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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35066

 

IMAX Corporation

(Exact name of registrant as specified in its charter)

 

 

Canada

98-0140269

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

2525 Speakman Drive,

Mississauga, Ontario, Canada L5K 1B1

(905) 403-6500

902 Broadway, Floor 20

New York, New York, USA 10010

(212) 821-0100

 

(Address of principal executive offices, zip code, telephone numbers)

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Shares, no par value

 

IMAX

 

The New York Stock Exchange

 

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

None

(Title of class)

 

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 ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒    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 the 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

☐

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of September 30, 2019

Common Shares, no par value

 

61,290,617

 

 

 

 

 

 

 

IMAX CORPORATION

 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

72

Item 4.

Controls and Procedures

73

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

74

Item 1A.

Risk Factors

74

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

75

Item 6.

Exhibits

76

Signatures

 

77

 

2

 

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements included in this quarterly report may constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, references to future capital expenditures (including the amount and nature thereof), business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business, operations and technology, plans and references to the future success of IMAX Corporation together with its consolidated subsidiaries (the "Company") and expectations regarding the Company's future operating, financial and technological results. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies of the United States and Canada; risks related to the Company’s growth and operations in China; the performance of IMAX DMR® films; the signing of theater system agreements; conditions, changes and developments in the commercial exhibition industry; risks related to currency fluctuations; the potential impact of increased competition in the markets within which the Company operates; competitive actions by other companies; the failure to respond to change and advancements in digital technology; risks relating to recent consolidation among commercial exhibitors and studios; risks related to new business initiatives; conditions in the in-home and out-of-home entertainment industries; the opportunities (or lack thereof) that may be presented to and pursued by the Company; risks related to cyber-security and data privacy; risks related to the Company’s inability to protect the Company’s intellectual property; general economic, market or business conditions; the failure to convert theater system backlog into revenue; changes in laws or regulations; the failure to fully realize the projected cost savings and benefits from any of the Company’s restructuring initiatives; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this quarterly report are qualified by these cautionary statements, and actual results or anticipated developments by the Company may not be realized, and even if substantially realized, may not have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

 

IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It In IMAX®, The IMAX Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, DMR®, IMAX nXos®, IMAX think big®, think big® and IMAX Is Believing®, are trademarks and trade names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions.

3

 

IMAX CORPORATION

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

 

Page

The following unaudited Condensed Consolidated Financial Statements are filed as part of this Report:

 

 

 

Condensed Consolidated Balance Sheets as at September 30, 2019 and December 31, 2018

5

Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019 and 2018

6

Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2019 and 2018

7

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2019 and 2018

8

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine month periods ended September 30, 2019 and 2018

              9

Notes to Condensed Consolidated Financial Statements

10

 

4

 

IMAX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,548

 

 

$

141,590

 

Accounts receivable, net of allowance for doubtful accounts of $4,996 (December 31, 2018 — $3,174)

 

 

81,681

 

 

 

93,309

 

Financing receivables, net of allowance for uncollectible amounts

 

 

121,340

 

 

 

127,432

 

Variable consideration receivable from contracts

 

 

37,080

 

 

 

35,985

 

Inventories

 

 

58,175

 

 

 

44,560

 

Prepaid expenses

 

 

11,477

 

 

 

10,294

 

Film assets

 

 

18,675

 

 

 

16,367

 

Property, plant and equipment

 

 

305,097

 

 

 

280,658

 

Investment in equity securities

 

 

13,659

 

 

 

1,022

 

Other assets

 

 

20,242

 

 

 

17,997

 

Deferred income taxes

 

 

29,742

 

 

 

31,264

 

Other intangible assets

 

 

31,246

 

 

 

34,095

 

Goodwill

 

 

39,027

 

 

 

39,027

 

Total assets

 

$

869,989

 

 

$

873,600

 

Liabilities

 

 

 

 

 

 

 

 

Bank indebtedness

 

$

18,103

 

 

$

37,753

 

Accounts payable

 

 

23,882

 

 

 

32,057

 

Accrued and other liabilities

 

 

104,443

 

 

 

97,724

 

Deferred revenue

 

 

104,169

 

 

 

106,709

 

Total liabilities

 

 

250,597

 

 

 

274,243

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

6,761

 

 

 

6,439

 

Shareholders' equity

 

 

 

 

 

 

 

 

Capital stock common shares — no par value. Authorized — unlimited number.

 

 

 

 

 

 

 

 

61,362,281 issued and 61,290,617 outstanding (December 31, 2018 — 61,478,168 issued and 61,433,589 outstanding)

 

 

423,370

 

 

 

422,455

 

Less: Treasury stock, 71,664 shares at cost (December 31, 2018 — 44,579)

 

 

(1,572

)

 

 

(916

)

Other equity

 

 

168,204

 

 

 

179,595

 

Accumulated deficit

 

 

(58,424

)

 

 

(85,385

)

Accumulated other comprehensive loss

 

 

(4,122

)

 

 

(3,588

)

Total shareholders' equity attributable to common shareholders

 

 

527,456

 

 

 

512,161

 

Non-controlling interests

 

 

85,175

 

 

 

80,757

 

Total shareholders' equity

 

 

612,631

 

 

 

592,918

 

Total liabilities and shareholders' equity

 

$

869,989

 

 

$

873,600

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

5

 

IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment and product sales

 

$

21,735

 

 

$

25,301

 

 

$

56,629

 

 

$

60,182

 

Services

 

 

44,168

 

 

 

39,440

 

 

 

144,977

 

 

 

138,971

 

Rentals

 

 

17,642

 

 

 

14,479

 

 

 

61,675

 

 

 

57,805

 

Finance income

 

 

2,845

 

 

 

2,888

 

 

 

8,104

 

 

 

8,479

 

 

 

 

86,390

 

 

 

82,108

 

 

 

271,385

 

 

 

265,437

 

Costs and expenses applicable to revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment and product sales

 

 

11,740

 

 

 

14,099

 

 

 

33,114

 

 

 

29,620

 

Services

 

 

20,181

 

 

 

18,824

 

 

 

66,205

 

 

 

62,808

 

Rentals

 

 

7,349

 

 

 

6,994

 

 

 

20,253

 

 

 

19,722

 

 

 

 

39,270

 

 

 

39,917

 

 

 

119,572

 

 

 

112,150

 

Gross margin

 

 

47,120

 

 

 

42,191

 

 

 

151,813

 

 

 

153,287

 

Selling, general and administrative expenses

 

 

29,482

 

 

 

26,654

 

 

 

89,267

 

 

 

87,097

 

Research and development

 

 

1,359

 

 

 

4,028

 

 

 

3,717

 

 

 

11,542

 

Amortization of intangibles

 

 

1,271

 

 

 

1,039

 

 

 

3,564

 

 

 

2,896

 

Receivable provisions, net of recoveries

 

 

599

 

 

 

861

 

 

 

1,957

 

 

 

1,667

 

Legal arbitration award

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,500

 

Exit costs, restructuring charges and associated impairments

 

 

—

 

 

 

—

 

 

 

850

 

 

 

1,158

 

Income from operations

 

 

14,409

 

 

 

9,609

 

 

 

52,458

 

 

 

41,427

 

Change in fair value of equity investment

 

 

(490

)

 

 

—

 

 

 

(2,543

)

 

 

—

 

Retirement benefits non-service expense

 

 

(160

)

 

 

(126

)

 

 

(480

)

 

 

(374

)

Interest income

 

 

490

 

 

 

631

 

 

 

1,632

 

 

 

1,121

 

Interest expense

 

 

(489

)

 

 

(958

)

 

 

(1,806

)

 

 

(2,303

)

Income before income taxes

 

 

13,760

 

 

 

9,156

 

 

 

49,261

 

 

 

39,871

 

Provision for income taxes

 

 

(3,030

)

 

 

(1,452

)

 

 

(11,986

)

 

 

(9,540

)

Gain (loss) from equity-accounted investments, net of tax

 

 

166

 

 

 

(202

)

 

 

(56

)

 

 

(507

)

Net income

 

 

10,896

 

 

 

7,502

 

 

 

37,219

 

 

 

29,824

 

Less: net income attributable to non-controlling interests

 

 

(1,863

)

 

 

(2,482

)

 

 

(8,524

)

 

 

(8,674

)

Net income attributable to common shareholders

 

$

9,033

 

 

$

5,020

 

 

$

28,695

 

 

$

21,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to common shareholders -

   basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share — basic and diluted

 

$

0.15

 

 

$

0.08

 

 

$

0.47

 

 

$

0.33

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

6

 

IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

10,896

 

 

$

7,502

 

 

$

37,219

 

 

$

29,824

 

Unrealized net gain (loss) from cash flow hedging instruments

 

