the filing date, the Company continues to negotiate with Regal regarding theESA andNCM LLC's provision of advertising services. In the event thatNCM LLC's orNCM, 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. 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 2022 and 2021, 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 theESA with AMC, the time sold to the founding member beverage supplier is priced equal to the greater of (1) the advertising CPM charged byNCM 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 byNCM 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 byNCM LLC . Beginning in 2020 and in accordance with the 2019ESA 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 forNCM 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% onNovember 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 2019ESA Amendments, Cinemark and Regal each receive an additional monthly theater access fee beginningNovember 1, 2019 in consideration forNCM 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: (i)$0.0375 per patron beginning onNovember 1, 2020 , (ii)$0.05 per patron beginning onNovember 1, 2021 , (iii)$0.052 per patron beginning onNovember 1, 2022 and (iv) increasing 8% every five years beginningNovember 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. IfNCM LLC runs advertising in more than one concurrent advertisers' Platinum Spot for any portion of the network over a period of time, thenNCM 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 onApril 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-leverNCM LLC's balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain ofNCM LLC's andNCM, Inc.'s activity, as its manager, are subject to review and approval by theBankruptcy 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 guaranteeNCM 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 theBankruptcy Court . See Note 16-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.
55 -------------------------------------------------------------------------------- We have concluded that our financial condition and projected operating results, the defaults underNCM LLC's debt agreements subsequent toDecember 29, 2022 , and the risks and uncertainties surroundingNCM 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 restructureNCM LLC's balance sheet,NCM LLC's expected cash outflows related to interest payments onNCM LLC's debt in 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. We are unable to predict whenNCM 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 theBankruptcy Court's approval of a Chapter 11 plan of reorganization, which will enableNCM 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 andBankruptcy Court decisions ongoing through the date on which such plan is confirmed.NCM LLC is a highly leveraged company.NCM, Inc.'s current primary source of liquidity is cash flow generated from the Management Services Agreement ofNCM, 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 thatNCM 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 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 theNCM LLC operating agreement) to Cinemark, 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 toNCM, Inc.'s common stockholders. As discussed within the 'Recent Developments' section, due to the COVID-19 Pandemic and other macroeconomic factors, the Company's ability to advertise within the reopened theaters in 2021 and 2022 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 balance. 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, the screen-based portion of these expenses returned to historical levels and the attendance-based portion of these expenses 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: •Offered the option for members of the Company's Board of Directors to receive the cash retainers beginning with the first quarter of 2021 in equivalent value of the Company's common stock in lieu of cash;
•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, which results in cash savings of
56 --------------------------------------------------------------------------------
in the fourth quarter of 2022 and cash savings of
•Introduced an active cash management process, which, among other things, requires CEO or CFO approval of all outgoing payments.
InMarch 2020 , we drew down an additional$110.0 million on our revolving credit facility, inMarch 2021 , we received$43.0 million in net proceeds under incremental term loans that mature onDecember 20, 2024 , and inJanuary 2022 we received$43.3 million in net proceeds under an incremental revolving credit facility that matures onJune 20, 2023 . The$59.4 million of cash atNCM LLC as ofDecember 29, 2022 will be used to fund operations during the period of expected reduced cash flows. Cash atNCM, Inc. is held for future payment of dividends toNCM, Inc. stockholders, income tax payments, income tax receivable payments toNCM LLC's founding members and other obligations. OnJanuary 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 endingDecember 29, 2022 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 aboutMarch 30, 2023 , 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or aboutJune 29, 2023 , 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or aboutSeptember 28, 2023 , and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or aboutDecember 28, 2023 and each fiscal quarter thereafter. Also onJanuary 5, 2022 ,NCM LLC also entered into the Revolving Credit Agreement 2022 amongNCM LLC , the lenders party thereto andWilmington 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 onJanuary 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 ofJune 20, 2023 and (iii) a termination premium ifNCM 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, for the period beginning in the second quarter of 2020 through the date thatNCM 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 underNCM LLC's revolving credit facility (the "Minimum Liquidity Requirement"). As ofDecember 29, 2022 ,NCM LLC was in compliance with the requirements of the Credit Agreement, as amended, and the Revolving Credit Agreement 2022.
