# Cinemark Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2020

- Company: [Cinemark Holdings, Inc.](/companies/cnk.md) (CIK 1385280)
- Form: 10-Q
- Filed: 2020-11-05
- Accepted by EDGAR: Nov 5, 2020, 06:51 ET
- Period: 2020-09-30
- Accession: 0001564590-20-050836
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1385280/000156459020050836/cnk-10q_20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1385280/000156459020050836/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $35.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $588.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | −$210.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | −$468.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $36.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $92.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | −$121.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | −$222.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | −$147.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | −$377.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | −$1.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | −$3.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | −$1.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | −$3.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 116,707,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 116,552,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | −$167.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-07-01 to 2020-09-30 | $20.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $67.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $42.3m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2020-09-30 | $825.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $984.0m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $5.80bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $623.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2020-09-30 | $2.37bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $8.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $1.01bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,175 characters.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes and schedules included elsewhere in this report.

#### Recent Developments

The outbreak of the COVID-19 pandemic has had an unprecedented impact on the world and the movie exhibition industry. The social and economic effects are widespread, and the situation continues to evolve. As a movie exhibitor that operates spaces where patrons gather in close proximity, we have been, and continue to be, significantly impacted by protective actions taken by governmental authorities to control the spread of the pandemic. To comply with government mandates at the initial outbreak of the COVID-19 pandemic, we temporarily closed all of our theatres in the U.S. and Latin America effective March 17, 2020 and March 18, 2020, respectively. In conjunction with the temporary closure of our theatres in March 2020, we implemented temporary personnel and salary reductions, halted non-essential operating and capital expenditures, and negotiated modified timing and/or abatement of contractual payments with landlords and other major suppliers until our theatres reopened.

As of September 30, 2020, we had reopened 252 of our domestic theatres and 15 of our international theatres showing limited volume of new releases along with library content during reduced operating hours. While some staffing has been brought back to pre-COVID-19 levels given the theatre reopenings, we continue to maintain a temporary reduction in staffing while limiting capital expenditures to essential activities and projects. We also continue to work with landlords and other vendors on extended or modified contractual payment terms while evaluating the status of the COVID-19 pandemic and local government regulations in assessing our plans to reopen our remaining theatres.

Our focus on maintaining a healthy balance sheet and low leverage allowed us to enter the global COVID-19 crisis in a strong financial position. Based on our current level of operations, we believe that we have sufficient cash to sustain operations until late 2021, which would extend into 2022 when considering the additional income tax benefits discussed at Note 2 to our condensed consolidated financial statements. Nonetheless, the COVID-19 pandemic has had, and may continue to have, adverse effects on our business, results of operations, cash flows, financial condition, access to credit markets and ability to service existing and future indebtedness, some of which may be significant.

We have elected to take advantage of certain tax-related benefits available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) signed into U.S. federal law on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss (“NOL”) utilization and carryback periods, modifications to the net interest deduction limitations and a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. Per the provisions of the CARES Act, we have deferred payment of certain employer payroll taxes for 2020 and have recorded payroll tax credits for expenses related to paying wages and health benefits to employees who were not working as a result of closures and reduced receipts associated with COVID-19.

If we receive certain government disaster relief assistance, it may be subject to certain requirements imposed by the government on the recipients of the aid including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt, incurrence of additional indebtedness and other similar restrictions until the aid is repaid or redeemed in full. However, we cannot predict the manner in which such benefits will be allocated or administered and cannot predict whether we will be able to access such benefits in a timely manner or at all.

#### General Information

We are a leader in the motion picture exhibition industry, with theatres in the U.S., Brazil, Argentina, Chile, Colombia, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Guatemala, Bolivia, Curacao and Paraguay. As of September 30, 2020, we managed our business under two reportable operating segments – U.S. markets and international markets. See Note 17 to our condensed consolidated financial statements.

We generate revenues primarily from filmed entertainment box office receipts and concession sales with additional revenues from screen advertising sales and other revenue streams, such as transactional fees, vendor marketing promotions, studio trailer placements, meeting rentals and electronic video games located in some of our theatres. We also offer alternative entertainment, such as live and pre-recorded sports programs, concert events, the Metropolitan Opera, in-theatre gaming and other special events in our theatres through AC JV, LLC. NCM provides our domestic theatres with various forms of in-theatre advertising. Our Flix Media subsidiaries provide screen advertising and alternative content for our international circuit and to other international exhibitors.

Films leading the box office during the nine months ended September 30, 2020 included *Bad Boys for Life, 1917, Sonic the Hedgehog, Jumanji: The Next Level, Star Wars: Episode IX – The Rise of Skywalker, Birds of Prey, Dolittle, Little Women, The Invisible Man* and *The Call of the Wild.* Films currently scheduled for release during the remainder of 2020 include *Wonder Woman 1984* and *Croods: A New Age,* among other films. Films scheduled for release during the remainder of 2020 could be rescheduled as a result of the COVID-19 pandemic.

Film rental costs are variable in nature and fluctuate with our admissions revenues. Film rental costs as a percentage of revenues are generally higher for periods in which more blockbuster films are released. The Company also receives virtual print fees from studios for certain of its international locations, which are included as a contra-expense in film rentals and advertising costs. Advertising costs, which are expensed as incurred, are primarily related to campaigns for new and renovated theatres, loyalty and membership programs and brand advertising that vary depending on the timing of such campaigns.

Concession supplies expense is variable in nature and fluctuates with our concession revenues and product mix. We negotiate prices for concession supplies directly with concession vendors and manufacturers to obtain volume rates.

Although salaries and wages include a fixed cost component (i.e. the minimum staffing costs to operate a theatre facility during non-peak periods), salaries and wages generally move in relation to revenues as theatre staffing is adjusted to respond to changes in attendance. In some international locations, staffing levels are also subject to local regulations.

Facility lease expense is primarily a fixed cost at the theatre level as most of our facility leases require a fixed monthly minimum rent payment. Certain leases are subject to percentage rent only, while others are subject to percentage rent in addition to their fixed monthly rent if a target annual performance level is achieved. Facility lease expense as a percentage of revenues is also affected by the number of theatres under operating leases, the number of theatres under capital and finance leases and the number of owned theatres.

Utilities and other costs include both fixed and variable costs and primarily consist of utilities, expenses for projection and sound equipment maintenance and monitoring, credit card fees, third party ticket sales commissions, property taxes, janitorial costs, repairs, maintenance and security services.

General and administrative expenses are primarily fixed in nature and consist of the costs to support the overall management of the Company, including salaries and wages, incentive compensation and benefit costs for our corporate office personnel, facility expenses for our corporate offices, consulting fees, legal fees, audit fees, travel expenses, supplies and other costs that are not specifically associated with the operations of our theatres.

### Results of Operations

The following table sets forth, for the periods indicated, certain operating data and the percentage of revenues represented by certain items reflected in our condensed consolidated statements of income.

| Operating data (in millions): Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Admissions | $14.9 | $454.5 | $307.4 | $1,371.1 |
| Concession | 9.1 | 289.5 | 199.6 | 886.1 |
| Other | 11.5 | 77.8 | 81.1 | 237.1 |
| Total revenues | $35.5 | $821.8 | $588.1 | $2,494.3 |
| Cost of operations |  |  |  |  |
| Film rentals and advertising | 8.2 | 254.9 | 165.2 | 759.7 |
| Concession supplies | 2.7 | 51.5 | 39.9 | 157.3 |
| Salaries and wages | 20.2 | 103.3 | 116.6 | 308.3 |
| Facility lease expense | 67.1 | 87.4 | 214.5 | 262.5 |
| Utilities and other | 43.3 | 123.9 | 178.7 | 357.2 |
| General and administrative expenses | 30.4 | 44.7 | 99.4 | 127.0 |
| Depreciation and amortization | 62.6 | 67.8 | 191.4 | 196.8 |
| Impairment of long-lived assets | 24.6 | 27.3 | 41.2 | 45.4 |
| Restructuring costs | 0.6 | — | 20.1 | — |
| (Gain) loss on disposal of assets and other | (13.3) | 2.5 | (11.0) | 8.1 |
| Total cost of operations | 246.4 | 763.3 | 1,056.0 | 2,222.3 |
| Operating income (loss) | $(210.9) | $58.5 | (467.9) | $272.0 |
| **Operating data as a percentage of total revenues:** |  |  |  |  |
| Revenues |  |  |  |  |
| Admissions | 42.0% | 55.3% | 52.3% | 55.0% |
| Concession | 25.6% | 35.2% | 33.9% | 35.5% |
| Other | 32.4% | 9.5% | 13.8% | 9.5% |
| Total revenues | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of operations (1) |  |  |  |  |
| Film rentals and advertising | 55.0% | 56.1% | 53.7% | 55.4% |
| Concession supplies | 29.7% | 17.8% | 20.0% | 17.8% |
| Salaries and wages | 56.9% | 12.6% | 19.8% | 12.4% |
| Facility lease expense | NM | 10.6% | 36.5% | 10.5% |
| Utilities and other | NM | 15.1% | 30.4% | 14.3% |
| General and administrative expenses | NM | 5.4% | 16.9% | 5.1% |
| Total cost of operations | NM | 92.9% | 179.6% | 89.1% |
| Operating income (loss) | NM | 7.1% | (79.6)% | 10.9% |
| Average screen count (month end average) | 5,975 | 6,084 | 6,068 | 6,064 |
| Total revenues per average screen (dollars) | NM | $135,078 | NM | $411,328 |