 

(527

)

 

 

506

 

 

 

(162

)

 

 

(1,180

)

Realization of cash flow hedging net (gain) loss upon

   settlement

 

 

322

 

 

 

(47

)

 

 

1,015

 

 

 

(379

)

Foreign currency translation adjustments

 

 

(1,498

)

 

 

(2,593

)

 

 

(1,670

)

 

 

(3,544

)

Other comprehensive loss, before tax

 

 

(1,703

)

 

 

(2,134

)

 

 

(817

)

 

 

(5,103

)

Income tax benefit (expense) related to other comprehensive loss

 

 

54

 

 

 

(120

)

 

 

(224

)

 

 

408

 

Other comprehensive loss, net of tax

 

 

(1,649

)

 

 

(2,254

)

 

 

(1,041

)

 

 

(4,695

)

Comprehensive income

 

 

9,247

 

 

 

5,248

 

 

 

36,178

 

 

 

25,129

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

(1,410

)

 

 

(1,651

)

 

 

(8,017

)

 

 

(7,538

)

Comprehensive income attributable to common shareholders

 

$

7,837

 

 

$

3,597

 

 

$

28,161

 

 

$

17,591

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

7

 

IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

37,219

 

 

$

 

29,824

 

Adjustments to reconcile net income to cash from operations:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

45,500

 

 

 

 

41,984

 

Write-downs, net of recoveries

 

 

 

2,984

 

 

 

 

2,541

 

Change in deferred income taxes

 

 

 

1,035

 

 

 

 

(2,849

)

Stock and other non-cash compensation

 

 

 

17,397

 

 

 

 

18,240

 

Unrealized foreign currency exchange loss

 

 

 

214

 

 

 

 

406

 

Change in fair value of equity investment

 

 

 

2,543

 

 

 

 

—

 

Loss from equity-accounted investments

 

 

 

789

 

 

 

 

209

 

(Gain) loss on non-cash contribution to equity-accounted investees

 

 

 

(733

)

 

 

 

298

 

Investment in film assets

 

 

 

(15,405

)

 

 

 

(22,240

)

Changes in other non-cash operating assets and liabilities

 

 

 

(24,286

)

 

 

 

(343

)

Net cash provided by operating activities

 

 

 

67,257

 

 

 

 

68,070

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

 

(5,528

)

 

 

 

(7,367

)

Investment in joint revenue sharing equipment

 

 

 

(31,099

)

 

 

 

(22,710

)

Acquisition of other intangible assets

 

 

 

(1,874

)

 

 

 

(3,198

)

Investment in equity securities

 

 

 

(15,153

)

 

 

 

—

 

Net cash used in investing activities

 

 

 

(53,654

)

 

 

 

(33,275

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

Increase in bank indebtedness

 

 

 

35,000

 

 

 

 

35,000

 

Repayment of bank indebtedness

 

 

 

(55,000

)

 

 

 

(40,667

)

Settlement of restricted share units and options

 

 

 

(8,589

)

 

 

 

(2,567

)

Treasury stock repurchased for future settlement of restricted share units

 

 

 

(1,572

)

 

 

 

(3,597

)

Repurchase of common shares, IMAX China

 

 

 

(19,157

)

 

 

 

—

 

Taxes withheld and paid on employee stock awards vested

 

 

 

(508

)

 

 

 

(1,437

)

Common shares issued - stock options exercised

 

 

 

2,391

 

 

 

 

1,017

 

Repurchase of common shares

 

 

 

(2,659

)

 

 

 

(46,452

)

Issuance of subsidiary shares to non-controlling interests (net of return on capital)

 

 

 

1,106

 

 

 

 

7,546

 

Dividends paid to non-controlling interests

 

 

 

(4,384

)

 

 

 

(6,934

)

Credit facility amendment fees paid

 

 

 

—

 

 

 

 

(1,909

)

Net cash used in financing activities

 

 

 

(53,372

)

 

 

 

(60,000

)

Effects of exchange rate changes on cash

 

 

 

727

 

 

 

 

95

 

Decrease in cash and cash equivalents during period

 

 

 

(39,042

)

 

 

 

(25,110

)

Cash and cash equivalents, beginning of period

 

 

 

141,590

 

 

 

 

158,725

 

Cash and cash equivalents, end of period

 

$

 

102,548

 

 

$

 

133,615

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

8

 

IMAX CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands of U.S. dollars)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Adjustments to capital stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

422,101

 

 

$

426,367

 

 

$

421,539

 

 

$

440,664

 

Change in shares held in treasury

 

 

3

 

 

 

1,038

 

 

 

(656

)

 

 

1,535

 

Employee stock options exercised

 

 

12

 

 

 

218

 

 

 

1,740

 

 

 

218

 

Fair value of stock options exercised at the grant date

 

 

3

 

 

 

70

 

 

 

100

 

 

 

70

 

Average carrying value of repurchased and retired common

   shares

 

 

(321

)

 

 

—

 

 

 

(925

)

 

 

(14,794

)

Balance, end of period

 

 

421,798

 

 

 

427,693

 

 

 

421,798

 

 

 

427,693

 

Adjustments to other equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

166,232

 

 

 

179,767

 

 

 

179,595

 

 

 

175,300

 

Paid-in-capital for employee stock options granted

 

 

2,231

 

 

 

1,550

 

 

 

6,719

 

 

 

4,393

 

Paid-in-capital for restricted share units granted

 

 

3,517

 

 

 

4,013

 

 

 

10,770

 

 

 

12,753

 

Paid-in-capital for restricted share units vested

 

 

(1,419

)

 

 

(1,127

)

 

 

(8,713

)

 

 

(9,042

)

Cash received from the issuance of common shares in excess of

   par value

 

 

—

 

 

 

—

 

 

 

651

 

 

 

799

 

Fair value of stock options exercised at the grant date

 

 

(3

)

 

 

(70

)

 

 

(100

)

 

 

(70

)

Common shares repurchased, IMAX China

 

 

(2,344

)

 

 

—

 

 

 

(19,157

)

 

 

—

 

Stock options exercised from treasury shares

 

 

(10

)

 

 

—

 

 

 

(1,561

)

 

 

—

 

Balance, end of period

 

 

168,204

 

 

 

184,133

 

 

 

168,204

 

 

 

184,133

 

Adjustments to accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

(66,828

)

 

 

(75,908

)

 

 

(85,385

)

 

 

(87,592

)

Retrospective adoption of ASC Topic 606, Revenue from

   Contracts with Customers

 

 

—

 

 

 

—

 

 

 

—

 

 

 

27,213

 

Net income attributable to common shareholders

 

 

9,033

 

 

 

5,020

 

 

 

28,695

 

 

 

21,150

 

Common shares repurchased and retired

 

 

(629

)

 

 

—

 

 

 

(1,734

)

 

 

(31,659

)

Balance, end of period

 

 

(58,424

)

 

 

(70,888

)

 

 

(58,424

)

 

 

(70,888

)

Adjustments to accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

(2,926

)

 

 

(2,762

)

 

 

(3,588

)

 

 

(626

)

Other comprehensive loss, net of tax

 

 

(1,196

)

 

 

(1,423

)

 

 

(534

)

 

 

(3,559

)

Balance, end of period

 

 

(4,122

)

 

 

(4,185

)

 

 

(4,122

)

 

 

(4,185

)

Adjustments to non-controlling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

85,472

 

 

 

76,981

 

 

 

80,757

 

 

 

74,511

 

Retrospective adoption of ASC Topic 606, Revenue from

   Contracts with Customers

 

 

—

 

 

 

—

 

 

 

—

 

 

 

735

 

Net income attributable to non-controlling interests

 

 

2,274

 

 

 

2,881

 

 

 

9,309

 

 

 

9,544

 

Other comprehensive loss, net of tax

 

 

(453

)

 

 

(831

)

 

 

(507

)

 

 

(1,136

)

Dividends paid to non-controlling shareholders

 

 

(2,118

)

 

 

(2,311

)

 

 

(4,384

)

 

 

(6,934

)

Balance, end of period

 

 

85,175

 

 

 

76,720

 

 

 

85,175

 

 

 

76,720

 

Total Shareholders' Equity

 

$

612,631

 

 

$

613,473

 

 

$

612,631

 

 

$

613,473

 

 

(The accompanying notes are an integral part of these condensed consolidated financial statements)

9

 

IMAX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)

(Unaudited)

1.  Basis of Presentation

IMAX Corporation, together with its consolidated subsidiaries (the “Company”), prepares its financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

These condensed consolidated financial statements include the accounts of the Company, except for subsidiaries which the Company has identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary. The nature of the Company’s business is such that the results of operations for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all normal and recurring adjustments necessary to make the results of operations for the interim periods a fair statement of such operations.