A summary of our financial liquidity is as follows (in millions):
Years Ended $ Change 2021 to December 29, 2022 December 30, 2021 2022 Cash, cash equivalents and marketable securities (1) $ 62.7 $ 102.5$ (39.8) Revolver availability (2) 7.2 6.8 0.4 Total liquidity $ 69.9 $ 109.3$ (39.4) (1)Included in cash and cash equivalents as ofDecember 29, 2022 andDecember 30, 2021 there was$59.4 million and$58.6 million , respectively, of cash held byNCM LLC which is not available to satisfyNCM, Inc.'s dividend payments and otherNCM, Inc. obligations. (2)The revolving credit facility portion ofNCM LLC's total borrowings is available, subject to certain conditions, for general corporate purposes ofNCM 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 was$175.0 million as ofDecember 29, 2022 andDecember 30, 2021 . As ofDecember 29, 2022 andDecember 30, 2021 , the amount available under theNCM LLC revolving credit facility in the table above, was net of the amount outstanding under the revolving credit facility of$167.0 million and$167.0 million , respectively, and net letters of credit of$0.8 million and$1.2 million , respectively. Subsequent to year-end, onJanuary 17, 2023 ,NCM LLC entered into (i) Amendment No. 4 (the "Credit Agreement Fourth Amendment") to its Credit Agreement, dated as ofJune 20, 2018 , amongNCM LLC , the several banks and other financial institutions or entities from time to time parties thereto, andJPMorgan Chase Bank, N.A ., as administrative agent, as previously amended and (ii) Amendment No. 1 to its Revolving Credit Agreement dated as ofJanuary 5, 2022 , among NCM 57 -------------------------------------------------------------------------------- LLC, lender parties thereto andWilmington Savings Fund Society , FSB, as administrative agent (the "Revolving Credit Agreement Amendment"). The Credit Agreement Fourth Amendment and Revolving Credit Agreement Amendment provide for the addback of specified professional fees paid byNCM LLC during the period ofJanuary 6, 2023 through the dateNCM LLC delivers a compliance certificate for the quarter ending on or aboutDecember 28, 2023 , when calculating the sum of unrestricted cash on hand at theNCM LLC and revolving credit facility availability under the Credit Agreement and Revolving Credit Agreement required to be maintained under each respective agreement.
We have generated and used cash as follows (in millions):
Years Ended 2022 2021 Operating cash flow$ (47.3) $ (95.2) Investing cash flow$ (0.4) $ (5.4) Financing cash flow$ 10.3 $ 21.5
Cash Flows - Fiscal Years 2022 and 2021
Operating Activities. The$47.9 million decrease in cash used in operating activities in 2022, as compared to 2021 was primarily due to 1) a$52.3 million decrease in consolidated net loss, 2) an$18.2 million decrease in non-cash gain on re-measurement of the payable founding members under the TRA, 3) an$11.9 million decrease in payments for accounts payable and accrued expenses due in part to the cash preservation and expense management actions taken by the Company to mitigate the impact of the COVID-19 Pandemic and 4) a$7.1 million increase in gain on early retirement of debt, net. The decrease in cash used was partially offset by 1) a$12.3 million decrease in deferred revenue due to timing of payments in 2022, as compared to 2021, 2) a$9.9 million decrease in amounts due to founding members, net, 3) a$9.3 million decrease in amounts received from founding members related to common membership unit adjustments 4) a$5.8 million increase in the impairment of long-lived assets related to the write down in the first quarter of 2022 of certain internally developed software no longer in use and 5) a$4.8 million increase in the amortization of debt issuance costs in 2022, as compared to 2021.
