UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________

FORM 10-Q

(Mark One)

For the quarterly period ended: September 30, 2020

OR

For the transition period from ___________ to ___________

Commission file number 1-8625

READING INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (213) 235-2240

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨ Accelerated Filer þ Non-Accelerated Filer  ¨ Smaller Reporting Company  ¨ Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 6, 2020, there were 20,068,607 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,680,590 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.
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READING INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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PART 1 – FINANCIAL INFORMATION

Item 1 - Financial Statements

READING INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share information)

See accompanying Notes to the Unaudited Consolidated Financial Statements.

READING INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; U.S. dollars in thousands, except per share data)

See accompanying Notes to the Unaudited Consolidated Financial Statements. 

READING INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; U.S. dollars in thousands)

See accompanying Notes to the Unaudited Consolidated Financial Statements. 

READING INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; U.S. dollars in thousands)

See accompanying Notes to the Unaudited Consolidated Financial Statements. 

READING INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Description of Business and Segment Reporting

Our Company

Reading International, Inc., a Nevada corporation (“RDI” and collectively with our consolidated subsidiaries and corporate predecessors, the “Company,” “Reading,” and “we,” “us,” or “our”) was incorporated in 1999. Our businesses consist primarily of:

the development, ownership, and operation of cinemas in the United States, Australia, and New Zealand; and,

the development, ownership, operation and/or rental of retail, commercial and live venue real estate assets in the United States, Australia, and New Zealand.

Business Segments

Reported below are the operating segments of our Company for which separate financial information is available and evaluated regularly by the Chief Executive Officer, the chief operating decision-maker of our Company. As part of our real estate activities, we hold undeveloped land in urban and suburban centers in the United States, Australia, and New Zealand.

The table below summarizes the results of operations for each of our business segments for the quarter and nine months ended September 30, 2020 and 2019, respectively. Operating expense includes costs associated with the day-to-day operations of the cinemas and the management of rental properties, including our live theatre assets.

A reconciliation of segment operating income to income before income taxes is as follows:

Note 2 – Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of our Company’s wholly-owned subsidiaries as well as majority-owned subsidiaries that our Company controls, and should be read in conjunction with our Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2019 (“2019 Form 10-K”). All significant intercompany balances and transactions have been eliminated on consolidation. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). As such, they do not include

all information and footnotes required by U.S. GAAP for complete financial statements. We believe that we have included all normal and recurring adjustments necessary for a fair presentation of the results for the interim period.

Operating results for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Significant estimates include (i) projections we make regarding the recoverability and impairment of our assets (including goodwill and intangibles), (ii) valuations of our derivative instruments, (iii) recoverability of our deferred tax assets, (iv) estimation of breakage and redemption experience rates, which drive how we recognize breakage on our gift card and gift certificates, and revenue from our customer loyalty program, (v) allocation of insurance proceeds to various recoverable components, and (vi) estimation of our Incremental Borrowing Rate (“IBR”) as relates to the valuation of our right-of-use assets and lease liabilities. Actual results may differ from those estimates.

Recently Adopted and Issued Accounting Pronouncements

Adopted:

1)On April 8, 2020, the FASB released FASB Staff Q&A Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. This provides optional relief when accounting for modifications to leases obtained as a result of COVID-19 which otherwise would have required full modification assessment under ASC 842. Where we have obtained rent concessions from our landlords, or provided concessions to our tenants, we have elected not to perform the standard Topic 842 modification evaluation where the concession does not result in the total consideration required by the contract being substantially less than the total consideration originally required by the contract. Under the guidance, where we have received or provided deferrals of rent, we have recorded the deferrals as receivables or payables, and where we have received or provided abatements, we have recorded these as variable rents in the consolidated statements of income.
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2)In the second quarter of 2020, in order to account for certain wage subsidies received from the Australian and New Zealand governments, we adopted International Accounting Standard 20 - Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”). The aim of these Australian and New Zealand government subsidies is to protect as many jobs as possible during the COVID-19 Pandemic by subsidizing the wages of employees, using the administrative capabilities of employers to forward such subsidies to their employees. The subsidies are not loans to employees or employers. U.S. GAAP has no codified accounting guidance concerning the measurement and presentation of such government grants, and in lieu of such guidance, common practice is to refer to IAS 20. IAS 20 permits entities to account for government grants on a gross basis, showing grants receivable as income and the associated expense as costs, or on a net basis, by deducting the grant from the related expense. The nature of the wage subsidies is such that, without them, our Company would likely have reduced its wages and salaries expense through the termination of certain employees. In order to faithfully present the transaction, our Company has therefore elected to present wages and salaries expense net of government grants. The impacted wages and salaries costs are contained within ‘other operating expenses’ and ‘general and administrative expenses’ in our cinema and real estate segments. As of September 30, 2020, we have received subsidies totaling AU$8.9 million and NZ$1.9 million. There are no unfulfilled conditions or contingencies relating to these subsidies as at September 30, 2020.