The Company has evaluated its various variable interests to determine whether they are VIEs as required by the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”).

The Company has ten film production companies that are VIEs. For five of the Company’s film production companies, the Company has determined that it is the primary beneficiary of these entities as the Company has the power to direct the activities of the respective VIE that most significantly impact the respective VIE’s economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the respective VIE or the right to receive benefits from the respective VIE that could potentially be significant to the respective VIE. The majority of these consolidated assets are held by the IMAX Original Film Fund (the “Original Film Fund”) as described in note 16(b). For the other five film production companies which are VIEs, the Company does not consolidate these film entities since it does not have the power to direct activities and does not absorb the majority of the expected losses or expected residual returns. The Company used the equity method of accounting for these entities. A loss in value of an investment other than a temporary decline is recognized as a charge to the condensed consolidated statements of operations.

Total assets and liabilities of the Company’s consolidated VIEs are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Total assets

 

$

11,331

 

 

$

12,203

 

Total liabilities

 

$

15,556

 

 

$

11,573

 

 

Total assets and liabilities of the VIE entities which the Company does not consolidate are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Total assets

 

$

448

 

 

$

447

 

Total liabilities

 

$

372

 

 

$

362

 

 

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323 “Investments – Equity Method and Joint Ventures” (“ASC 323”) or ASC 320 “Investments in Debt and Equity Securities” (“ASC 320”), as appropriate.

All intercompany accounts and transactions, including all unrealized intercompany profits on transactions with equity-accounted investees, have been eliminated.

The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

These interim financial statements should be read in conjunction with the consolidated financial statements included in the Company’s 2018 Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) which should be consulted for a summary of the significant accounting policies utilized by the Company. These interim financial statements are prepared following accounting policies consistent with the Company’s financial statements for the year ended December 31, 2018, except as noted below.

10

 

2.  New Accounting Standards and Accounting Changes

Adoption of New Accounting Policies

The Company adopted several standards including the following standards on January 1, 2019, which are effective for annual periods ending after December 31, 2018, and for annual and interim periods thereafter.

In 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASC Topic 842”). The Company adopted 2016-02 and several associated ASUs on January 1, 2019. See note 3 for a further discussion of the Company’s adoption of ASC Topic 842.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The adoption of this standard was applied prospectively and did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The adoption of this standard was applied prospectively and did not have an impact on the Company. See note 15(d) for additional disclosure regarding the Company’s hedging arrangements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The adoption of this standard was applied prospectively and did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued FASB Accounting Standard Codification Updates

In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments – Credit Losses (Topic 326)” (“ASU 2019-05”).  The purpose of ASU 2019-05 is to provide the option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for certain financial assets upon adoption of ASU 2016-13.  Adoption of ASU 2019-05 coincides with the adoption of ASU 2016-13 and will therefore be effective for interim and annual reporting periods beginning after December 15, 2019.  The Company’s Accounts receivable, Financing receivables, Variable consideration receivable from contracts and certain small loans receivable are within the scope of ASU 2019-05.  The Company has concluded that historical data, adjusted for any current events, is the most appropriate modelling information to determine the Company’s expected credit losses.  The Company continues to aggregate its data into the groupings necessary to develop its transition adjustment on January 1, 2020.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”). The purpose of ASU 2019-04 is to provide clarification and improve the guidance provided by ASU 2016-01, ASU 2016-13, and ASU 2017-12. Adoption of these amendments are required at the time of adopting ASU 2016-01, ASU 2016-13, and ASU 2017-12. As the Company has not yet adopted ASU 2016-13, the effective date and transition requirements for the amendments in ASU 2019-04 related to amendments in 2016-13, have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019 (see below). The Company is currently assessing the impact of the codification improvements on its condensed consolidated financial statements. The Company has previously adopted ASU 2016-01 and ASU 2017-12. As a result, the effective date for adoption of ASU 2019-04 as it pertains to ASU 2016-01 is the fiscal year beginning after December 15, 2019 and ASU 2017-12 is the beginning of the first annual period beginning after the issuance date. The Company is currently assessing the potential impacts of the codification improvements in ASU 2019-04 relating to ASU 2016-01 and 2017-12 on its condensed consolidated financial statements.

In March 2019, the FASB issued ASU No. 2019-02, “Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350)” (“ASU 2019-02”). The purpose of ASU 2019-02 is to align the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization, as well as requiring an entity to reassess estimates of the use of a film in a film group. In addition, ASU 2019-02 will require an entity to test for impairment at a film group level if it is predominantly monetized with other films. Amendments in this update would be applied prospectively, and for public entities, the amendments in ASU 2019-02 are effective for interim and annual reporting periods beginning after December 15, 2019.  The Company is currently assessing the impact of ASU 2019-02 on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The purpose of ASU 2016-13 is to require a financial asset measured on the amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt

11

 

securities should be recorded through an allowance for credit losses. For public entities, the amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2016-13 on its condensed consolidated financial statements.

The Company considers the applicability and impact of all recently issued FASB accounting standard codification updates. Accounting standards updates that are not noted above were assessed and determined to be not applicable or not significant to the Company’s condensed consolidated financial statements for the period ended September 30, 2019.

3.  Adoption of ASC Topic 842, Leases, effective January 1, 2019

On January 1, 2019, the Company adopted ASC Topic 842 “Leases”.  The standard was issued to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

As a lessee, the adoption of the standard resulted in the Company recording a net increase to net lease assets and lease liabilities of approximately $17.4 million as at January 1, 2019. The gross right-of-use assets and lease liabilities amounted to $20.0 million, while prepaid expenses of less than $0.1 million and unamortized lease inducements and other accruals of $2.5 million were reclassed from accrued liabilities to offset the applicable right-of-use asset. The Company mainly leases office and warehouse storage space. Office equipment is generally purchased outright. Adoption of ASC Topic 842 did not change the lease classification of its leases. The leases continue to be classified as operating leases similar to the guidance under ASC Topic 840. The adoption of ASC Topic 842 did not materially impact the Company’s net earnings and had no impact on cash flows.

As a lessor, several of the Company’s leases of IMAX theater systems are classified as sales-type leases. The accounting treatment of its lease arrangements for IMAX theater systems has not changed under Topic ASC 842 as compared to guidance under ASC Topic 840, as the Company has very few sales-type leases with variable consideration tied to an index.

The Company adopted ASC Topic 842, utilizing the modified retrospective transition method, which allowed the Company to adopt the standard as of the date of initial application. Prior year comparative amounts are not required to be restated and are presented in accordance with ASC Topic 840, “Leases” or other applicable standards effective prior to January 1, 2019. The Company has elected the ‘package of practical expedients’ permitted under the transition guidance within ASC Topic 842, which permits the Company to carry forward the historical lease classification and not reassess whether any expired or existing contracts are or contain leases. In addition, the Company is not required to reassess initial direct costs for any existing leases. The Company did not elect the land easements and the use of hindsight practical expedients in determining the lease term for existing leases. ASC Topic 842 also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases with a term of less than 12 months, it will not recognize right-of-use assets or lease liabilities. The Company also elected the practical expedient to not separate lease and non-lease components for all its leases regardless of whether the Company is the lessee or a lessor to the lease.

The following table presents the impact from the adoption of ASC Topic 842 on the Company’s assets and liabilities in the condensed consolidated balance sheet:

 

 

 

Balance at

 

 

 

 

 

 

Balance at

 

 

 

December 31,

 

 

ASC Topic 842

 

 

January 1,

 

 

 

2018

 

 

Adjustments

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

280,658

 

 

$

17,462

 

 

$

298,120

 

Prepaid expenses

 

 

10,294

 

 

 

(36

)

 

 

10,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accrued and other liabilities

 

 

97,724

 

 

 

17,426

 

 

 

115,150

 

 

4.  Lease Arrangements and Financing Receivables

IMAX Corporation as a Lessor:

Several of the Company’s leases are classified as sales-type leases for transactions related to the lease of IMAX theater systems. Certain arrangements that are legal sales are also classified as sales-type leases as certain clauses within the arrangements limit transfer of title or provide the Company with conditional rights to the system. The customer’s rights under the Company’s lease arrangements are described in note 2(m) in the Company’s 2018 Form 10-K. The Company classifies its lease arrangements at inception of the arrangement and, if required, after a modification of the lease arrangement, to determine whether they are sales-type

12

 

leases or operating leases. Under the Company’s lease arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s lease portfolio terms are typically non-cancellable for 10 to 20 years with renewal provisions from inception. Except for those sales arrangements that are classified as sales-type leases, the Company’s leases generally do not contain an automatic transfer of title at the end of the lease term. The Company’s lease arrangements do not contain a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty generally after the first year of the lease until the end of the lease term. The customer is responsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered back to the Company.