Investing Activities. The
Financing Activities. The$11.2 million decrease in cash provided by financing activities in 2022, compared to 2021 was primarily due to a$19.8 million increase in the purchase of Notes due 2028 and a$0.9 million increase in the repayment of term loan facilities in 2022, as compared to 2021. These increases were partially offset by a$7.4 million decrease in dividends paid related to the decrease in the dividends declared from$0.20 per share to$0.11 per share in 2022, as compared to 2021, a$1.8 million decrease in purchases of stock for restricted stock tax withholding and a$0.3 million decrease in debt issuance costs paid in 2022, as compared to 2021.
Sources of Capital and Capital Requirements
NCM, Inc.'s primary source of liquidity and capital resources is the quarterly available cash distributions fromNCM LLC as well as its existing cash balances and marketable securities, which as ofDecember 29, 2022 were$62.7 million (including$59.4 million of cash held byNCM LLC ).NCM LLC's primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its revolving credit facility and cash on hand.NCM LLC drew down an additional$110.0 million of its revolving credit facility inMarch 2020 in order to supplement the decrease in cash provided by operating activities during the period our network theaters were closed. OnJanuary 5, 2022 , the company entered in the Revolving Credit Agreement 2022 and drew down upon the revolving credit facility of$50.0 million . Cash atNCM, Inc. is used to fund income taxes, payments associated with the TRA with the founding members, payments ofNCM, Inc. specific expenses, purchases of low risk investments and for future payment of dividends toNCM, Inc. stockholders. Refer to Note 10 to the audited Consolidated Financial Statements included elsewhere in this document and "Financings" below for a detailed discussion of the debt transactions in 2021 and 2022 and the debt outstanding as ofDecember 29, 2022 . During the next fiscal year, the Company intends to have cash outflows of interest payments of$85.0 million and amortization payments of$4.0 million payable throughout the fiscal year as required by the Credit Agreement, Revolving Credit Agreement 2022, Senior Secured Notes due 2028 and Senior Notes due 2026, capital expenditures between$7.0 million and$8.0 million , prepayments to affiliates of$3.9 million and lease payments of$3.8 million . The Company expects to continue to make capital expenditures and other contractually obligated prepayments and upfront payments that may vary from our historical practice. For other long-term anticipated cash outflows, refer to Note 10 - Borrowings and Note 13 - Commitments and Contingencies for discussion of future anticipated payments. 58 -------------------------------------------------------------------------------- Cash flows generated byNCM LLC's distributions toNCM, Inc. and the founding members have been impacted by the COVID-19 Pandemic and may be deferred through at least the quarter endingDecember 28, 2023 or longer due to the limitations instituted by the Credit Agreement Amendment, Credit Agreement Second Amendment (as defined herein) and Credit Agreement Third Amendment.NCM LLC is required pursuant to the terms of theNCM LLC Operating Agreement to distribute its available cash, as defined in the operating agreement, unless prohibited byNCM LLC's Credit Agreement, quarterly to its members (Cinemark and NCM, Inc. ). The available cash distribution to the members ofNCM LLC for the combined three months endedMarch 31, 2022 , three months endedJune 30, 2022 , three months endedSeptember 29, 2022 and three months endedDecember 29, 2022 was calculated as approximately negative$20.5 million , of whichNCM, Inc.'s share is approximately negative$5.2 million . Pursuant to theNCM LLC Operating Agreement and the Credit Agreement Amendment, there were no available cash distributions made for the fourth quarter of 2022. As such, the positive available cash distribution for the fourth quarter of 2022 has been accrued for within "Amounts due to founding members, net" on the audited Consolidated Balance Sheet ofDecember 29, 2022 . 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 theNCM 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 a TRA payment for the 2022 tax year. The Company will also consider opportunistically using cash received for partial repayments ofNCM LLC's outstanding debt balance, while ensuring the Company's financial flexibility is maintained. Distributions fromNCM LLC andNCM, 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 pay a regular dividend at the discretion of the Board of Directors consistent with the Company's intention to distribute substantially all its free cash flow to stockholders through its quarterly dividend. The declaration, payment, timing and amount of any dividends payable will be at the sole discretion of the Board of Directors who will take into account general economic and advertising market business conditions, the Company's financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant, which includes short-term and long-term impacts to the Company related to the COVID-19 Pandemic and restrictions under theNCM LLC Credit Agreement.