(1) All costs are expressed as a percentage of total revenues, except film rentals and advertising, which are expressed as a percentage of admissions revenues and concession supplies, which are expressed as a percentage of concession revenues. Certain values are considered not meaningful (“NM”) as they are not comparable due to the temporary theatre closures effective March 18, 2020.

### Three months ended September 30, 2020 versus September 30, 2019

We began reopening our domestic theatres in June 2020 and operated under a test-and-learn strategy to define training, communication, implementation and execution of enhanced health and safety protocols. These theatres opened to reduced operating hours with library content and “welcome back” pricing for tickets and concession products to encourage patrons to return to the movies. As of September 30, 2020, we had 252 domestic theatres and 15 international theatres reopened. We continue to monitor the status of the COVID-19 pandemic and local government regulations to plan the reopening of our remaining theatres.

|  | U.S. Operating Segment 2020 | 2019 | International Operating Segment 2020 (4) | 2019 | Constant Currency (3) 2020 | Consolidated 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Admissions revenues (1) | $14.9 | $351.1 | $0.1 | $103.4 | $0.1 | $15.0 | $454.5 |
| Concession revenues (1) | $8.9 | $230.4 | $0.3 | $59.1 | $0.4 | $9.2 | $289.5 |
| Other revenues (1)(2) | $10.8 | $51.5 | $0.7 | $26.3 | $0.8 | $11.5 | $77.8 |
| Total revenues (1)(2) | $34.6 | $633.0 | $1.1 | $188.8 | $1.3 | $35.7 | $821.8 |
| Attendance (1) | 1.9 | 44.1 | — | 29.2 |  | 1.9 | 73.3 |
| Average ticket price (1) | $8.01 | $7.96 | N/M | $3.54 | N/M | $7.96 | $6.20 |
| Concession revenues per patron (1) | $4.79 | $5.22 | N/M | $2.02 | N/M | $4.87 | $3.95 |

(1) Revenues and attendance amounts in millions. Average ticket price is calculated as admissions revenues divided by attendance. Concession revenues per patron is calculated as concession revenues divided by attendance. Certain values are considered not meaningful (“NM”) as they are not comparable due to the temporary theatre closures effective March 18, 2020.

(2) U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 17 to our condensed consolidated financial statements.

(3) Constant currency revenue amounts, which are non-GAAP measurements, were calculated using the average exchange rate for the corresponding month for 2019. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign currency exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

(4) Actual third quarter attendance for our international operating segment was 25 thousand patrons.

- *U.S.* We reopened theatres in the U.S. throughout the third quarter of 2020, showing library content and limited new releases. We offered library content at promotional prices, and also offered private watch parties to our patrons at many of our theatres. We continue to offer a limited menu of concession items, largely at ‘welcome back” discount prices. Other revenues for the third quarter of 2020 included primarily the amortization of NCM screen advertising advances. The third quarter of 2019 film product included blockbuster films such as *The Lion King* and *Spider Man: Far from Home.*
- *International.* We began reopening international theatres in late August 2020 with a total of 15 theatres open at the end of the third quarter of 2020. We offered library content and limited new releases, with library content at promotional pricing. We offered core concession items at our open theatres and also offered take out concession items at certain locations. Other revenues included primarily screen advertising and loyalty program revenues.

*Cost of Operations.* The table below summarizes our theatre operating costs (in millions) by reportable operating segment for the three months ended September 30, 2020 and 2019.

|  | U.S. Operating Segment 2020 | 2019 | International Operating Segment 2020 | 2019 | Constant Currency (1) 2020 | Consolidated 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Film rentals and advertising | $8.1 | $203.5 | $0.1 | $51.4 | $0.1 | $8.2 | $254.9 |
| Concession supplies | $2.3 | $38.6 | $0.4 | $12.9 | $0.6 | $2.7 | $51.5 |
| Salaries and wages | $15.9 | $83.2 | $4.3 | $20.1 | $5.4 | $20.2 | $103.3 |
| Facility lease expense | $60.8 | $64.5 | $6.3 | $22.9 | $8.2 | $67.1 | $87.4 |
| Utilities and other | $36.5 | $91.7 | $6.8 | $32.2 | $8.6 | $43.3 | $123.9 |

(1) Constant currency expense amounts, which are non-GAAP measurements, were calculated using the average exchange rate for the corresponding month for 2019. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign currency exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

- *U.S.* Film rentals and advertising costs for the third quarter of 2020 were 54.4% of admissions revenue, reflecting both new releases and library content as well as promotional expenses related to the reopening of our theatres. Film rentals and advertising costs were 58.0% of admissions revenues for the third quarter of 2019, which reflected a higher concentration of blockbuster films. Concession supplies expenses for the third quarter of 2020 was 25.8% of concessions revenue compared

to 16.8% of concession revenues for the third quarter of 2019. The increase in the concessions supplies expense rate was primarily due to the impact of promotional pricing, as well as the disposal of expired products as a result of the temporary closure of our theatres.

Salaries and wages decreased for the third quarter of 2020 as some of our theatres were temporarily closed during this time and other theatres opened during the third quarter of 2020 with limited operating hours. Facility lease expense decreased for the third quarter of 2020 compared to the third quarter of 2019 primarily due to a decline in percentage rent expense and the permanent closure of certain theatres. Utilities and other costs decreased for the third quarter of 2020 compared to the third quarter of 2019, as many of these costs, such as credit card fees, security, janitorial costs and repairs and maintenance are variable in nature and were impacted by the temporary closure of our theatres and reduced operating hours of the theatres that were reopened.

- *International.* Our international theatres remain temporarily closed with the exception of 15 theatres that opened during the third quarter of 2020. Film rental and advertising costs for the third quarter of 2020 included some local advertising and promotions associated with the reopening of theatres. Concessions supplies expense for the third quarter of 2020 reflected the items sold as well as the disposal of expired products.

Salaries and wages decreased for the third quarter of 2020 compared to the third quarter of 2019. The decrease was due to a majority of our international theatres remaining closed during the period. Facility lease expense decreased for the third quarter of 2020 compared to the third quarter of 2019. The decrease was due to lower percentage rent and rent-free periods allowed in certain international locations due to mall closures. Utilities and other costs decreased for the third quarter of 2020 compared to the third quarter of 2019, as many of these costs are variable in nature and were impacted by the temporary closure of our theatres.

*General and Administrative Expenses.* General and administrative expenses decreased for the third quarter of 2020 compared to the third quarter of 2019. The decrease was primarily due to temporary salary reductions for corporate office staff through the end of August, the impact of the 2020 Restructuring Plan (see Note 2) that permanently reduced headcount and reduced travel expense.

*Depreciation and Amortization.* Depreciation and amortization expense decreased during the third quarter of 2020 compared to the third quarter of 2019. The decrease was primarily due to the impact of theatre assets previously impaired and changes in foreign currency exchange rates in certain countries in which we operate. See Note 13 to our condensed consolidated financial statements for discussion of impairment.

*Impairment of Long-Lived Assets.* We recorded asset impairment charges of $24.6 million on assets held and used during the third quarter of 2020 compared to $27.3 million during the third quarter of 2019. The asset impairment charges recorded during the third quarter of 2020 were primarily a result of the prolonged impact of the COVID pandemic on our operations, as some theatres remained closed and film content continues to shift into future periods, both of which impacted our estimated future cash flows for theatres. Impairment charges for the third quarter of 2020 impacted seven countries and impairment charges for the third quarter of 2019 impacted six countries. See Note 13 to our condensed consolidated financial statements.