The Company has assessed the nature of its joint revenue sharing arrangements and concluded that, based on the guidance in the Revenue Recognition Topic of the ASC, the arrangements contain a lease. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to equipment under joint revenue sharing arrangements does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered back to the Company. See additional details regarding the Company’s traditional and hybrid joint revenue sharing arrangements as described in note 2(m) in the Company’s 2018 Form 10-K.

Financing receivables, consisting of net investment in sales-type leases and receivables from financed sales of theater systems are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Gross minimum lease payments receivable

 

$

12,350

 

 

$

10,499

 

Unearned finance income

 

 

(699

)

 

 

(902

)

Minimum lease payments receivable

 

 

11,651

 

 

 

9,597

 

Accumulated allowance for uncollectible amounts

 

 

(155

)

 

 

(155

)

Net investment in leases

 

 

11,496

 

 

 

9,442

 

Gross financed sales receivables

 

 

143,251

 

 

 

155,044

 

Unearned finance income

 

 

(32,492

)

 

 

(36,215

)

Financed sales receivables

 

 

110,759

 

 

 

118,829

 

Accumulated allowance for uncollectible amounts

 

 

(915

)

 

 

(839

)

Net financed sales receivables

 

 

109,844

 

 

 

117,990

 

Total financing receivables

 

$

121,340

 

 

$

127,432

 

 

 

 

 

 

 

 

 

 

Net financed sales receivables due within one year

 

$

27,443

 

 

$

26,911

 

Net financed sales receivables due after one year

 

$

82,401

 

 

$

91,079

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term (years)

 

 

 

 

 

 

 

 

 

 

Sales-type lease arrangements

 

 

 

7.5

 

 

 

 

7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average interest rate

 

 

 

 

 

 

 

 

 

 

 

Sales-type lease arrangements

 

 

 

3.60

 

%

 

 

8.00

 

%

Financed sales receivables

 

 

 

9.10

 

%

 

 

9.10

 

%

 


13

 

IMAX Corporation as a Lessee:

The Company mainly leases office and warehouse storage space and office equipment is generally purchased outright. Leases with an initial term of less than 12 months are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 5 years or more. The Company assumed that it was reasonably certain that the renewal options on its warehouse leases would be exercised based on previous history and knowledge, current understanding of future business needs and level of investment in leasehold improvements, among other considerations. The incremental borrowing rate used in the calculation of the lease liability is based on the location of each leased property. None of the Company’s leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain office space to third parties, which have a remaining term of less than 12 months and are not expected to be renewed.

 

The components of lease expense are as follows:

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating lease cost (1)

 

SG&A Expenses

 

$

102

 

 

$

1,240

 

 

$

565

 

 

$

3,677

 

Amortization of lease assets

 

SG&A Expenses

 

 

667

 

 

 

—

 

 

 

1,863

 

 

 

—

 

Interest on lease liabilities

 

SG&A Expenses

 

 

265

 

 

 

—

 

 

 

807

 

 

 

—

 

Total lease cost

 

 

 

$

1,034

 

 

$

1,240

 

 

$

3,235

 

 

$

3,677

 

 

(1)

Includes short-term leases and variable lease costs, which are not significant for the three and nine months ended September 30, 2019.

Supplemental cash flow information related to leases are as follows:

 

 

 

Nine Months Ended September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

2,732

 

 

Supplemental balance sheet information related to leases are as follows:

 

 

 

 

September 30,

 

 

January 1,

 

 

 

 

2019

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating Leases

Property, plant and equipment

 

$

15,877

 

 

$

17,462

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Operating Leases(1)

Accrued and other liabilities

 

$

18,391

 

 

$

19,960

 

 

(1)

The Company recorded lease liabilities of approximately $20.0 million as at January 1, 2019 upon initial adoption of ASC Topic 842. In addition, unamortized lease inducements and other accruals of $2.5 million were reclassed from accrued liabilities to offset against the applicable right-of-use asset.

 

 

 

 

September 30,

 

 

January 1,

 

 

 

 

 

2019

 

 

2019

 

 

Weighted-average remaining lease term (years)

 

 

 

 

 

 

 

 

 

Operating Leases

 

 

 

7.8

 

 

 

8.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

 

 

5.90

 

%

 

5.80

 

%

 

14

 

Maturities of lease liabilities are as follows:

 

 

 

Operating Leases

 

2019 (three months remaining)

 

$

831

 

2020

 

 

3,451

 

2021

 

 

3,047

 

2022

 

 

2,283

 

2023

 

 

2,175

 

Thereafter

 

 

11,312

 

Total lease payments

 

$

23,099

 

Less: interest expense

 

 

(5,006

)

Present value of lease liabilities

 

$

18,093

 

 

As of December 31, 2018, under ASC Topic 840, minimum lease payments under non-cancelable operating leases by period were expected to be as follows:

 

 

 

Operating Leases

 

2019

 

$

3,847

 

2020

 

 

2,790

 

2021

 

 

2,491

 

2022

 

 

1,843

 

2023

 

 

1,759

 

Thereafter

 

 

9,657

 

Total lease payments

 

$

22,387

 

 

5.  Inventories

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

31,461

 

 

$

29,705

 

Work-in-process

 

 

5,864

 

 

 

4,733

 

Finished goods

 

 

20,850

 

 

 

10,122

 

 

 

$

58,175

 

 

$

44,560

 

 

At September 30, 2019, finished goods inventory for which title had passed to the customer and revenue was deferred amounted to $2.3 million (December 31, 2018 — $1.9 million).

There were no write-downs for excess and obsolete inventory based on current estimates of net realizable value considering future events and conditions, during the three and nine months ended September 30, 2019 and 2018.

6.  Credit Facility and Other Financing Arrangements

Credit Facility

On June 28, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as agent, and a syndicate of lenders party thereto. The Credit Agreement expands the Company’s revolving borrowing capacity from $200.0 million to $300.0 million, and contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to $440.0 million or greater, depending on the mix of revolving and term loans comprising the incremental facility. The facility (the “Credit Facility”) matures on June 28, 2023.

Loans under the Credit Facility will bear interest, at the Company’s option, at (i) LIBOR plus a margin ranging from 1.00% to 1.75% per annum; or (ii) the U.S. base rate plus a margin ranging from 0.25% to 1.00% per annum, in each case depending on the Company’s Total Leverage Ratio (as defined in the Credit Agreement).

15

 

The Credit Agreement provides that the Company is required to maintain a Senior Secured Net Leverage Ratio (as defined in the Credit Agreement) as of the last day of any Fiscal Quarter (as defined in the Credit Agreement) of no greater than 3.25:1.00. In addition, the Credit Agreement contains customary affirmative and negative covenants for a transaction of this type, including covenants that limit indebtedness, liens, capital expenditures, asset sales, investments and restricted payments, in each case subject to negotiated exceptions and baskets. The Credit Agreement also contains representations, warranties and event of default provisions customary for a transaction of this type.

The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries (the “Guarantors”) and are secured by first-priority security interests in substantially all the assets of the Company and the Guarantors.

The Company was in compliance with all of its requirements at September 30, 2019.

Total amounts drawn and available under the Credit Facility at September 30, 2019 were $20.0 million and $280.0 million, respectively (December 31, 2018 — $40.0 million and $260.0 million, respectively). The effective interest rate for the three and nine months ended September 30, 2019 was 3.34% and 3.50%, respectively (2018 — 3.28% and 3.28%).

As at September 30, 2019 and December 31, 2018, the Company did not have any letters of credit and advance payment guarantees outstanding under the Credit Facility.

Working Capital Loan

On July 5, 2018, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), one of the Company’s majority-owned subsidiaries in China, entered into an unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.0 million U.S. Dollars) to fund ongoing working capital requirements. On July 24, 2019, this facility was renewed. The total amounts drawn and available under the working capital loan at September 30, 2019 and December 31, 2018 were nil and 200.0 million Renminbi, respectively ($nil and approximately $30.0 million U.S. Dollars, respectively).

Bank indebtedness includes the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Credit Facility

 

$

20,000

 

 

$

40,000

 

Deferred charges on debt financing

 

 

(1,897

)

 

 

(2,247

)

 

 

$

18,103

 

 

$

37,753

 

 

Wells Fargo Foreign Exchange Facility

Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. The net settlement risk on its foreign currency forward contracts was $0.4 million at September 30, 2019, as the notional value exceeded the fair value of the forward contracts (December 31, 2018 — $1.2 million). As at September 30, 2019, the Company has $38.8 million in notional value of such arrangements outstanding (December 31, 2018 — $50.8 million).