Capital Expenditures
Capital expenditures ofNCM LLC include digital applications being developed primarily by our programmers and outside consultants, capitalized software development or upgrades for ourDigital Content Software , audience targeting and data management systems, cinema advertising management system, equipment required for our Customer Experience Center and content production and post-production facilities, office leasehold improvements, desktop equipment for use by our employees, and in certain cases, the costs necessary to install equipment at or digitize all or a portion of a network affiliate's theaters when they are added to our network. Capital expenditures in 2022 were$4.2 million (including$1.9 million associated with digital product development;$0.9 million associated with upgrades to our existing systems related to the continued upgrades of our cinema advertising management system;$0.4 million associated with network affiliate additions and$0.1 million associated with certain implementation and prepaid costs associated with Cloud Computing arrangements) compared to$6.5 million for the 2021 period (including$1.7 million associated with digital product development;$1.6 million associated with upgrades to our existing systems related to the upgrade of our cinema advertising management system;$1.5 million associated with certain implementation and prepaid costs associated with Cloud Computing arrangements; and$0.6 million associated with network affiliate additions). The capital expenditures have typically been satisfied through cash flow from operations. All capital expenditures related to the DCN within the founding members' theaters have been made by the founding members under the ESAs. We expect they will continue to be made by the founding members in accordance with the ESAs. We expect to make approximately$7.0 million to$8.0 million of capital expenditures in fiscal 2023, including approximately$2.4 million for digital product development. We expect these digital products to allow us to capture exclusive first party data on our movie audiences and build our own foundational capabilities for digital ad buying, selling and serving. We also expect approximately$1.0 million of capital expenditures related to upgrades to ourDigital Content Software distribution and content management software and our other internal management systems, including our cinema advertising management system, reporting systems, network equipment related to currently contracted network affiliate theaters, server and storage upgrades and software licensing. Our capital expenditures may increase as we add additional network affiliates. We expect that additional expenditures, if any, would be funded in part by additional cash flows associated with those new network affiliates.
Financings
OnJanuary 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 59 -------------------------------------------------------------------------------- leverage financial covenants through the fiscal quarter endingDecember 29, 2022 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 aboutMarch 30, 2023 , 8.50 to 1.00 and 6.50 to 1.00, respectively, for the fiscal quarter ending on or aboutJune 29, 2023 , 8.00 to 1.00 and 6.00 to 1.00, respectively, for the fiscal quarter ending on or aboutSeptember 28, 2023 , and 6.25 to 1.00 and 4.50 to 1.00, respectively, for the fiscal quarter ending on or aboutDecember 28, 2023 and each fiscal quarter thereafter. Also onJanuary 5, 2022 ,NCM LLC entered into the Revolving Credit Agreement 2022. 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 onJanuary 5, 2022 . The Revolving Credit Agreement 2022 provides for (i) a cash interest rate of term SOFR plus 8.0%, with a 1.0% floor, (ii) a maturity date ofJune 20, 2023 and (iii) a termination premium ifNCM 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. As ofDecember 29, 2022 ,NCM LLC was in compliance with the requirements of the Credit Agreement Third Amendment and the Revolving Credit Agreement 2022. OnMarch 8, 2021 ,NCM LLC entered into a second amendment to its Credit Agreement ("the Credit Agreement Second Amendment"), dated as ofJune 20, 2018 . Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants;(ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter endedJune 30, 2022 ; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or aboutSeptember 29, 2022 , and (iv) with respect toNCM LLC's audited financial statements for the fiscal year endedDecember 30, 2021 , a waiver of the requirement to deliver such financial statements without a "going concern" or like qualification or exception. The Credit Agreement Second Amendment also: (i) grants security interests in certain assets ofNCM LLC and other potential loan parties that are not currently pledged to the lenders and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%. Additionally, pursuant to the terms of the Credit Agreement Second Amendment,NCM LLC is restricted from making available cash distributions until afterNCM LLC delivers a compliance certificate for the quarter ending on or aboutDecember 29, 2022 , and, thereafter,NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is$39.0 million or less. In addition, pursuant to the Credit Agreement Second Amendment,NCM LLC incurred new incremental term loans in an aggregate principal amount of$50.0 million , the proceeds of which will be used for general corporate purposes. The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Amendment), except that the New Incremental Loans will: (i) have a cash interest rate of LIBOR plus 8.00%, (ii) have a maturity ofDecember 20, 2024 , and (iii) be subject to prepayment premiums ifNCM LLC prepays the New Incremental Loans before maturity. In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement,NCM LLC concurrently entered into an amendment to the Security Agreement, dated as ofOctober 8, 2019 made byNCM LLC , as issuer, in favor ofJPMorgan Chase Bank, N.A ., as collateral agent, relating to that certain Indenture, dated as ofOctober 8, 2019 , betweenNCM LLC , as issuer andWells Fargo Bank, National Association , as trustee, relating toNCM LLC's Senior Secured Notes due 2028. This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes. OnApril 30, 2020 ,NCM LLC entered into the first amendment to the Credit Agreement (the "Credit Agreement Amendment") to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter endingJune 25, 2020 until and including the quarter endingJuly 1, 2021 (the "Covenant Holiday Period"). The Credit Agreement Amendment requires that, until the fiscal quarter endingJuly 1, 2021 ,NCM LLC must not permit the sum of unrestricted cash on hand atNCM LLC and availability under its revolving credit facility to be less than$55.0 million . Further,NCM LLC can make available cash distributions to its members (Cinemark and NCM, Inc. ) during the Covenant Holiday Period only if trailing 12-month Consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds$277.0 million and outstanding loans under the revolving credit facility are equal to or less than$39.0 million .NCM LLC can make available cash distributions to its members outside of the Covenant Holiday Period so long asNCM LLC's Consolidated Net Senior Secured Leverage Ratio is equal to or less than 5.00 to 1.00 and no default or event of default under the Credit Agreement has occurred and is continuing. OnOctober 8, 2019 ,NCM LLC completed a private offering of$400.0 million aggregate principal amount of 5.875% senior secured notes due 2028. The 2028 Notes will mature onApril 15, 2028 . Interest on the 2028 Notes accrues at a rate of 5.875% per annum and is payable semi-annually in arrears onApril 15 andOctober 15 of each year, commencing onApril 15 , 60 -------------------------------------------------------------------------------- 2020.NCM LLC will pay interest to those persons who were holders of record at the close of business on theApril 1 andOctober 1 immediately preceding the interest payment date. At any time prior toApril 15, 2023 ,NCM LLC may redeem all or any portion of the 2028 Notes at a redemption price equal to 100% of the principal amount plus a make-whole premium, plus accrued and unpaid interest, if any, to the redemption date. On or afterApril 15, 2023 ,NCM LLC may redeem all or any portion of the 2028 Notes at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior toApril 15, 2023 ,NCM LLC may on any one or more occasions redeem up to 35% of the original aggregate principal amount of the 2028 Notes from the net proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the original aggregate principal amount of the 2028 Notes remains outstanding after each such redemption and the redemption occurs within 90 days after the closing of such applicable equity offering. InJune 2018 , we entered into the Credit Agreement to replaceNCM LLC's previous senior secured credit facility. Consistent with the structure of the previous facility, the Credit Agreement consists of a term loan facility and a revolving credit facility for$270.0 million and$175.0 million , respectively. The Credit Agreement extended the maturity dates by 5.5 years toJune 20, 2025 for the term loan facility and 3.5 years toJune 20, 2023 for the revolving credit facility. The interest rate under the term loan facility is either the LIBOR index plus 4.00% or the base rate plus 3.00% and the rate under the revolving credit facility is either the LIBOR index plus an applicable margin ranging from 3.00%-3.50% or the base rate plus an applicable margin ranging from 2.00%-2.50%. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio forNCM LLC . As ofDecember 29, 2022 ,NCM LLC's senior secured credit facility consisted of a$175.0 million revolving credit facility, a$258.5 million term loan (first tranche) and a$49.3 million term loan (second tranche). As ofDecember 29, 2022 , the weighted average remaining maturity was 3.2 years. As ofDecember 29, 2022 , approximately 54% of our total borrowings bear interest at fixed rates. The remaining 46% of our borrowings bear interest at variable rates and as such, our net income and earnings per share could fluctuate with market interest rate fluctuations that could increase or decrease the interest paid on our borrowings. Critical Accounting Estimates The significant accounting policies of the Company are described in Note 1 to the audited Consolidated Financial Statements included elsewhere in this document. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances and are evaluated on an ongoing basis. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Allowance for Doubtful Accounts