*Restructuring Costs.* We recorded restructuring costs of $0.5 million during the third quarter of 2020. The costs recorded during the third quarter of 2020 were due to accrual adjustments made for theatres closed as part of our 2020 Restructuring Plan. See Note 2 to our condensed consolidated financial statements for further discussion.

*(Gain) Loss on Disposal of Assets and Other.* We recorded a gain on disposal of assets and other during the third quarter of 2020 compared to a loss during the third quarter of 2019. Activity for the third quarter of 2020 was primarily related to a favorable litigation outcome for a case that was previously accrued. Activity for the third quarter of 2019 was primarily due to the retirement of assets related to theatre remodels.

*Interest Expense.* Interest expense, which includes amortization of debt issue costs, amortization of accumulated losses for swap amendments and accretion of interest on the 4.50% convertible senior notes, increased to $36.6 million during the third quarter of 2020 compared to $25.0 million the third quarter of 2019. The increase was primarily due to the issuance of 8.750% senior secured notes on April 20, 2020 and the issuance of 4.50% convertible senior notes on August 21, 2020. See Note 7 to our condensed consolidated financial statements.

*Distributions from NCM.* We recorded distributions from NCM of $1.1 million during the third quarter of 2020 compared to $2.5 million recorded during the third quarter of 2019, which were in excess of the carrying value of our Tranche 1 investment. The decrease in distributions from NCM is primarily due to the impact of theatres being temporarily closed as a result of the COVID-19 pandemic as discussed at Note 2. See Note 9 to our condensed consolidated financial statements for discussion of our investment in NCM.

*Interest expense – NCM.* We recorded non-cash interest expense of $5.9 million for the third quarter of 2020 compared to $4.7 million recorded during the third quarter of 2019, related to the significant financing component associated with certain of our agreements with NCM. See Note 9 to our condensed consolidated financial statements for further discussion.

*Equity in Income (Loss) of Affiliates.* We recorded equity in loss of affiliates of $(16.1) million during the third quarter of 2020 compared to equity in income of affiliates of $15.1 million during the third quarter of 2019. The decrease in equity income (loss) of affiliates is primarily due to the impact of theatres being temporarily closed as a result of the COVID-19 pandemic as discussed at Note 2 to our condensed consolidated financial statements. See Notes 9 and 10 to our condensed consolidated financial statements for information about our equity investments.

*Income Taxes.* An income tax benefit of $(121.1) million was recorded for the third quarter of 2020 compared to income tax expense of $14.1 million for the third quarter of 2019. The effective tax rate was approximately 45.0% for the third quarter of 2020 compared to 30.5% for the third quarter of 2019. See *Income Tax Considerations* at Note 2 to our condensed consolidated financial statements for further discussion. Income tax provisions for interim (quarterly) periods are based on estimated annual income tax rates and are adjusted for the effects of significant, infrequent or unusual items (i.e. discrete items) occurring during the interim period. As a result, the interim rate may vary significantly from the normalized annual rate.

### Nine months ended September 30, 2020 versus September 30, 2019

All of our domestic and international theatres were temporarily closed effective March 17, 2020 and March 18, 2020, respectively, due to the COVID-19 pandemic. We began reopening our domestic theatres in June 2020 and operated under a test-and-learn strategy to define training, communication, implementation and execution of enhanced health and safety protocols. These theatres opened to reduced operating hours with library content and “welcome back” pricing for tickets and concession products to encourage patrons to return to the movies. As of September 30, 2020, we had 252 domestic theatres and 15 international theatres reopened. We continue to monitor the status of the COVID-19 pandemic and local government regulations to plan the reopening of our remaining theatres.

Total revenues were $588.1 million for the nine months ended September 30, 2020 (“2020 period”) and $2,494.3 million for the nine months ended September 30, 2019 (“2019 period”). The table below, presented by reportable operating segment, summarizes our revenue performance and certain key performance indicators for the nine months ended September 30, 2019 and 2020.

|  | U.S. Operating Segment 2020 | 2019 | International Operating Segment 2020 | 2019 | Constant Currency (3) 2020 | Consolidated 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Admissions revenues (1) | $247.2 | $1,066.9 | $60.2 | $304.2 | $71.2 | $307.4 | $1,371.1 |
| Concession revenues (1) | $161.7 | $704.7 | $37.9 | $181.4 | $44.2 | $199.6 | $886.1 |
| Other revenues (1)(2) | $61.2 | $159.2 | $19.9 | $77.9 | $24.4 | $81.1 | $237.1 |
| Total revenues (1)(2) | $470.1 | $1,930.8 | $118.0 | $563.5 | $139.8 | $588.1 | $2,494.3 |
| Attendance (1) | 29.8 | 132.9 | 17.9 | 82.9 |  | 47.7 | 215.8 |
| Average ticket price (1) | $8.30 | $8.03 | $3.36 | $3.67 | $3.98 | $6.44 | $6.35 |
| Concession revenues per patron (1) | $5.43 | $5.30 | $2.12 | $2.19 | $2.47 | $4.18 | $4.11 |

(1) Revenues and attendance amounts in millions. Average ticket price is calculated as admissions revenues divided by attendance. Concession revenues per

patron is calculated as concession revenues divided by attendance.

(2) U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 17 to our condensed consolidated financial statements.

(3) Constant currency revenue amounts, which are non-GAAP measurements, were calculated using the average exchange rate for the corresponding month for 2019. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign currency exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

- *U.S.* Admissions revenues decreased primarily due to a 77.6% decrease in attendance, partially offset by a 3.4% increase in average ticket price. The increase in average ticket price was primarily due to price increases, partially offset by the impact of the deferral of admissions revenues for loyalty points issued. Concession revenues decreased primarily due to the decrease in attendance, partially offset by a 2.5% increase in concession revenues per patron. Concession revenues per patron grew primarily due to incremental sales of traditional concession products, continued expansion of concession offerings and price increases. Attendance declined primarily due to the temporary closure of all of our U.S. theatres on March 17, 2020, which began reopening in June 2020. Other revenues decreased as a result of the temporary closure of theatres.
- *International.* Admissions revenues decreased as reported and in constant currency. Average ticket price decreased as reported (increased in constant currency). Concession revenues decreased as reported and in constant currency. Concession revenues per patron decreased as reported (increased in constant currency). Average ticket price and concession revenues per

patron decreased, as reported, primarily due to the impact of changes in foreign currency exchange rates in certain countries in which we operate, partially offset by price increases. Attendance declined primarily due to the temporary closure of all of our international theatres on March 18, 2020, which began reopening in August 2020.

*Cost of Operations.* The table below summarizes our theatre operating costs (in millions) by reportable operating segment for the nine months ended September 30, 2020 and 2019.

|  | U.S. Operating Segment 2020 | 2019 | International Operating Segment 2020 | 2019 | Constant Currency (1) 2020 | Consolidated 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Film rentals and advertising | $136.3 | $610.3 | $28.9 | $149.4 | $34.4 | $165.2 | $759.7 |
| Concession supplies | $29.4 | $117.6 | $10.5 | $39.7 | $12.5 | $39.9 | $157.3 |
| Salaries and wages | $90.5 | $247.4 | $26.1 | $60.9 | $31.8 | $116.6 | $308.3 |
| Facility lease expense | $186.0 | $194.1 | $28.5 | $68.4 | $34.2 | $214.5 | $262.5 |
| Utilities and other | $140.3 | $260.8 | $38.4 | $96.4 | $46.5 | $178.7 | $357.2 |

(1) Constant currency expense amounts, which are non-GAAP measurements were calculated using the average exchange rate for the corresponding month for 2019. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign currency exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

- *U.S.* Film rentals and advertising costs were 55.1% of admissions revenues for the 2020 period compared to 57.2% of admissions revenues for the 2019 period. The decrease in the film rental and advertising rate was a result of typical summer content not being released during the 2020 period as only library content and limited new releases were available as theatres reopened during the third quarter of 2020. Concession supplies expense was 18.2% of concession revenues for the 2020 period compared to 16.7% of concession revenues for the 2019 period. The increase in the concession supplies rate was primarily due to the impact of the disposal of perishable food and expired product as a result of the temporary closure of our theatres, as well as promotional pricing implemented upon reopening theatres.

Salaries and wages decreased for the 2020 period from the 2019 period primarily due to the temporary closure of all of our U.S. theatres for a portion of the 2020 period and limited operating hours upon reopening. Facility lease expense decreased for the 2020 period from the 2019 period primarily due to a decline in percentage rent expense. Utilities and other costs decreased for the 2020 period from the 2019 period, as many of these costs, such as credit card fees, security, janitorial costs and repairs and maintenance, are variable in nature and were impacted by reduced operating hours of the theatres that were reopened.