Bank of Montreal Facility

Prior to September 30, 2019, the Company had available a $10.0 million facility (December 31, 2018 — $10.0 million) with the Bank of Montreal for use solely in conjunction with the issuance of performance guarantees and letters of credit fully insured by Export Development Canada (the “Bank of Montreal Facility”). As at September 30, 2019, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2018 — $nil) under the Bank of Montreal Facility. The Bank of Montreal Facility expired as of September 30, 2019 and was not renewed. On October 28, 2019, the Company entered into a $5.0 million facility with the National Bank of Canada for use solely in conjunction with the issuance of performance guarantees and letters of credit fully insured by Export Development Canada (the “NBC Facility”) to replace the Bank of Montreal Facility.

 


16

 

7.  Commitments, Contingencies and Guarantees

Commitments

In the ordinary course of business, the Company enters into contractual agreements with third parties that include non-cancellable payment obligations, for which it is liable in future periods. These arrangements can include terms binding the Company to minimum payments and/or penalties if it terminates the agreement for any reason other than an event of default as described by the agreement.  

Contingencies and guarantees

The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. In accordance with the Contingencies Topic of the FASB ASC, the Company will make a provision for a liability when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions in conjunction with any related provisions on assets related to the claims at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case. Should developments in any of these matters outlined below cause a change in the Company’s determination as to an unfavorable outcome and result in the need to recognize a material provision, or, should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on the Company’s results of operations, cash flows, and financial position in the period or periods in which such a change in determination, settlement or judgment occurs.

The Company expenses legal costs relating to its lawsuits, claim and proceedings as incurred.

(a)In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages before the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) of its December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-City Entertainment (I) PVT Limited (“E-City”). On March 27, 2008, the arbitration panel issued a final award in favor of the Company in the amount of $11.3 million, consisting of past and future rents owed to the Company, plus interest and costs, as well as an additional $2,512 each day in interest from October 1, 2007 until the date the award is paid. In July 2008, E-City commenced a proceeding in Mumbai, India seeking an order that the ICC award may not be recognized in India and on June 10, 2013, the Bombay High Court ruled that it had jurisdiction over the proceeding filed by E-City. The Company appealed that ruling to the Supreme Court of India, and on March 10, 2017, the Supreme Court set aside the Bombay High Court’s judgement and dismissed E-City’s petition. On March 29, 2017, the Company filed an Execution Application in the Bombay High Court seeking to enforce the ICC award against E-City and several related parties. That matter is currently pending. The Company has also taken steps to enforce the ICC final award outside of India. In December 2011, the Ontario Superior Court of Justice issued an order recognizing the final award and requiring E-City to pay the Company $30,000 to cover the costs of the application, and in October 2015, the New York Supreme Court recognized the Canadian judgment and entered it as a New York judgment. The Company intends to continue pursuing its rights and seeking to enforce the award, although no assurances can be given with respect to the ultimate outcome.

(b)On November 11, 2013, Giencourt Investments, S.A. (“Giencourt”) initiated arbitration before the International Centre for Dispute Resolution in Miami, Florida, based on alleged breaches by the Company of its theater agreement and related license agreement with Giencourt. An arbitration hearing for witness testimony was held during the week of December 14, 2015. At the hearing, Giencourt’s expert identified monetary damages of up to approximately $10.4 million, which Giencourt sought to recover from the Company. The Company asserted a counterclaim against Giencourt for breach of contract and sought to recover lost profits in excess of $24.0 million under the agreements. Subsequently, in December 2015, Giencourt made a motion to the panel seeking to enforce a purported settlement of the matter based on negotiations between Giencourt and the Company. The panel held a final hearing with closing arguments in October 2016. On February 7, 2017, the panel issued a Partial Final Award and on July 21, 2017, the panel issued a Final Award (collectively, the “Award”), which held that the parties had reached a binding settlement, and therefore the panel did not reach the merits of the dispute. The Company strongly disputes that discussions about a potential resolution of this matter amounted to an enforceable settlement. In October 2017, the Company filed a petition to vacate the arbitration award in the United States Court for the Southern District of Florida on various grounds, including that the panel exceeded its jurisdiction, and a hearing was held on June 27, 2019. On September 27, 2019, a Magistrate Judge filed a non-binding recommendation that the Company’s petition be dismissed.  On October 14, 2019, the Company filed an objection to that recommendation. The Company’s petition to vacate the arbitration award is still pending a final review and decision by the District Judge. At this time, the Company is unable to determine the amounts that it may owe pursuant to the Award, or the timing of any such payments, and therefore no assurances can be given with respect to the ultimate outcome of the matter.

 

17

 

(c)In addition to the matters described above, the Company is currently involved in other legal proceedings or governmental inquiries which, in the opinion of the Company’s management, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings.

 

(d)In the normal course of business, the Company enters into agreements that may contain features that meet the definition of a guarantee. The Guarantees Topic of the FASB ASC defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments (either in cash, financial instruments, other assets, shares of its stock or provision of services) to a third party based on (a) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty, (b) failure of another party to perform under an obligating agreement or (c) failure of another third party to pay its indebtedness when due.

Financial Guarantees

The Company has provided no significant financial guarantees to third parties.

Product Warranties

The Company’s accrual for product warranties, which was recorded as part of accrued and other liabilities in the condensed consolidated balance sheets, was $0.2 million and $0.2 million at September 30, 2019 and December 31, 2018, respectively.

Director/Officer Indemnifications

The Company’s General By-law contains an indemnification of its directors/officers, former directors/officers and persons who have acted at its request to be a director/officer of an entity in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by the Canada Business Corporations Act, against expenses (including legal fees), judgments, fines and any amounts actually and reasonably incurred by them in connection with any action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Company. In addition, the Company has entered into indemnification agreements with each of its directors in order to effectuate the foregoing. The nature of the indemnification prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been accrued in the condensed consolidated balance sheets as at September 30, 2019 and December 31, 2018, with respect to this indemnity.

Other Indemnification Agreements

In the normal course of the Company’s operations, the Company provides indemnifications to counterparties in transactions such as: theater system lease and sale agreements and the supervision of installation or servicing of the theater systems; film production, exhibition and distribution agreements; real property lease agreements; and employment agreements. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims that may be suffered by the counterparty as a consequence of the transaction or the Company’s breach or non-performance under these agreements. While the terms of these indemnification agreements vary based upon the contract, they normally extend for the life of the agreements. A small number of agreements do not provide for any limit on the maximum potential amount of indemnification; however, virtually all of the Company’s system lease and sale agreements limit such maximum potential liability to the purchase price of the system. The fact that the maximum potential amount of indemnification required by the Company is not specified in some cases prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnifications and no amounts have been accrued in the condensed consolidated financial statements with respect to the contingent aspect of these indemnities.

 


18

 

8.  Condensed Consolidated Statements of Operations Supplemental Information

 

(a)

Selling Expenses

The Company defers direct selling costs such as sales commissions and other amounts related to its sales and sales-type lease arrangements until the related revenue is recognized. These costs and direct advertising and marketing, included in costs and expenses applicable to Revenues – Equipment and product sales, totaled $0.6 million and $1.5 million for the three and nine months ended September 30, 2019, respectively (2018 — $0.8 million and $2.0 million, respectively).

Film exploitation costs, including advertising and marketing, totaled $4.3 million and $18.4 million for the three and nine months ended September 30, 2019, respectively (2018 — $3.1 million and $15.7 million, respectively), and are recorded in costs and expenses applicable to revenues-services as incurred.

Commissions are recognized as costs and expenses applicable to Revenues – Rentals in the month they are earned. These costs totaled an expense of $0.3 million and a recovery of $0.3 million for the three and nine months ended September 30, 2019, respectively (2018 — expense of $0.4 million and $1.0 million, respectively). Direct advertising and marketing costs for each theater are charged to costs and expenses applicable to Revenues – Rentals as incurred. These costs totaled an expense of $0.5 million and $1.4 million for the three and nine months ended September 30, 2019, respectively (2018 — $0.5 million and $1.2 million, respectively).

 

(b)

Foreign Exchange

Included in selling, general and administrative expenses for the three and nine months ended September 30, 2019 is a loss of $0.7 million and $1.1 million, respectively (2018 — gain of $0.4 million and loss of $0.7 million, respectively) for net foreign exchange gains/losses related to the translation of foreign currency denominated monetary assets and liabilities. See note 15(d) for additional information.

 

(c)

Collaborative Arrangements

Joint Revenue Sharing Arrangements

In a joint revenue sharing arrangement, the Company receives a portion of a theater’s box office and in certain arrangements a portion of concession revenues and a small upfront or initial payment, in exchange for placing a theater system at the theater operator’s venue. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to equipment under joint revenue sharing arrangements generally does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered back to the Company.