3)On January 1, 2020, we adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new guidance removes the second step of the two-step impairment test for measuring goodwill and is to be applied on a prospective basis only. Adoption of this standard has no material effect on our consolidated financial statements.

4)On January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This new guidance replaces the incurred loss impairment methodology under prior GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We have no history of significant bad debt losses and as such adoption of this standard has no material effect on our consolidated financial statements.

5)On January 1, 2019, we adopted ASU 2016-02 Leases (Topic 842) using the current period adjustment method. We recognized the cumulative effect of initially applying the new leasing standard as an adjustment to the opening balance of retained earnings. The comparative information was not restated. Adoption of this standard has no material effect on our opening equity balances, and on a net basis has had no material effect on our consolidated financial statements.

Issued:

ASUs Effective 2020 and Beyond

1)In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASC 2020-04 is effective as of March 12, 2020 through December 31, 2022. Our Company is currently evaluating the effect the new standard will have on its consolidated financial statements.

Prior period financial statement correction of immaterial errors

Sales Tax

During the fourth quarter of 2019, we identified immaterial errors related to the accounting for sales tax on certain products sold from cinemas dating back to 2017. These errors resulted in an overstatement of revenue for certain periods.

We assessed the materiality of these errors on our financial statements for prior periods in accordance with the SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods. However, the aggregate amount of $993,000 related to the prior period immaterial errors through September 30, 2019, would have been material to the full year Consolidated Statement of Operations to December 31, 2019, presented within the December 31, 2019, Form 10-K. Consequently, in accordance with ASC 250 (specifically SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), we have corrected these errors for all prior periods presented by revising the consolidated financial statements and other financial information included herein.

The following is a summary of the previously issued financial statement line items for all periods and statements included in this Form 10-Q report affected by the correction.

Consolidated Statements of Operations:

Consolidated Balance Sheets:

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Consolidated Statements of Cash Flows:

Note 3 – Impact of COVID-19 Pandemic and Liquidity

On March 11, 2020, the World Health Organization (“WHO”) declared the novel coronavirus, COVID-19, a global pandemic. Following the date of this declaration, a number of jurisdictions imposed various restrictions on “non-essential” activities. In the jurisdictions in which we operate, these restrictions typically included closure of all business deemed “non-essential” (including movie-theaters and most other indoor forms of entertainment), and that all “non-essential” workers, and all members of the public, remain in their homes. As a result, beginning in March 2020 and continuing through and beyond the end of the first quarter of 2020, we temporarily closed all of our live theatres and cinema operations in the U.S., Australia and New Zealand. Operating restrictions adopted in Australia and New Zealand also affected, and to varying degrees continue to affect, many of our tenants at our retail shopping centers. While most of these tenants have, to date, remained open for trading, we have in many cases agreed to rent abatements or deferrals.

In the second and third quarters of 2020, several jurisdictions began relaxing COVID-19 restrictions, but principally due to pressure on their economies, rather than material containment of COVID-19. Conversely, certain jurisdictions are to varying degrees reinstating their lockdowns due to the resurgence of COVID-19. Even where businesses have been allowed to reopen, operational limitations on density, hours of operation, and other operating factors, and public concern about interacting with third parties, have prevented a return to normal operations. These periodic closures and limitations on operating activities are expected to continue until the COVID-19 spread is considered materially contained. There is no reliable estimate as to when this will be.

Cinema Segment Impact

As of the date of this Report, we had reopened all of the cinemas in our New Zealand circuit except for our Reading Cinemas at Courtenay Central (which continues to be closed due to seismic concerns), with social distancing measures in place. Government imposed social distancing requirements were discontinued in New Zealand on June 8, 2020. In June and July, 2020, we reopened all of our Australia circuit with social distancing measures in place, but as the state of Victoria went from partial lockdown to full lockdown on July 8, 2020, six of our locations were required to close as of this date, with the seventh location subsequently required to close as of August 5, 2020. This situation in Australia is still in place, although there are indications that the lockdown in Victoria is easing. As of the date of this Report, 13 of our U.S. cinemas have reopened with social distancing measures in place and 11 U.S. cinemas remain temporarily closed. No reopening dates have been determined for these remaining cinemas.