- *International.* Film rentals and advertising costs were 48.0% of admissions revenues for the 2020 period compared to 49.1% of admissions revenues for the 2019 period. Concession supplies expense was 27.7% of concession revenues for the 2020 period compared to 21.9% of concession revenues for the 2019 period. The increase in the concession supplies rate was primarily due to the impact of the disposal of perishable food and expired product as a result of temporarily closing our theatres.

Salaries and wages decreased as reported and in constant currency for the 2020 period compared to the 2019 period. The decrease was due the temporary closure of all of our international theatres on March 18, 2020, fifteen of which reopened beginning in August. Facility lease expense decreased as reported and in constant currency for 2020 period compared to the 2019 period. The decrease was due to lower percentage rent and rent-free periods allowed in certain international locations due to mall closures. Utilities and other costs decreased as reported and in constant currency for the 2020 period compared to the 2019 period as many of these costs, such as credit card fees, security, janitorial costs and repairs and maintenance are variable in nature and were impacted by the temporary closure of our theatres and reduced operating hours of the theatres that were reopened.

*General and Administrative Expenses.* General and administrative expenses decreased for the 2020 period compared to the 2019 period. The decrease was primarily due to temporary salary reductions and the furlough of a portion of our corporate office staff for a portion of the 2020 period, the impact of the 2020 Restructuring Plan (see Note 2) and the impact of changes in foreign currency exchange rates in certain countries in which we operate.

*Depreciation and Amortization.* Depreciation and amortization expense decreased during the 2020 period compared the 2019 period. The decrease was primarily due to previously impaired theatre assets. See Note 13 to our condensed consolidated financial statements for discussion of impairment.

*Impairment of Long-Lived Assets.* We recorded asset impairment charges on assets held and used of $41.2 million during the 2020 period compared to $45.4 million during the 2019 period. The long-lived asset impairment charges recorded during each of the periods presented were specific to theatres that were directly and individually impacted by industry conditions, temporary closures, recovery expectations, increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatre. The long-lived asset impairment charges recorded during the 2020 period were also a result of the prolonged impact of the COVID pandemic on our operations, as some theatres remained closed and film content continues to shift into future periods, both of which impact estimated future cash flows for theatres. Impairment charges for the 2020 period impacted seven countries and impairment charges for the 2019 period impacted seven countries. See Note 13 to our condensed consolidated financial statements.

*Restructuring costs.* We recorded restructuring costs of $20.1 million during the 2020 period related to the 2020 Restructuring Plan implemented during the 2020 period. See Note 2 to our condensed consolidated financial statements for further discussion.

*(Gain) Loss on Disposal of Assets and Other.* We recorded a gain on disposal of assets and other during 2020 period compared to a loss during the 2019 period. Activity for the 2020 period was primarily related to a favorable litigation outcome for a case that was previously accrued, partially offset by the retirement of assets related to theatre remodels. Activity for the 2019 period was primarily due to the retirement of assets related to theatre remodels.

*Interest Expense.* Interest expense, which includes amortization of debt issue costs, amortization of accumulated losses in swap amendments and accretion of interest on the 4.500% convertible senior notes, increased during the 2020 period compared to the 2019 period2019. The increase was primarily due to the issuance of 8.750% senior secured notes on April 20, 2020 and the issuance of 4.50% convertible senior notes on August 21, 2020. See Note 7 to our condensed consolidated financial statements.

*Distributions from NCM.* We recorded distributions from NCM of $7.0 million during the 2020 period compared to $9.2 million recorded during the 2019 period, which were in excess of the carrying value of our Tranche 1 investment. The decrease in distributions from NCM is primarily due to the impact of theatres being temporarily closed as a result of the COVID-19 pandemic as discussed at Note 2. See Note 9 to our condensed consolidated financial statements for discussion of our investment in NCM.

*Interest expense – NCM.* We recorded non-cash interest expense of $17.7 million for the 2020 period compared to $14.2 million recorded during the 2019 period, related to the significant financing component associated with certain of our agreements with NCM. See Note 9 to our condensed consolidated financial statements for further discussion.

*Equity in Income (Loss) of Affiliates.* We recorded equity in loss of affiliates during the 2020 period compared to equity in income of affiliates during the 2019 period. The decrease in equity income (loss) of affiliates is primarily due to the impact of theatres being temporarily closed as a result of the COVID-19 pandemic as discussed at Note 2. See Notes 9 and 10 to our condensed consolidated financial statements for information about our equity investments.

*Income Taxes.* An income tax benefit of $(222.4) million was recorded for the 2020 period compared to income tax expense of $64.2 million recorded for the 2019 period. The effective tax rate was approximately 37.0% for the 2020 period compared to 27.8% for the 2019 period. See *Income Tax Considerations* at Note 2 to our condensed consolidated financial statements for further discussion. Income tax provisions for interim (quarterly) periods are based on estimated annual income tax rates and are adjusted for the effects of significant, infrequent or unusual items (i.e. discrete items) occurring during the interim period. As a result, the interim rate may vary significantly from the normalized annual rate.

### Liquidity and Capital Resources

#### Operating Activities

We primarily collect our revenues in cash, mainly through box office receipts and the sale of concessions. Our revenues are received in cash prior to the payment of related expenses; therefore, we have an operating “float” and historically have not required traditional working capital financing. However, we temporarily closed all of our theatres effective March 18, 2020. As we reopen our theatres to limited operating hours, we will fund operating expenses with cash on hand and recent additional financing discussed below under *Financing Activities.*

Cash used for operating activities was $(167.7) million for the nine months ended September 30, 2020 compared to cash provided by operating activities of $397.2 million for the nine months ended September 30, 2019. The decrease in cash provided by operating activities was primarily a result of the temporary closure of all of our theatres effective March 18, 2020. As discussed in Note 4 of our condensed consolidated financial statements, we negotiated the deferral of rent and other lease-related payments for the second and third quarters of 2020 with many of our landlords, resulting in approximately $62.6 million in deferred lease payments as of September 30, 2020. We began to repay previously deferred amounts during the third quarter of 2020, while a majority of the repayments will be made throughout 2021.

#### Investing Activities

Our investing activities have been principally related to the development, remodel and acquisition of theatres. New theatre openings and acquisitions historically have been financed with internally generated cash and by debt financing, including borrowings under our senior secured credit facility. Cash used for investing activities was $(67.5) million for the nine months ended September 30, 2020 compared to $(196.3) million for the nine months ended September 30, 2019. The decrease in cash used for investing activities was primarily due to the suspension of non-essential capital expenditures in response to the temporary closure of our theatres.

Capital expenditures for the nine months ended September 30, 2020 and 2019 were as follows (in millions):

| Period | New Theatres | Existing Theatres | Total |
| --- | ---: | ---: | ---: |
| Nine Months Ended September 30, 2020 | $18.7 | $48.9 | $67.6 |
| Nine Months Ended September 30, 2019 | $54.7 | $131.8 | $186.5 |

We operated 533 theatres with 5,974 screens worldwide as of September 30, 2020. Theatres and screens acquired, built and closed during the three months ended September 30, 2020 were as follows:

| U.S (42 states) | January 1, 2020 | Built | Closed | September 30, 2020 |
| --- | ---: | ---: | ---: | ---: |
| Theatres | 345 | 1 | 15 | 331 |
| Screens | 4,645 | 12 | 140 | 4,517 |
| International (15 countries) |  |  |  |  |
| Theatres | 209 | 1 | 8 | 202 |
| Screens | 1,487 | 16 | 46 | 1,457 |
| Worldwide |  |  |  |  |
| Theatres | 554 | 2 | 23 | 533 |
| Screens | 6,132 | 28 | 186 | 5,974 |

As of September 30, 2020, we had the following signed commitments (costs in millions):

| Remainder of 2020 | Theatres | Screens | Estimated Cost (1) |
| --- | ---: | ---: | ---: |
| U.S. | 2 | 16 | $6.6 |
| International | — | — | — |
| Total | 2 | 16 | $6.6 |
| Subsequent to 2020 |  |  |  |
| U.S. | 10 | 126 | $89.2 |
| International | 10 | 79 | 36.8 |
| Total | 20 | 205 | $126.0 |
| Total commitments at September 30, 2020 | 22 | 221 | $265.2 |

(1) We expect approximately $4.3 million, $65.5 million, $45.0 million and $17.8 million to be paid during the remainder of 2020, during 2021, 2022 and 2023, respectively. The timing of payments is subject to change depending on project or other related delays.