The Company has signed joint revenue sharing agreements with 39 exhibitors for a total of 1,243 theater systems, of which 841 theaters were operating as at September 30, 2019, the terms of which are similar in nature, rights and obligations. The accounting policy for the Company’s joint revenue sharing arrangements is disclosed in note 2(m) of the Company’s 2018 Form 10-K.

Amounts attributable to transactions arising between the Company and its customers under joint revenue sharing arrangements are included in Revenue — Equipment and product sales and Revenue — Rentals and for the three and nine months ended September 30, 2019 amounted to $17.9 million and $66.1 million, respectively (2018 — $17.0 million and $60.6 million, respectively).

IMAX DMR

In an IMAX DMR arrangement, the Company transforms conventional motion pictures into the Company’s large screen format, allowing the release of Hollywood content to the global IMAX theater network. In a typical IMAX DMR film arrangement, the Company will absorb its costs for the digital re-mastering and then recoup this cost from a percentage of the box-office receipts of the film, which in recent years has averaged approximately 12.5% outside of Greater China and a lower percentage for certain films within Greater China. The Company does not typically hold distribution rights or the copyright to these films.

19

 

For the nine months ended September 30, 2019, the majority of IMAX DMR revenue was earned from the exhibition of 59 IMAX DMR films (2018 – 58) throughout the IMAX theater network. The accounting policy for the Company’s IMAX DMR arrangements is disclosed in note 2(m) of the Company’s 2018 Form 10-K.

Amounts attributable to transactions arising between the Company and its customers under IMAX DMR arrangements are included in Revenues – Services and for the three and nine months ended September 30, 2019 amounted to $26.7 million and $93.9 million, respectively (2018 — $22.4 million and $85.6 million, respectively).

Co-Produced Film Arrangements

In certain film arrangements, the Company co-produces a film with a third party whereby the third party retains the copyright and rights to the film. In some cases, the Company obtains exclusive theatrical distribution rights to the film. Under these arrangements, both parties contribute funding to the Company’s partly-owned subsidiary for the production and distribution of the film and for associated exploitation costs.

As at September 30, 2019, the Company has two significant co-produced film arrangements which represent the VIE total assets balance of $11.3 million and liabilities balance of $15.6 million and three other co-produced film arrangements, the terms of which are similar. The accounting policies relating to co-produced film arrangements are disclosed in notes 2(a) and 2(m) of the Company’s 2018 Form 10-K.

For the three and nine months ended September 30, 2019, expenses totaling $0.1 million and $0.3 million, respectively (2018 — expense of $0.2 million and $0.4 million, respectively) attributable to transactions between the Company and other parties involved in the production of the films have been included in cost and expenses applicable to Revenues – Services.

For the three and nine months ended September 30, 2019, revenues of $nil and $nil, respectively (2018 —$nil and $0.4 million, respectively) and costs and expenses applicable to revenues of $nil and $nil, respectively (2018 — $nil and $0.5 million, respectively) attributable to this collaborative arrangement have been recorded in Revenue – Services and Costs and expenses applicable to Revenues – Services, respectively.

 


20

 

9.  Condensed Consolidated Statements of Cash Flows Supplemental Information

 

(a)

Depreciation and amortization are comprised of the following:

 

 

Nine Months Ended

 

 

September 30,

 

 

 

2019

 

 

 

2018

 

Film assets

$

 

13,015

 

 

$

 

11,166

 

Property, plant and equipment

 

 

 

 

 

 

 

 

 

Joint revenue sharing arrangements

 

 

17,179

 

 

 

 

15,293

 

Other property, plant and equipment

 

 

9,100

 

 

 

 

9,753

 

Other intangible assets

 

 

4,568

 

 

 

 

3,871

 

Other assets

 

 

1,262

 

 

 

 

925

 

Deferred financing costs

 

 

376

 

 

 

 

976

 

 

$

 

45,500

 

 

$

 

41,984

 

 

 

(b)

Write-downs, net of recoveries, are comprised of the following:

 

 

Nine Months Ended

 

 

September 30,

 

 

 

2019

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

$

 

1,957

 

 

$

 

1,567

 

Joint revenue sharing arrangements (1)

 

 

748

 

 

 

 

354

 

Film assets (2)

 

 

179

 

 

 

 

—

 

Property, plant and equipment (1)

 

 

78

 

 

 

 

482

 

Other intangible assets

 

 

22

 

 

 

 

38

 

Financing receivables

 

 

—

 

 

 

 

100

 

 

$

 

2,984

 

 

$

 

2,541

 

 

(1)

The Company recognized asset impairment charges of $0.1 million (2018 — $0.8 million) reflecting property, plant and equipment that were no longer in use. In the nine months ended September 30, 2019, the Company recorded a charge of $0.2 million in cost of sales applicable to Equipment and product sales and $0.1 million in revenue applicable to Equipment and product sales upon the upgrade of xenon-based digital systems under joint revenue sharing arrangements to laser-based digital systems. No such charge was recorded in the nine months ended September 30, 2018.

(2)

The Company discontinued production of a certain film asset in 2019, resulting in a write down of costs incurred totalling $0.2 million (2018 —$nil).

 

(c)

Significant non-cash investing and financing activities are comprised of the following:

 

 

Nine Months Ended

 

 

September 30,

 

 

 

2019

 

 

 

2018

 

Net accruals related to:

 

 

 

 

 

 

 

 

 

   Investment in joint revenue sharing arrangements

$

 

2,040

 

 

$

 

(200

)

   Acquisition of other intangible assets

 

 

6

 

 

 

 

(189

)

   Purchases of property, plant and equipment

 

 

(432

)

 

 

 

634

 

 

$

 

1,614

 

 

$

 

245

 

 

 


21

 

10.  Income Taxes

 

 

(a)

Income Taxes

 

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or decreases in the year, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations. During the quarter ended September 30, 2019, there was no change in the Company’s estimates of the recoverability of its deferred tax assets based on an analysis of both positive and negative evidence including projected future earnings as necessary.

 

As at September 30, 2019, the Company had net deferred income tax assets after valuation allowance of $29.7 million (December 31, 2018 — $31.3 million), which consists of a gross deferred income tax asset of $29.9 million (December 31, 2018 — $31.5 million), against which the Company is carrying a $0.2 million valuation allowance (December 31, 2018 — $0.2 million).

 

For the quarter ended September 30, 2019, the Company recorded a provision for income taxes of $3.0 million. Included in the provision for income taxes was a recovery of $0.7 million related to its provision for uncertain tax positions and there were no amounts recognized related to its provision for tax shortfalls related to stock-based compensation costs recognized in the period.

 

In 2018, the Company finalised its accounting related to changes in the U.S. Tax Act. Among other things, the Company has finalised provisional estimates and tax calculations, which included an evaluation of recent interpretations and new guidance issued. No adjustments were recognised during the year ended December 31, 2018, and the provisional re-measurement effect on deferred taxes recorded in the 2017 year reflects the total effect of the changes in the U.S. Tax Act.   

 

The Company has not provided for taxes on cumulative earnings of non-Canadian affiliates and associated companies that have been reinvested indefinitely. Taxes are provided for earnings of non-Canadian affiliates and associated companies when the Company determines that such earnings are no longer indefinitely reinvested.

 

Cash held outside of North America as at September 30, 2019 was $84.2 million (December 31, 2018 — $121.9 million), of which $63.5 million was held in the People’s Republic of China (“PRC”) (December 31, 2018 — $54.7 million). The Company's intent is to permanently reinvest these amounts outside of Canada and the Company does not currently anticipate that it will need funds generated from foreign operations to fund North American operations. In the event funds from foreign operations are needed to fund operations in North America and if withholding taxes have not already been previously provided, the Company would be required to accrue and pay these additional withholding tax amounts on repatriation of funds from China to Canada. The Company currently estimates this amount to be $10.2 million (December 31, 2018 — $8.4 million).