Nature of Estimates Required. The allowance for doubtful accounts represents management's estimate of probable credit losses inherent in its trade receivables, which represent a significant asset on the balance sheet. Estimating the amount of the allowance for doubtful accounts requires significant judgment and the use of estimates related to the amount and timing of estimated losses based on historical loss experience, consideration of current economic trends and conditions and debtor-specific factors, all of which may be susceptible to significant change. Amounts deemed uncollectible within the account receivable balance are charged against the allowance, while recoveries of amounts previously charged are credited to the allowance. A provision for bad debt is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. To the extent actual outcomes differ from management estimates, additional provision for bad debt could be required that could adversely affect earnings or financial position in future periods. Sensitivity Analysis. As ofDecember 29, 2022 , our allowance for doubtful accounts was$1.7 million , or 1.8% of the gross accounts receivable balance. A 10% difference in the allowance for doubtful accounts as ofDecember 29, 2022 would have affected net loss attributable toNCM, Inc. by approximately$0.2 million .
Valuation of Intangible Assets
In accordance with ASC 360 - Property, Plant and Equipment, we evaluate intangible assets and other long-lived assets for impairment whenever a triggering event occurs indicating that they may not be recoverable. Recoverability is assessed by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized equal to the difference between the carrying amount and the fair value of the asset group. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. In order to develop future undiscounted net cash flows, we utilize estimates and assumptions based on historical data and 61 -------------------------------------------------------------------------------- consideration of future market conditions while incorporating management's expectations as of the balance sheet date. Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in impairment charges.
Share-Based Compensation
Nature of Estimates Required.NCM, Inc.'s 2020 Omnibus Equity Incentive Plan, 2016 Equity Incentive Plan and its 2007 Equity Incentive Plan, as amended (the "Equity Incentive Plans") are treated as equity plans under the provisions of ASC 718 - Compensation - Stock Compensation, and the determination of fair value of options, restricted stock and restricted stock units for accounting purposes requires that management make estimates and judgments. Stock options are granted using the Black-Scholes option pricing model to estimate the fair value of stock option grants, which was affected by our stock price and a number of assumptions, including expected term, expected volatility, risk-free interest rate and expected dividends. The fair value of restricted stock and restricted stock units are based on the closing market price of our common stock on the date of grant. Restricted stock and restricted stock units granted to employees vest upon the achievement of Company two or three-year performance measures and service conditions consisting of individual year performance measures or only service conditions whereby they vest ratably over two or three years. Restricted stock units granted to non-employee directors usually vest after the completion of a service period of thirteen months. Compensation expense equal to the fair value of each restricted stock award or restricted stock unit is recognized ratably over this requisite service period once the performance-based metric has been determined, if applicable. For the restricted stock awards including performance vesting conditions, compensation expense is based on management's projections and the probability of achievement of those targets, which requires considerable judgment. We record a cumulative adjustment to share-based compensation expense in periods that we change our estimate of the number of shares expected to vest. Additionally, we ultimately adjust the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Further, we estimate a forfeiture rate to reflect the potential separation of employees. Assumptions and Approach Used. In determining the value of stock options, we estimated an expected term based upon historical actuals and company peer actuals and adjusted it by the cost of equity in order to incorporate the impact of the market condition and the expected dividend yield based upon our expectation of the dividend that would be paid out on the underlying shares during the expected term of the