Actual expenditures for continued theatre development, remodels and acquisitions are subject to change based upon the availability of attractive opportunities. We may fund capital expenditures for our continued development with cash flow from operations, borrowings under our senior secured credit facility, and proceeds from debt issuances, sale leaseback transactions and/or sales of excess real estate.

#### Financing Activities

Cash provided by financing activities was $577.5 million for the nine months ended September 30, 2020 compared to cash used for financing activities of ($139.1) million for the nine months ended September 30, 2019. The increase in cash provided by financing activities was primarily due to the issuance of 8.750% Senior Secured notes on April 20, 2020 and the issuance of 4.500% Convertible Senior Notes on August 21, 2020. In addition, we suspended our dividend due to the temporary closure of our theatres.

We, at the discretion of the board of directors and subject to applicable law, may pay dividends on our common stock. The amount, if any, of the dividends to be paid in the future will depend upon our then available cash balance, anticipated cash needs, overall financial condition, loan agreement restrictions as discussed below, future prospects for earnings and cash flows, as well as other relevant factors. We suspended our quarterly dividend due to the impact of the COVID-19 pandemic.

We may from time to time, subject to compliance with our debt instruments, purchase our debt securities on the open market depending upon the availability and prices of such securities. Long-term debt consisted of the following as of September 30, 2020 (in millions):

|  |  |
| --- | ---: |
| Cinemark USA, Inc. term loan | $641.4 |
| Cinemark USA, Inc. 5.125% senior notes due 2022 | 400.0 |
| Cinemark USA, Inc. 4.875% senior notes due 2023 | 755.0 |
| Cinemark USA, Inc. 8.750% senior secured notes due 2025 | 250.0 |
| Cinemark Holdings, Inc. 4.500% convertible senior notes due 2025 | 460.0 |
| Other debt | 7.0 |
| Total long-term debt | $2,513.4 |
| Less current portion | 8.0 |
| Subtotal long-term debt, less current portion | $2,505.4 |
| Less: Debt discounts and debt issuance costs, net of accumulated amortization | 139.0 |
| Long-term debt, less current portion, net of debt discounts and unamortized debt issuance costs | $2,366.4 |

As of September 30, 2020, $100 million was available for borrowing under the revolving line of credit.

#### Contractual Obligations

In April 2020, Cinemark USA, Inc. issued $250.0 million 8.750% senior secured notes. In August 2020, Cinemark Holdings, Inc. issued $460.0 million 4.50% convertible senior notes. Additionally, during the nine months ended September 30, 2020, our international subsidiaries in Peru and Colombia borrowed $7.2 million under four separate loan agreements. Included below is an updated summary of long-term debt obligations and related estimated scheduled interest payment obligations as of September 30, 2020, reflecting these additional obligations.

*(in millions)*

| Contractual Obligations | Payments Due by Period Total | Less Than One Year | 1 - 3 Years | 3 - 5 Years | After 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt (1) | $2,513.4 | $8.0 | $1,173.2 | $1,332.2 | $— |
| Scheduled interest payments on long-term debt (2) | $436.1 | $121.9 | $214.5 | $99.7 | $— |

(1) Amounts are presented before adjusting for debt issuance costs and the discount associated with the $460.0 million 4.50% convertible senior notes discussed below.

(2) Amounts include scheduled interest payments on fixed rate and variable rate debt agreements. Estimates for the variable rate interest payments were based on interest rates in effect on September 30, 2020. The average interest rates in effect on our fixed rate and variable rate debt are 4.9% and 2.3%, respectively, as of September 30, 2020.

There have been no other material changes in our contractual obligations previously disclosed in “Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed February 21, 2020.

#### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

#### Senior Secured Credit Facility

Cinemark USA, Inc. has a senior secured credit facility that includes a $700.0 million term loan and a $100.0 million revolving credit line (the “Credit Agreement”). Under the amended Credit Agreement, quarterly principal payments of $1.6 million are due on the term loan through December 31, 2024, with a final principal payment of $613.4 million due on March 29, 2025. Cinemark USA, Inc. had $100.0 million available borrowing capacity on the revolving credit line as of September 30, 2020.

Interest on the term loan accrues at Cinemark USA, Inc.’s option at: (A) the base rate equal to the greater of (1) the US “Prime Rate” as quoted in The Wall Street Journal or if no such rate is quoted therein, in a Federal Reserve Board statistical release, (2) the federal funds effective rate plus 0.50%, and (3) a one-month Eurodollar-based rate plus 1.0%, plus, in each case, a margin of 0.75% per annum, or (B) a Eurodollar-based rate for a period of 1, 2, 3, 6, 9 or 12 months plus a margin of 1.75% per annum. Interest on the revolving credit line accrues, at our option, at: (A) a base rate equal to the greater of (1) the US “Prime Rate” as quoted in The Wall Street Journal or if no such rate is quoted therein, in a Federal Reserve Board statistical release, (2) the federal funds effective rate plus 0.50%, and (3) a one-month Eurodollar-based rate plus 1.0%, plus, in each case, a margin that ranges from 0.50% to 1.25% per annum, or (B) a Eurodollar-based rate for a period of 1, 2, 3, 6, 9 or 12 months plus a margin that ranges from 1.50% to 2.25% per annum. The margin of the revolving credit line is determined by the consolidated net senior secured leverage ratio as defined in the Credit Agreement.

Cinemark USA, Inc.’s obligations under the Credit Agreement are guaranteed by Cinemark Holdings, Inc. and certain of Cinemark USA, Inc.’s domestic subsidiaries and are secured by mortgages on certain fee and leasehold properties and security interests in substantially all of Cinemark USA, Inc.’s and the guarantors’ personal property, including, without limitation, pledges of all of Cinemark USA, Inc.’s capital stock, all of the capital stock of certain of Cinemark USA, Inc.’s domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on Cinemark USA, Inc.’s ability, and in certain instances, its subsidiaries’ and our ability, to consolidate or merge or liquidate, wind up or dissolve; substantially change the nature of its business; sell, transfer or dispose of assets; create or incur indebtedness; create liens; pay dividends or repurchase stock; and make capital expenditures and investments. If Cinemark USA, Inc. has borrowings outstanding on the revolving credit line, it is required to satisfy a consolidated net senior secured leverage ratio covenant as defined in the Credit Agreement, not to exceed 4.25 to 1. See below for discussion of recent covenant waivers.

The dividend restriction contained in the Credit Agreement prevents the Company and any of its subsidiaries from paying a dividend or otherwise distributing cash to its stockholders unless (1) the Company is not in default, and the distribution would not cause Cinemark USA, Inc. to be in default, under the Credit Agreement; and (2) the aggregate amount of certain dividends, distributions, investments, redemptions and capital expenditures made since December 18, 2012, including dividends declared by the board of directors, is less than the sum of (a) the aggregate amount of cash and cash equivalents received by Cinemark Holdings, Inc. or Cinemark USA, Inc. as common equity since December 18, 2012, (b) Cinemark USA, Inc.’s consolidated EBITDA minus 1.75 times its consolidated interest expense, each as defined in the Credit Agreement, and (c) certain other defined amounts (collectively the “Applicable Amount”).

On April 17, 2020, in conjunction with the issuance of the 8.750% Secured Notes discussed below, we obtained a waiver of the leverage covenant from the majority of revolving lenders under the Credit Agreement for the fiscal quarters ending September 30, 2020 and December 31, 2020. The waiver is subject to certain liquidity thresholds, restrictions on investments and the use of the Applicable Amount.

On August 21, 2020, in conjunction with the issuance of the 4.50% Convertible Senior Notes discussed below, we further amended the waiver of the leverage covenant through the fiscal quarter ending September 30, 2021. The amendment also i) modifies the leverage covenant calculation beginning with the calculation for the trailing twelve-month period ended December 31, 2021, ii) for purposes of testing the consolidated net senior secured leverage ratio for the fiscal quarters ending on December 31, 2021, March 31, 2022 and June 30, 2022, permits us to substitute Consolidated EBITDA for the first three fiscal quarters of 2019 in lieu of Consolidated EBITDA for the corresponding fiscal quarters of 2021, (iii) modifies the restrictions imposed by the covenant waiver and (iv) makes such other changes to permit the issuance of the 4.50% Convertible Senior Notes discussed below.