COVID-19 has and continues to adversely impact our business not only as a result of government mandated closures, but also by reducing our seating capacities, increasing our costs of operation due to the need for the implementation of enhanced cleaning protocols, deterring potential customers from sharing entertainment spaces with third parties, and deterring film distributors from releasing their films to exhibitors. Even if legally permitted to reopen, our decisions to reopen particular theaters, and whether to have those theaters remain open, will be impacted by a variety of considerations including movie availability, customer demand, and safety considerations relative to our staff and customers.

Real Estate Segment Impact

Most of the rentable retail portions of our Courtenay Central location continue to be closed since January 2019 due to seismic concerns. All of our tenants in our New Zealand real estate business are currently open for trading. Substantially all of our tenants in our Australian real estate business are currently open for trading. We have, to varying degrees, supported certain tenants with rent abatements and deferrals, and may continue to do so until we believe that such tenants are in a position to fully perform their obligations despite COVID-19 impacts. In the U.S., the majority of our real estate income is generated by rental revenue from our live theatres which, as of the date of this Report, are closed to the public due to COVID-19.

Liquidity Impact

The repercussions of COVID-19 resulted in a significant decrease in our Company’s revenues and earnings in the first nine months of 2020. The closure of our global cinemas resulted in effectively no revenue in the second quarter of 2020. And, with respect to the third quarter of 2020, our Company has continued to experience significantly reduced Company revenues and as a result, operating losses due to (i) the continuing closure of certain cinemas due to government mandates as a result of COVID-19, (ii) the major studios postponing or removing their tentpole movies from the global 2020 release calendar as a direct result of COVID-19, (iii) increased operating costs due to COVID-19 safety protocols, and (iv) reduced attendance due to potential audience hesitance to engage socially with third parties and/or a lack of compelling movies scheduled at reopened theaters. These third quarter losses were partially offset by revenues related to our 9 New Zealand cinemas that were open (without social distancing restrictions), our 16 Australian cinemas that were open (with social distancing restrictions), which did not include those in Australia’s State of Victoria, and the 13 out of 24 U.S. cinemas that were open (with social distancing restrictions). As a result of the conditions described in (ii), (iii) and (iv) above, even in markets where we have been permitted to reopen, we have, in many cases, not been able to operate profitably at the theater level.

With regards to our real estate operations, while all of our New Zealand and Australian real estate tenants are currently trading (other than certain tenants who have closed for reasons unrelated to COVID-19), our real estate revenue and earnings may continue to be affected by any rent relief that we may deem necessary to provide to certain tenants experiencing impacts from COVID-19.

As of September 30, 2020, our Company had negative working capital of $74.8 million. In response to the issues associated with COVID-19, our Company has taken, and continues to take, significant proactive steps to preserve cash by:

(i)Completing arrangements with substantially all of our third-party landlords, which arrangements have resulted in both abatements and deferrals of our occupancy costs;

(ii)As the impacts of COVID-19 extend longer than anticipated, the Company is negotiating with such third-party landlords to further extend into the 2021 period and beyond such abatement and/or deferrals of occupancy costs and related repayment terms;

(iii)Terminating most hourly cinema employees in the U.S.;

(iv)Reducing the hours of certain other employees;

(v)Implementing a hiring freeze across our home offices in Culver City, New York City, Melbourne (Australia) and Wellington (New Zealand);

(vi)Eliminating non-essential operating costs;

(vii)Deferring, to the extent practicable, certain operating expenses, such as utility costs; and

(viii)Deferring, to the extent practicable, all non-essential capital expenditures.

Our Company secured access to government wage subsidy programs in Australia and New Zealand. The Australian wage subsidy program expires on December 31, 2020, after which a further application can be made for the first quarter of 2021. No assurances can be given that we will qualify for this scheme in the first quarter of 2021, or if our application will be successful. The New Zealand program expired on August 25, 2020. Our Company continues to review various programs offered by governmental agencies in the jurisdictions where it operates as those programs are further defined or revised, but there can be no assurances that our Company will qualify for any such programs or, even if it does qualify, the degree that it may be successful in its applications for such support.

In addition, during the third quarter of 2020, Management lodged an application to carry back certain operating losses under the recently enacted CARES Act. The CARES Act permits net operating losses generated from tax years 2018 through 2020 to be carried back five years. During the third quarter of 2020, the Company filed its 2019 federal income tax return and carried back the net operating losses generated in 2019 to offset taxable income from tax years 2015 and 2016. The CARES Act also permits corporate taxpayers to claim in full any previously unrefunded alternative minimum tax credit in the 2019 tax year. This claim was made with our Company’s 2019 federal income tax return. The carryback of the 2019 net operating loss and the refund claim for 100% of the remaining alternative minimum tax credit will result in a tax refund of approximately $5.1 million receivable at September 30, 2020.