 

 

(b)

Income Tax Effect on Other Comprehensive Income

 

The income tax (expense) benefit included in the Company’s other comprehensive income are related to the following items:

 

 

Three Months Ended

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Unrealized change in cash flow hedging instruments

 

$

(84

)

 

$

(132

)

 

$

(266

)

 

$

309

 

Realized change in cash flow hedging instruments upon settlement

 

 

138

 

 

 

12

 

 

 

42

 

 

 

99

 

 

 

$

54

 

 

$

(120

)

 

$

(224

)

 

$

408

 

 

 

22

 

11.  Capital Stock

 

(a)

Stock-Based Compensation

Compensation costs recorded in the condensed consolidated statements of operations for the Company’s stock-based compensation plans were $5.5 million and $16.9 million for the three and nine months ended September 30, 2019, respectively (2018 — $5.6 million and $17.1 million, respectively). The following reflects the stock-based compensation expense recorded to the respective financial statement line items:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost and expenses applicable to revenues

$

 

448

 

 

$

 

587

 

 

$

 

1,268

 

 

$

 

1,319

 

Selling, general and administrative expenses

 

 

4,983

 

 

 

 

4,840

 

 

 

 

15,371

 

 

 

 

15,499

 

Research and development

 

 

96

 

 

 

 

135

 

 

 

 

277

 

 

 

 

347

 

Exit costs, restructuring charges and associated impairments

 

 

—

 

 

 

 

—

 

 

 

 

—

 

 

 

 

(19

)

 

$

 

5,527

 

 

$

 

5,562

 

 

$

 

16,916

 

 

$

 

17,146

 

 

The following reflects a breakdown of the Company’s stock-based compensation expense by each plan type:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock options

$

 

2,145

 

 

$

 

1,489

 

 

$

 

6,228

 

 

$

 

4,239

 

Restricted Share Units

 

 

2,933

 

 

 

 

3,772

 

 

 

 

9,175

 

 

 

 

11,792

 

China Long Term Incentive Plan Restricted Share Units

 

 

363

 

 

 

 

241

 

 

 

 

1,283

 

 

 

 

961

 

China Options

 

 

86

 

 

 

 

60

 

 

 

 

230

 

 

 

 

154

 

 

$

 

5,527

 

 

$

 

5,562

 

 

$

 

16,916

 

 

$

 

17,146

 

 

    Included in the above table is an expense of less than $0.1 million in the three and nine months ended September 30, 2019, respectively (2018 – $nil and $nil, respectively) related to RSU grants issued to a certain advisor of the Company.

 

Stock Option Summary

The following table summarizes certain information in respect of option activity under the Company’s Stock Option Plan (“SOP”) and IMAX Amended and Restated Long Term Incentive Plan (“IMAX LTIP”) for the nine months ended September 30:

 

 

 

Number of Shares

 

 

 

Weighted Average Exercise

Price Per Share

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Options outstanding, beginning of period

 

 

5,465,046

 

 

 

5,082,100

 

 

$

 

27.63

 

 

$

 

29.31

 

Granted

 

 

1,016,882

 

 

 

1,081,120

 

 

 

 

20.66

 

 

 

 

21.96

 

Exercised

 

 

(86,337

)

 

 

(12,750

)

 

 

 

20.15

 

 

 

 

17.08

 

Forfeited

 

 

(329,346

)

 

 

(51,238

)

 

 

 

23.60

 

 

 

 

31.14

 

Expired

 

 

(299,134

)

 

 

(490,042

)

 

 

 

25.82

 

 

 

 

31.61

 

Cancelled

 

 

(26,281

)

 

 

(100,596

)

 

 

 

31.08

 

 

 

 

30.32

 

Options outstanding, end of period

 

 

5,740,830

 

 

 

5,508,594

 

 

 

 

26.82

 

 

 

 

27.66

 

Options exercisable, end of period

 

 

4,511,208

 

 

 

3,902,341

 

 

 

 

27.76

 

 

 

 

28.58

 

 

23

 

Restricted Share Units (“RSU”) Summary

The following table summarizes certain information in respect of RSU activity under the IMAX LTIP for the nine months ended September 30:

 

 

 

Number of Awards

 

 

Weighted Average Grant Date

Fair Value Per Share

 

 

 

2019

 

 

2018

 

 

 

2019

 

 

 

2018

 

RSUs outstanding, beginning of period

 

 

1,033,871

 

 

 

995,329

 

 

$

 

25.70

 

 

$

 

32.68

 

Granted

 

 

649,389

 

 

 

658,353

 

 

 

 

22.33

 

 

 

 

20.99

 

Vested and settled

 

 

(367,020

)

 

 

(392,066

)

 

 

 

26.66

 

 

 

 

30.87

 

Forfeited

 

 

(206,593

)

 

 

(63,621

)

 

 

 

23.77

 

 

 

 

30.34

 

RSUs outstanding, end of period

 

 

1,109,647

 

 

 

1,197,995

 

 

 

 

23.77

 

 

 

 

26.97

 

 

    Included in the above table is 12,580 RSU awards issued to a certain advisor of the Company which were granted, vested and settled in the nine months ended September 30, 2019.

 

Issuer Purchases of Equity Securities

In 2017, the Company’s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common shares. The share repurchase program expires on June 30, 2020. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. During the three and nine months ended September 30, 2019, the Company repurchased 46,615 and 134,384 common shares, respectively, at an average price of $20.35 and $19.76 per share, respectively, excluding commissions (2018 – nil and 2,154,689 common shares, respectively at an average price of $nil and $21.54 per share, respectively).

The total number of shares purchased during the three and nine months ended September 30, 2019 does not include 45,000 and 445,000 common shares, respectively (2018 — nil and 300,000 common shares, respectively), purchased in the administration of employee share-based compensation plans, at an average price of $21.52 and $22.83 per share, respectively (2018 — $nil and $20.55 per share, respectively).

As at September 30, 2019, the IMAX LTIP trustee held 71,664 shares purchased for $1.6 million in the open market to be issued upon the settlement of RSUs and certain stock options. The shares held with the trustee are recorded at cost and are reported as a reduction against capital stock on the condensed consolidated balance sheet.

In 2018, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to repurchase shares of IMAX China in an amount not to exceed 10% of the total number of issued shares of IMAX China as at May 3, 2018 (35,818,112 shares). The share repurchase program expired on June 6, 2019. In 2019, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to repurchase shares of IMAX China in an amount not to exceed 10% of the total number of issued shares of IMAX China as at June 6, 2019 (35,605,560 shares). The share repurchase program expires on the date of the 2020 annual general meeting of IMAX China. The repurchases may be made in the open market or through other means permitted by applicable laws. IMAX China has no obligation to repurchase its shares and the share repurchase program may be suspended or discontinued by IMAX China at any time. During the three and nine months ended September 30, 2019, IMAX China repurchased 1,025,800 and 8,051,500 common shares at an average price of HKD 17.90 per share and HKD 18.63, respectively (U.S. 2.29 and U.S. $2.38, respectively). No shares were repurchased during the three and nine months ended September 30, 2018.

 

24

 

 

(b)

Net Income Per Share

Reconciliations of the numerator and denominator of the basic and diluted per-share computations are comprised of the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common shareholders

$

 

9,033

 

 

$

 

5,020

 

 

$

 

28,695

 

 

$

 

21,150

 

Weighted average number of common shares (000's):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued and outstanding, beginning of period

 

 

61,331

 

 

 

 

62,522

 

 

 

 

61,434

 

 

 

 

64,696

 

Weighted average number of shares repurchased, net of shares

   issued during the period

 

 

(27

)

 

 

 

29

 

 

 

 

(97

)

 

 

 

(1,230

)

Weighted average number of shares used in computing basic

   income per share

 

 

61,304

 

 

 

 

62,551

 

 

 

 

61,337

 

 

 

 

63,466

 

Assumed exercise of stock options and RSUs, net of shares

   assumed repurchased

 

 

175

 

 

 

 

242

 

 

 

 

172

 

 

 

 

114

 

Weighted average number of shares used in computing diluted

   income per share

 

 

61,479

 

 

 

 

62,793

 

 

 

 

61,509

 

 

 

 

63,580

 

 

The calculation of diluted earnings per share for the three and nine months ended September 30, 2019 excludes 5,289,172 and 5,902,208 shares, respectively (2018 — 5,732,840 and 5,735,717 shares, respectively) that are issuable upon the vesting of 71,321 and 161,378 RSUs, respectively (2018 — 299,859 and 302,736 RSUs, respectively) and the exercise of 5,217,851 and 5,740,830 stock options, respectively (2018 — 5,432,981 and 5,432,981 stock options, respectively), as the impact would be antidilutive.

12.  Revenue from Contracts with Customers

The Company’s revenue arrangements with certain customers may involve performance obligations consisting of the delivery of a theater system (projector, sound system, screen system and, if applicable, 3D glasses cleaning machine); services associated with the theater system including theater design support, supervision of installation, and projectionist training; a license to use the IMAX brand; 3D glasses; maintenance and extended warranty services; and licensing of films. The Company evaluates all of the performance obligations in an arrangement to determine which are considered distinct, either individually or in a group, for accounting purposes and which of the deliverables represent separate units of accounting based on the applicable accounting guidance in the Leases Topic of the FASB ASC; the Guarantees Topic of the FASB ASC; and the Revenue Recognition Topic of the FASB ASC.  If separate units of accounting are either required under the relevant accounting standards or determined to be applicable under the Revenue Recognition Topic, the total transaction price received or receivable in the arrangement is allocated based on the applicable guidance in the above noted standards. The Company’s revenue recognition policies are described in note 2(m) in the Company’s 2018 Form 10-K.