We have four interest rate swap agreements that are used to hedge a portion of the interest rate risk associated with the variable interest rates on the term loan outstanding under the Credit Agreement. See Note 7 of our condensed consolidated financial statements for discussion of the interest rate swaps.

At September 30, 2020, there was $641.4 million outstanding under the term loan and no borrowings were outstanding under the $100.0 million revolving line of credit. The average interest rate on outstanding term loan borrowings under the Credit Agreement at September 30, 2020 was approximately 3.4% per annum, after giving effect to the interest rate swap agreements discussed above.

#### Cinemark USA, Inc. 5.125% Senior Notes

On December 18, 2012, Cinemark USA, Inc. issued $400.0 million aggregate principal amount of 5.125% Senior Notes due 2022, at par value (the “5.125% Senior Notes”). Interest on the 5.125% Senior Notes is payable on June 15 and December 15 of each year. The 5.125% Senior Notes mature on December 15, 2022.

The indenture to the 5.125% Senior Notes contains covenants that limit, among other things, the ability of Cinemark USA, Inc. and certain of its subsidiaries to (1) make investments or other restricted payments, including paying dividends, making other distributions or repurchasing subordinated debt or equity, (2) incur additional indebtedness and issue preferred stock, (3) enter into transactions with affiliates, (4) enter new lines of business, (5) merge or consolidate with, or sell all or substantially all of its assets to, another person and (6) create liens. As of September 30, 2020, Cinemark USA, Inc. could have distributed up to approximately $3,014.7 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the indenture to the 5.125% Senior Notes, subject to its available cash and other borrowing restrictions outlined in the indenture. Upon a change of control, as defined in the indenture governing the 5.125% Senior Notes, Cinemark USA, Inc. would be required to make an offer to repurchase the 5.125% Senior Notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest, if any, through the date of repurchase. The indenture governing the 5.125% Senior Notes allows Cinemark USA, Inc. to incur additional indebtedness if it satisfies the coverage ratio specified in the indenture, after giving effect to the incurrence of the additional indebtedness, and in certain other circumstances. The required minimum coverage ratio is 2 to 1 and our actual ratio as of September 30, 2020 was approximately 0.3 to 1.

#### Cinemark USA, Inc. 4.875% Senior Notes

On May 24, 2013, Cinemark USA, Inc. issued $530.0 million aggregate principal amount of 4.875% Senior Notes due 2023, at par value (the “4.875% Senior Notes”). On March 21, 2016, Cinemark USA, Inc. issued an additional $225.0 million aggregate principal amount of the 4.875% Senior Notes at 99.0% of the principal amount plus accrued and unpaid interest from December 1, 2015. These additional 4.875% Senior Notes have identical terms, other than the issue date, the issue price and the first interest payment date, and constitute part of the same series as the Company’s existing 4.875% Senior Notes. Interest on the 4.875% Senior Notes is payable on June 1 and December 1 of each year. The 4.875% Senior Notes mature on June 1, 2023.

The indenture to the 4.875% Senior Notes contains covenants that limit, among other things, the ability of Cinemark USA, Inc. and certain of its subsidiaries to (1) make investments or other restricted payments, including paying dividends, making other distributions or repurchasing subordinated debt or equity, (2) incur additional indebtedness and issue preferred stock, (3) enter into transactions with affiliates, (4) enter new lines of business, (5) merge or consolidate with, or sell all or substantially all of its assets to, another person and (6) create liens. As of September 30, 2020, Cinemark USA, Inc. could have distributed up to approximately $3,008.9 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the indenture to the 4.875% Senior Notes, subject to its available cash and other borrowing restrictions outlined in the indenture. Upon a change of control, as defined in the indenture governing the 4.875% Senior Notes, Cinemark USA, Inc. would be required to make an offer to repurchase the 4.875% Senior Notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest, if any, through the date of repurchase. The indenture governing the 4.875% Senior Notes allows Cinemark USA, Inc. to incur additional indebtedness if it satisfies the coverage ratio specified in the indenture, after giving effect to the incurrence of the additional indebtedness, and in certain other circumstances. The required minimum coverage ratio is 2 to 1 and our actual ratio as of September 30, 2020 was approximately 0.3 to 1.

#### 8.750% Secured Notes

On April 20, 2020, Cinemark USA, Inc. issued $250,000 8.750% senior secured notes (the “8.750% Secured Notes”). The 8.750% Senior Notes will mature on May 1, 2025; provided, however, that if (i) on September 13, 2022, the aggregate outstanding principal amount of the 5.125% Senior Notes that shall not have been purchased, repurchased, redeemed, defeased or otherwise acquired, retired, cancelled or discharged exceeds $50,000, the 8.750% Senior Notes will mature on September 14, 2022 and (ii) on February 27, 2023, the aggregate outstanding principal amount of the 4.875% Senior Notes that shall not have been purchased, repurchased, redeemed, defeased or otherwise acquired, retired, cancelled or discharged exceeds $50,000, the 8.750% Senior Notes will mature on February 28, 2023. Interest on the 8.750% Senior Notes will be payable on May 1 and November 1 of each year, beginning on November 1, 2020.

The 8.750% Secured Notes are fully and unconditionally guaranteed on a joint and several senior basis by certain of the Company’s subsidiaries that guarantee, assume or in any other manner become liable with respect to any of the Company’s or its guarantors’ other debt. If the Company cannot make payments on the 8.750% Secured Notes when they are due, the Company’s guarantors must make them instead. Under certain circumstances, the guarantees may be released without action by, or the consent of, the holders of the 8.750% Secured Notes.

The 8.750% Secured Notes and the guarantees will be the Company’s and its guarantors’ senior obligations and they will:

- rank effectively senior in right of payment to the Company’s and its guarantors’ existing and future debt that is not secured by the collateral as described within the indentures to the 8.750% Secured Notes (“Collateral”), including all obligations under the Credit Agreement, and unsecured obligations, including the existing senior notes, in each case to the extent of the value of the collateral;
- rank effectively junior to the Company’s and its guarantors’ existing and future debt secured by assets that are not part of the Collateral to the extent of the value of the collateral securing such debt, including all obligations under the Credit Agreement;
- otherwise rank equally in right of payment to the Company’s and its guarantors’ existing and future senior debt, including debt under the Credit Agreement and the existing senior notes;
- rank senior in right of payment to the Company’s and its guarantors’ future subordinated debt; and
- be structurally subordinated to all existing and future debt and other liabilities of the Company’s non-guarantor subsidiaries.

The indenture to the 8.750% Secured Notes contains covenants that limit, among other things, the ability of Cinemark USA, Inc. and certain of its subsidiaries to (1) make investments or other restricted payments, including paying dividends, making other distributions or repurchasing subordinated debt or equity, (2) incur additional indebtedness and issue preferred stock, (3) enter into transactions with affiliates, (4) enter new lines of business, (5) merge or consolidate with, or sell all or substantially all of its assets to, another person and (6) create liens. As of September 30, 2020, Cinemark USA, Inc. could have distributed up to approximately $3,295.3 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the indenture to the 8.750% Secured Notes, subject to its available cash and other borrowing restrictions outlined in the indenture. Upon a change of control, as defined in the indenture governing the 8.750% Secured Notes, Cinemark USA, Inc. would be required to make an offer to repurchase the 8.750% Secured Notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest, if any, through the date of repurchase. The indenture governing the 8.750% Secured Notes allows Cinemark USA, Inc. to incur additional indebtedness if it satisfies a coverage ratio specified in the indenture, after giving effect to the incurrence of the additional indebtedness, and in certain other circumstances. The required minimum coverage ratio is 2.0 to 1 and our actual ratio as of September 30, 2020 was approximately 0.2 to 1.

#### Issuance of 4.50% Convertible Senior Notes

On August 21, 2020, Cinemark Holdings, Inc. issued $460 million 4.50% convertible senior notes (the “4.50% Convertible Senior Notes”). The notes will mature on August 15, 2025, unless earlier repurchased or converted. Interest on the notes will be payable on February 15 and August 15 of each year, beginning on February 15, 2021.

Holders of the 4.50% Convertible Senior Notes may convert their 4.50% Convertible Senior Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2025 only under the following circumstances: (1) during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (2) if we distribute to all or substantially all stockholders (i) rights options or warrants entitling them to purchase shares at a discount to the recent average trading price of our common stock (including due to a stockholder rights plan) or (ii) our assets or securities or rights, options or warrants to purchase the same with a per share value exceeding 10% of the trading price of our common stock, (3) upon the occurrence of specified corporate events as described further in the indenture. Beginning May 15, 2025, holders may convert their notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, or (4) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price (initially $14.35 per share), on each applicable trading day. Upon conversion of the notes, we will pay or deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion rate will initially be 69.6767 shares of our common stock per one thousand dollars principal amount of the 4.50% Convertible Senior Notes. The conversion rate will be subject to adjustment upon the occurrence of certain events. If a make-whole fundamental change as defined in the indenture occurs prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with such make-whole fundamental change.