To address the impacts of COVID-19 on our liquidity, we have renegotiated certain financial covenant modifications with our applicable lenders. These modifications permit us to classify the relevant debt instruments as long term and are further discussed below in Note 11 – Debt. As of March 31, 2020, Management had drawn down in full the operating debt facilities available to our Company. As of September 30, 2020, all of our Company’s facilities remain fully drawn with the exception of the Bank of America Credit Facility which has $5.8 million of capacity available, as detailed in Note 11 – Debt. Our Company’s use of these funds is in some ways limited due to limitations on the repatriation of funds from Australia and New Zealand to the United States and limitations on our use of the proceeds from our $55.0 million Bank of America Credit Facility for purposes unrelated to our U.S. cinema activities.

Management continues to explore and pursue additional sources of liquidity and means of preserving existing liquidity, including but not limited to,

Completing the refinancing of certain loans before the conclusion of 2020, to provide additional cash and extend maturity dates;

Raising of additional debt finance using certain unencumbered real estate assets;

Deferring capital expenditures;

Potential sale of certain non-core real estate assets, or sale of interests in such assets;

Further negotiations with landlords regarding rent abatements and payment deferrals;

The use of creative exhibition structures (such as auditorium rentals, private screenings for movies or gaming experiences) to bring people back to our auditoriums; and

Pursuit of additional benefits under various state and government COVID-19 relief legislation.

Management continues to evaluate the assertion required by ASC 205-40 Going Concern as it relates to our Company, including its operations in its various individual operating jurisdictions: U.S., Australia and New Zealand. Management’s evaluation is informed by current liquidity positions, cash flow estimates, known capital and other expenditure requirements and commitments and Management’s current business plan and strategies. Our Company’s business plan - two businesses (real estate and cinema) in three countries (Australia, New Zealand and the U.S.) - has served us well since the onset of COVID-19 and is key to Management’s overall evaluation of ASC 205-40 Going Concern.

Based on Management’s evaluation of ASC 205-40 Going Concern and the current conditions and events, considered in the aggregate, and Management’s various plans for enhancing its liquidity, Management has concluded that it is probable that our Company will be able to continue as a going concern for at least twelve months following the issuance of our financial statements.

Management’s forecasts and cash flow estimates are based on the current expectation that the global cinema industry will begin to recover in 2021, but this forecast relies upon, among other things, the elimination of governmental restrictions on the reopening of cinemas, the resumption of release of tentpole movies, and confidence of moviegoers in the safety protocols established by the global cinema industry. These named factors are both out of Management’s control and are material, individually and in the aggregate, to the realization of Management’s forecasts and expectations throughout the period of COVID-19. Management recognizes that in times of domestic or global economic turmoil, including COVID-19, our estimates and judgments with respect to these cash flow estimates are subject to greater uncertainty than in more stable periods. The forecasts are inherently uncertain and have required us to make estimates and judgements regarding the extent to which COVID-19 will continue to affect the cinema industry.

Management reviewed its significant cinema and real estate operations in Australia and New Zealand, two geographies that have experienced relatively more success in controlling COVID-19 than the U.S. As of September 30, 2020, substantially all of our cinema operations and real estate operations had resumed in Australia and New Zealand. However, the cash flow of our Australian and New Zealand cinemas has been diminished by the temporary determinations by the major studios to delay the global release of tentpole movies because key cinema markets in the U.S. (i.e. New York City and Los Angeles) remain closed. Our Australian real estate’s revenue generation abilities are less affected by COVID-19, and aside from the issuance of rental abatements and deferrals to certain tenants, our portfolio continues to generate near-to-expected cash flows. In addition, we hold in New Zealand unencumbered high value assets that, if required to, could be leveraged or sold to meet our expected obligations as they fall due.

In order to alleviate doubt that the Company will be able to generate sufficient cash flows within the twelve month period after the issuance of these financial statements to meet its obligations as they become due, Management has in place various specific plans to meet such obligations. Firstly, construction having been completed (except for punch list items) and a temporary certificate having been issued, Management is implementing our business plan to refinance the construction loan on our 44 Union Square building in New York City (the “Union Square Refinancing Plan”) to free up cash for other purposes. The Union Square Refinancing Plan has been a key part of the three-year real estate business strategy presented to our Board of Directors annually since 2018.  In August 2020, Management engaged and instructed an experienced New York based mortgage broker to source and complete such takeout financing. Although no assurances can be given, based on current facts and circumstances, including, without limitation, recent appraisals and consultation with our mortgage broker, Management is confident that this takeout financing will be completed before the end of the first quarter 2021, on satisfactory terms.