option. Expected volatility is based on our historical stock prices using a mathematical formula to measure the standard deviation of the change in the natural logarithm of our underlying stock price over a period of time commensurate with the expected term. The risk-free interest rate is derived from the zero coupon rate onU.S. Treasury instruments with a term commensurate with the award's expected term. For restricted stock with vesting contingent on the achievement of Company performance conditions, the amount of compensation expense is estimated based on the expected achievement of the performance condition. This requires us to make estimates of the likelihood of the achievement of Company performance conditions, which is highly judgmental. We base our judgments as to the expected achievement of Company performance conditions based on the financial projections of the Company that are used by management for business purposes, which represent our best estimate of expected Company performance. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of stock-based awards, we may be required to accelerate, increase or decrease any remaining, unrecognized stock-based compensation expense. To the extent that we grant additional stock-based awards, compensation expense will increase in relation to the fair value of the additional grants. Compensation expense may be significantly impacted in the future to the extent our estimates differ from actual results. Further, we estimate a forfeiture rate of restricted stock based upon historical forfeitures. If future forfeitures differ significantly from our past experience our compensation expense may be significantly impacted.
Income Taxes
Nature of Estimates Required. We account for income taxes in accordance with ASC 740 - Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the audited Consolidated Financial Statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are to be established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company generated a three-year cumulative pre-tax book loss during 2021 driven by the impact of the COVID-19 Pandemic on the Company's operations in 2020 and 2021. Given the associated weight assigned to this item as negative evidence within the Company's analysis, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company's deferred tax assets before they expire. Given the additional pre-tax book losses in 2022, we have a valuation allowance in the amount of$245.5 million against the deferred tax asset as ofDecember 29, 2022 . As we do expect to generate pre-tax book income following the complete recovery from the lingering impacts of the COVID-19 Pandemic, we have not 62 --------------------------------------------------------------------------------
recorded any impact of the Net Business Interest Expense Limitation IRC § 163(j) on our payable to founding members under the TRA.
In addition, due to the basis differences resulting from our IPO-related transactions (including the TRA with the founding members) and subsequent adjustments pursuant to the common unit adjustment agreement, we are required to make cash payments under the TRA to the founding members in amounts equal to 90% of our actual tax benefit realized from the tax amortization of the basis difference for certain deferred assets noted above. Following the increase in the valuation allowance as ofDecember 31, 2020 , the Company recorded a corresponding$151.9 million reduction to the "Payable to founding members under the tax receivable agreement" equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as ofDecember 31, 2020 . Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to founding members under the tax receivable agreement which would increase to reflect future payments to the founding members at that time. The requirements of the TRA, as amended, are highly technical and complex and involve management's judgment, including judgments to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements. Management performs thorough analysis of the estimate each quarter and upon new information or conditions will refine its estimate. If we were to fail to meet certain of the requirements of the TRA, we could be subject to additional payments to taxing authorities or to the founding members. We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the audited Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. For fiscal 2022, our provision for income taxes was$0.0 million . Changes in management's estimates and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences and judgments used to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements could impact the provision for income taxes and change the effective tax rate.
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 audited Consolidated Financial Statements included elsewhere in this document.
Related-Party Transactions
For a discussion of the related-party transactions, refer to the information provided under Note 9 to the audited Consolidated Financial Statements included elsewhere in this document.
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