The 4.50% Convertible Notes will be effectively subordinated to any of our, or our subsidiaries’, existing and future secured debt to the extent of the value of the assets securing such indebtedness, including obligations under the Credit Agreement. The 4.50% Convertible Notes will be structurally subordinated to all existing and future debt and other liabilities, including trade payables, including Cinemark USA’s 5.125% senior notes due 2022, 4.875% senior notes due 2023 and the 8.750% Secured Notes due 2025, or, collectively, Cinemark USA’s senior notes (but excluding all obligations under the Credit Agreement which are guaranteed by Cinemark Holdings, inc.). The 4.50% Convertible Notes rank equally in right of payment with all of our existing and future unsubordinated debt, including all obligations under the Cinemark USA, Inc. Credit Agreement, which such Credit Agreement is guaranteed by Cinemark Holdings, Inc., and senior in right of payment to any future debt that is expressly subordinated in right of payment to the notes. The 4.50% Convertible Notes are not guaranteed by any of Cinemark Holdings, Inc.’s subsidiaries.

In accordance with accounting guidance on debt and equity financing, we bifurcated the gross proceeds from the issuance of 4.50% Convertible Senior Notes and recorded a portion as long-term debt and a portion in equity. The long-term debt value was based on the fair value of the debt, determined as the present value of principal and interest payments assuming a market interest rate for similar debt that excluded a conversion feature. The difference between the face value of the 4.50% Convertible Senior Notes and the fair value is referred to as the debt discount, and represents the amount allocated to equity. The debt discount is being amortized to interest expense at an effective interest rate of 9.375% over the contractual terms of the notes.

Concurrently with the issuance of the 4.50% Convertible Senior Notes, we entered into privately negotiated convertible note hedge transactions (the “Hedge Transactions”) with one or more of the Initial Purchasers or their respective affiliates (the “Option Counterparties”). The Hedge Transactions cover the number of shares of our common stock that will initially underlie the aggregate amount of the 4.50% Convertible Senior Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 4.50% Convertible Senior Notes. The Hedge Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of the 4.50% Convertible Senior Notes and/or offset any cash payments we may be required to make in excess of the principal amount of converted 4.50% Convertible Senior Notes, as the case may be. Concurrently with entering into the Hedge Transactions, we also entered into separate privately negotiated warrant transactions with Option Counterparties whereby we sold to Option Counterparties warrants to purchase (subject to the net share settlement provisions set forth therein) up to the same number of shares of our common stock, subject to customary anti-dilution adjustments (the “Warrants”). The Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the strike price of the warrants on the applicable expiration dates unless, subject to the terms of the Warrants, we elect to cash settle the Warrants. The exercise price of the Warrants is initially $22.08 and is subject to certain adjustments under the terms of the warrants. The Company received $89.4 million in cash proceeds from the sale of Warrants, which were used along with proceeds from the 4.50% Convertible Senior Notes, to pay approximately $142.1 million to enter into the Hedge Transactions. The tax impact of the conversion option and Warrants amounted to $10,960 and was recorded in additional paid-in-capital.

Together, the Hedge Transactions and the Warrants are intended to reduce the potential dilution from the conversion of the 4.50% Convertible Senior Notes. The Hedge Transactions and Warrants are recorded in equity and are not accounted for as derivatives, in accordance with applicable accounting guidance.

#### Additional Borrowings of International Subsidiaries

During May 2020, our subsidiary in Peru borrowed the USD equivalent of $2.8 million under a loan that bears interest at approximately 1%. Principal payments are due monthly beginning in July 2021 through June 2023. Accrued and unpaid interest is to be paid when principal payments are due. We are subject to certain customary negative covenants under the loan.

During May, June and September 2020, our subsidiary in Colombia borrowed the USD equivalent of $4.4 million under three variable rate loans. Monthly principal payments due under the notes borrowed in May and June are due beginning in December 2020 over 30 months and monthly principal payments due under the notes borrowed in September are due beginning in October 2021 over 48 months. Accrued and unpaid interest is to be paid when principal payments are due. The variable interest rates on the loans ranged from approximately 7.0% to 9.0% as of September 30, 2020. We are subject to certain customary negative covenants and ratio covenants under the loans.

#### Covenant Compliance

As of September 30, 2020, we believe we were in full compliance with all agreements, including all related covenants, governing our outstanding debt.

## Market risk

As filed, 2,058 characters.

We have exposure to financial market risks, including changes in interest rates, foreign currency exchange rates and other relevant market prices.

#### Interest Rate Risk

We are currently party to a variable rate debt facility. An increase or decrease in interest rates would affect our interest expense relating to our variable rate debt. At September 30, 2020, we had an aggregate of approximately $48.8 million of variable rate debt outstanding. Based on the interest rates in effect on the variable rate debt outstanding at September 30, 2020, a 100 basis point increase in market interest rates would increase our annual interest expense by approximately $0.5 million.

The table below provides information about our fixed rate and variable rate long-term debt agreements as of September 30, 2020:

*(in millions)*

|  | Expected Maturity for the Twelve-Month Periods Ending September 30, 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | Average Interest Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed rate | $— | $— | $1,155.0 | $— | $1,310.0 | $— | $2,465.0 | $2,260.1 | 4.9% |
| Variable rate (1) | 8.0 | 9.5 | 8.7 | 6.9 | 15.3 | — | 48.4 | 43.9 | 2.3% |
| Total debt | $8.0 | $9.5 | $1,163.7 | $6.9 | $1,325.3 | $— | $2,513.4 | $2,304.0 |  |

#### Interest Rate Swap Agreements

All of our interest rate swap agreements qualify for cash flow hedge accounting. The fair values of the interest rate swaps are recorded on our consolidated balance sheet as an asset or liability with the related gains or losses reported as a component of accumulated other comprehensive loss. See Note 7 to the condensed consolidated financial statements for further discussion of the interest rate swap agreements.

#### Foreign Currency Exchange Rate Risk

There have been no material changes in foreign currency exchange rate risk previously disclosed in “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed February 21, 2020.

## Controls and procedures

As filed, 1,540 characters.

#### Evaluation of the Effectiveness of Disclosure Controls and Procedures

As of September 30, 2020, we carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

#### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 that occurred during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 19,104 characters.

See discussion in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed February 21, 2020, as updated by the risk factors below.

### Our substantial indebtedness could adversely affect our financial condition.

We currently have a substantial amount of indebtedness. This substantial amount of indebtedness could limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, stock repurchases or other purposes. It may also increase our vulnerability to adverse economic, market and industry conditions (including the impact of COVID-19), limit our flexibility in planning for, or reacting to, changes in our business operations or to our industry overall, and place us at a disadvantage in relation to our competitors that have lower debt levels.

### A lowering or withdrawal of the ratings assigned or a change in outlook to our outstanding debt securities by

***rating agencies may increase our future borrowing costs and reduce our access to capital.***

Our debt currently has a non-investment grade rating, and any rating assigned could be lowered (or outlook thereof could be changed) or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes in our business or industry, including as a result of COVID-19, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. In particular, our access to the capital markets may be impacted, our other funding sources may decrease, the cost of debt may increase as a result of increased interest rates or fees, and we may be required to provide additional credit assurances, including collateral, under certain contracts or arrangements.

***Our inability to raise funds necessary to settle conversions of, or to repurchase, the 4.50% Convertible Senior Notes, upon a fundamental change as described in the indenture governing the 4.50% Convertible Senior Notes, may lead to defaults under such indenture and under agreements governing our existing or future indebtedness.***

If we settle the 4.50% Convertible Senior Notes by cash, or by a combination of cash and shares of our common stock, upon a fundamental change as described in the indenture governing the 4.50% Convertible Senior Notes, we will be required to make cash payments with respect to the 4.50% Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make purchases of the 4.50% Convertible Senior Notes being surrendered or converted. In addition, our ability to repurchase the 4.50% Convertible Senior Notes or to pay cash upon conversion of the 4.50% Convertible Senior Notes is limited by the agreements governing our existing indebtedness (including the Credit Agreement) and may also be limited by law, by regulatory authority or by agreements that will govern our future indebtedness. Our failure to repurchase 4.50% Convertible Senior Notes at a time when the repurchase is required by the indenture governing the 4.50% Convertible Senior Notes or to pay cash payable on future conversions of the 4.50% Convertible Senior Notes as required by such indenture would constitute a default under such indenture. A default under the indenture governing the 4.50% Convertible Senior Notes or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness (including the Credit Agreement and the indentures governing Cinemark USA’s senior notes.

***The conditional conversion feature of the 4.50% Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.***

In the event the conditional conversion feature of the 4.50% Convertible Senior Notes is triggered, holders of the 4.50% Convertible Senior Notes will be entitled to convert the 4.50% Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their 4.50% Convertible Senior Notes, initially we elect to satisfy our conversion obligations by combination settlement. In addition, in the future, we may elect to settle all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their 4.50% Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 4.50% Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

***Conversion of the 4.50% Convertible Senior Notes will dilute the ownership interest of existing stockholders, or may otherwise depress the price of our common stock.***

The conversion of some or all of the 4.50% Convertible Senior Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the 4.50% Convertible Senior Notes. The 4.50% Convertible Senior Notes may from time to time in the future be convertible at the option of their holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 4.50% Convertible Senior Notes may encourage short selling by market participants because the conversion of the 4.50% Convertible Senior Notes could be used to satisfy short positions, or anticipated conversion of the 4.50% Convertible Senior Notes into shares of our common stock could depress the price of our common stock.

***The 4.50% Convertible Senior Notes Hedge Transactions and Warrant Transactions may affect the value of our common stock.***

In connection with the pricing of the 4.50% Convertible Senior Notes, we entered into Hedge Transactions with, and sold Warrants to, Option Counterparties. The Hedge Transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the 4.50% Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 4.50% Convertible Senior Notes, as the case may be. The Warrants would separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the strike price of any warrants on the applicable expiration dates unless, subject to the terms of the Warrants, we elect to cash settle the Warrants. In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 4.50% Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the 4.50% Convertible Senior Notes or following any repurchase of the 4.50% Convertible Senior Notes by us in connection with any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or decrease in the market price of our common stock.

In addition, if any such Hedge Transactions and Warrants fail to become effective, the Option Counterparties or their respective affiliates may unwind their hedge positions with respect to our common stock, which could adversely affect the market price of our common stock. The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

***We are subject to counterparty risk with respect to the 4.50% Convertible Senior Notes Hedge Transactions.***

The Option Counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such Option Counterparties may default under the Hedge Transactions. Our exposure to the credit risk of the Option Counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by the option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.

***The accounting method for convertible debt securities that may be settled in cash, such as the 4.50% Convertible Senior Notes, may have a material effect on our reported financial results.***

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of certain convertible debt instruments (such as the 4.50% Convertible Senior Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the 4.50% Convertible Senior Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 4.50% Convertible Senior Notes. As a result, we will be required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the 4.50% Convertible Senior Notes to their face amount over the term of the 4.50% Convertible Senior Notes. We will report lower net income (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results and the market price of our common stock.

In addition, convertible debt instruments (such as the 4.50% Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for using the treasury stock method under certain circumstances. Under the treasury stock method, the shares issuable upon conversion of the 4.50% Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the 4.50% Convertible Senior Notes exceeds their principal amount. The number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are assumed to be issued under the treasury stock method. We initially elect to satisfy our conversion obligations by combination settlement and therefore, under certain circumstances, may be permitted to apply the treasury stock method. In particular, to apply the treasury stock method, we must rebut a presumption of share settlement. We cannot be sure that we will be able to rebut the presumption of share settlement in accordance with current accounting guidance or, even if we do rebut such presumption, that the accounting guidance in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 4.50% Convertible Senior Notes, we will be required to use the if-converted method, and our diluted earnings per share could be adversely affected.

In addition, if the market price of our common stock exceeds the applicable strike price of the warrants we issued in conjunction with the Hedge Transactions and Warrant Transactions and are “in-the-money,” then our diluted earnings per share would also be adversely affected.

In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), or ASU 2020-06. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ASU 2020-06 changes the accounting for the convertible debt instruments described above. Under ASU 2020-06, an entity is no longer required to separately account for the liability and equity components of convertible debt instruments. When adopted, ASU 2020-06 may have the impact of reducing non-cash interest expense, and thereby reducing our net loss, or increasing our net income. Additionally, the treasury stock method for calculating earnings (loss) per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares. Rather, the if-converted method will be required, which could increase our diluted loss per share, or decrease our diluted earnings per share. We are evaluating the impact that the adoption of ASU 2020-06 will have on our accounting for the 4.50% Convertible Senior Notes, and the impact on our financial statements.

***The COVID-19 pandemic has disrupted and is expected to continue to disrupt our industry and our business and could continue to materially affect our financial condition and results of operations for an extended period of time.***

The outbreak of the COVID-19 pandemic has disrupted, and we expect it will continue to disrupt, our industry and our business for an extended period of time. While we have reopened 252 of our domestic theatres and 15 of our international theatres as of September 30, 2020, our business, results of operations, liquidity, cash flows and financial conditions continue to be severely impacted by the COVID-19 pandemic. One of the key factors that have materially affected our business is the availability of new films for exhibition at our theatres. Due to the COVID-19 pandemic, production of films has been temporarily halted or delayed and new film releases have been postponed, resulting in a drastic reduction in the volume of new films available for theatrical exhibition. Even when new films are available, studios have reduced the window for video and digital releases or have released directly to alternative film distribution channels such as streaming services and bypassed a theatrical release.

In addition to the impact on film product availability for theatrical exhibition, governmental restrictions such as limitations on capacity and food and beverage sales continue to hurt our results of operations, liquidity and cash flows. As the COVID-19 pandemic continues to spike, there could be additional federal, state or local responses that further restrict in-person gathering and/or movement of guests or otherwise impact our business.

We cannot predict when the effects of the COVID-19 pandemic will subside or if business will return to normal levels of operation.

***Our results of operations may be impacted by shrinking video and digital release windows.***

The average video and digital release window, which represents the time that elapses from the date of a film’s theatrical release to the date a film is available for DVD, has been approximately ninety days and digital purchase for ownership (also known as electronic sell-through) has been approximately seventy-four days for the past several years. During the COVID-19 pandemic, certain studios have reduced the release windows further than ninety days or eliminated them altogether. If our patrons continue to choose to wait for an in-home release rather than attend a theatre to view the film, it may continue to adversely impact our business and results of operations, financial condition and cash flows. The release windows, which are determined by the studios, may be reduced further or be eliminated altogether, which could have an adverse impact on our business and results of operation.

***We may not be able to generate additional revenues or continue to realize value from our investment in NCM.***

As of September 30, 2020, we owned 40,850,068 common units of NCM, which represented an ownership interest in NCM of approximately 25%. We receive monthly theatre access and advertising fees under our Exhibitor Services Agreement with NCM and we are entitled to receive mandatory quarterly distributions of excess cash from NCM. During the nine months ended September 30, 2020 and 2019, the Company received approximately $27.7 million and $35.5 million in other revenues from NCM, respectively, $14.2 million and $18.5 million in cash distributions recorded as a reduction of our investment in NCM, respectively, and $7.0 million and $9.2 million in cash distributions in excess of our investment in NCM, respectively. Cinema advertising is a small component of the U.S. advertising market and therefore, NCM competes with larger, more established and well known media platforms such as broadcast radio and television, cable and satellite television, outdoor advertising and Internet portals. In-theatre advertising may not continue to attract advertisers or NCM’s in-theatre advertising format may not continue to be received favorably by theatre patrons. If NCM is unable to continue to generate consistent advertising revenues, its results of operations may be adversely affected and our investment in and distributions and revenues from NCM may be adversely impacted. NCM revenues and excess cash distributions have been significantly impacted by the COVID-19 pandemic and resulting temporary theatre closures. Future NCM revenues and excess cash distributions from NCM to the Company will depend on the reopening of theatres.

Each of our common units in NCM is convertible into one share of NCM, Inc. common stock. The market value of NCM, Inc.’s stock price may vary due to the performance of the business, industry trends, general and economic conditions and other factors. If NCM, Inc.’s stock price declines below our carrying value for an extended period of time, we may record an impairment in our investment. As a result of the COVID-19 pandemic, the stock price of NCM, Inc. has remained below the Company’s book value for approximately seven months.

Filed Nov 5, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-050836. Last ingested by Listed: Nov 3, 2026, 08:34 ET. No prices; not investment advice.