The Company’s arrangements include a requirement for the provision of maintenance services over the life of the arrangement, subject to a consumer price index increase on renewal each year. In circumstances where customers prepay the entire term’s maintenance arrangement, payments are due to the Company for the years after the extended warranty and maintenance services offered as part of the System Obligation expire. Payments upon renewal each year can be either in arrears or in advance and can vary in frequency from monthly to annually. At September 30, 2019 $15.5 million of consideration has been deferred in relation to outstanding stand ready performance obligations related to these maintenance services (December 31, 2018 — $21.9 million). As the maintenance services are a stand ready obligation, revenue, subject to appropriate constraint, is recognized evenly over the contract term.

In instances where consideration is received prior to performance obligations being satisfied, it is deferred. The majority of the Company’s deferred revenue balance relates to payments for theater systems that have not yet been recognized. The deferred revenue related to an individual theater increases as progress payments are made and is recognized at the time the system obligation is satisfied. Recognition dates are variable and depend on numerous factors, including some outside of the Company’s control.

The recognition of variable consideration involves a significant amount of judgment. Variable consideration is to be recognized subject to appropriate constraints to avoid a significant reversal of revenue in future periods. The Company will review the variable

25

 

interest assets on an ongoing basis. In the three and nine months ended September 30, 2019, the Company recorded a true-up of variable consideration of $0.6 million and $2.5 million, respectively due to the modification of existing arrangements.

The following tables present a breakdown of the Company’s revenues between fixed and variable consideration and lease arrangements:

 

 

Three Months Ended

 

 

September 30, 2019

 

 

Subject to the Revenue

 

 

Subject to the

 

 

 

 

 

 

 

Recognition Standard

 

 

Lease Standard

 

 

 

 

 

 

 

Fixed

consideration

 

 

Variable

consideration

 

 

Lease

arrangements

 

 

Total

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

$

 

—

 

 

$

 

26,665

 

 

$

 

—

 

 

$

 

26,665

 

Joint revenue sharing arrangements – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

16,546

 

 

 

 

16,546

 

IMAX systems – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

32

 

 

 

 

32

 

 

 

 

—

 

 

 

 

26,665

 

 

 

 

16,578

 

 

 

 

43,243

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases

 

 

15,520

 

 

 

 

2,580

 

 

 

 

—

 

 

 

 

18,100

 

Ongoing fees and finance income

 

 

2,903

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,903

 

Joint revenue sharing arrangements – fixed fees

 

 

—

 

 

 

 

—

 

 

 

 

1,438

 

 

 

 

1,438

 

Theater system maintenance

 

 

13,657

 

 

 

 

—

 

 

 

 

—

 

 

 

 

13,657

 

Other theater

 

 

1,560

 

 

 

 

—

 

 

 

 

—

 

 

 

 

1,560

 

 

 

 

33,640

 

 

 

 

2,580

 

 

 

 

1,438

 

 

 

 

37,658

 

New business

 

 

596

 

 

 

 

-

 

 

 

 

—

 

 

 

 

596

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

2,185

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,185

 

Film distribution

 

 

—

 

 

 

 

1,343

 

 

 

 

—

 

 

 

 

1,343

 

Other

 

 

—

 

 

 

 

328

 

 

 

 

1,037

 

 

 

 

1,365

 

 

 

 

2,185

 

 

 

 

1,671

 

 

 

 

1,037

 

 

 

 

4,893

 

Total

$

 

36,421

 

 

$

 

30,916

 

 

$

 

19,053

 

 

$

 

86,390

 

26

 

 

 

Nine Months Ended

 

 

September 30, 2019

 

 

Subject to the Revenue

 

 

Subject to the

 

 

 

 

 

 

 

Recognition Standard

 

 

Lease Standard

 

 

 

 

 

 

 

Fixed

consideration

 

 

Variable

consideration

 

 

Lease

arrangements

 

 

Total

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

$

 

—

 

 

$

 

93,908

 

 

$

 

—

 

 

$

 

93,908

 

Joint revenue sharing arrangements – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

59,704

 

 

 

 

59,704

 

IMAX systems – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

189

 

 

 

 

189

 

 

 

 

—

 

 

 

 

93,908

 

 

 

 

59,893

 

 

 

 

153,801

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases

 

 

36,758

 

 

 

 

5,454

 

 

 

 

—

 

 

 

 

42,212

 

Ongoing fees and finance income

 

 

8,588

 

 

 

 

—

 

 

 

 

—

 

 

 

 

8,588

 

Joint revenue sharing arrangements – fixed fees

 

 

—

 

 

 

 

—

 

 

 

 

6,525

 

 

 

 

6,525

 

Theater system maintenance

 

 

39,815

 

 

 

 

—

 

 

 

 

—

 

 

 

 

39,815

 

Other theater

 

 

5,766

 

 

 

 

—

 

 

 

 

—

 

 

 

 

5,766

 

 

 

 

90,927

 

 

 

 

5,454

 

 

 

 

6,525

 

 

 

 

102,906

 

New business

 

 

1,908

 

 

 

 

-

 

 

 

 

—

 

 

 

 

1,908

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

6,458

 

 

 

 

—

 

 

 

 

—

 

 

 

 

6,458

 

Film distribution

 

 

—

 

 

 

 

3,333

 

 

 

 

—

 

 

 

 

3,333

 

Other

 

 

—

 

 

 

 

1,519

 

 

 

 

1,460

 

 

 

 

2,979

 

 

 

 

6,458

 

 

 

 

4,852

 

 

 

 

1,460

 

 

 

 

12,770

 

Total

$

 

99,293

 

 

$

 

104,214

 

 

$

 

67,878

 

 

$

 

271,385

 

 

 

Three Months Ended

 

 

September 30, 2018

 

 

Subject to the Revenue

 

 

Subject to the

 

 

 

 

 

 

 

Recognition Standard

 

 

Lease Standard

 

 

 

 

 

 

 

Fixed

consideration

 

 

Variable

consideration

 

 

Lease

arrangements

 

 

Total

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

$

 

—

 

 

$

 

22,372

 

 

$

 

—

 

 

$

 

22,372

 

Joint revenue sharing arrangements – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

14,327

 

 

 

 

14,327

 

 

 

 

—

 

 

 

 

22,372

 

 

 

 

14,327

 

 

 

 

36,699

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases

 

 

19,320

 

 

 

 

1,107

 

 

 

 

—

 

 

 

 

20,427

 

Ongoing fees and finance income

 

 

2,971

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,971

 

Joint revenue sharing arrangements – fixed fees

 

 

2,798

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,798

 

Theater system maintenance

 

 

12,415

 

 

 

 

—

 

 

 

 

—

 

 

 

 

12,415

 

Other theater

 

 

2,076

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,076

 

 

 

 

39,580

 

 

 

 

1,107

 

 

 

 

—

 

 

 

 

40,687

 

New business

 

 

1,112

 

 

 

 

163

 

 

 

 

—

 

 

 

 

1,275

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

2,262

 

 

 

 

—

 

 

 

 

—

 

 

 

 

2,262

 

Film distribution

 

 

—

 

 

 

 

800

 

 

 

 

—

 

 

 

 

800

 

Other

 

 

—

 

 

 

 

385

 

 

 

 

—

 

 

 

 

385

 

 

 

 

2,262

 

 

 

 

1,185

 

 

 

 

—

 

 

 

 

3,447

 

Total

$

 

42,954

 

 

$

 

24,827

 

 

$

 

14,327

 

 

$

 

82,108

 

27

 

 

 

Nine Months Ended

 

 

September 30, 2018

 

 

Subject to the Revenue

 

 

Subject to the

 

 

 

 

 

 

 

Recognition Standard

 

 

Lease Standard

 

 

 

 

 

 

 

Fixed

consideration

 

 

Variable

consideration

 

 

Lease

arrangements

 

 

Total

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

$

 

—

 

 

$

 

85,586

 

 

$

 

—

 

 

$

 

85,586

 

Joint revenue sharing arrangements – contingent rent

 

 

—

 

 

 

 

—

 

 

 

 

56,919

 

 

 

 

56,919

 

 

 

 

—

 

 

 

 

85,586

 

 

 

 

56,919

 

 

 

 

142,505

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases

 

 

45,142

 

 

 

 

5,403

 

 

 

 

—

 

 

 

 

50,545

 

Ongoing fees and finance income

 

 

8,982

 

 

 

 

—

 

 

 

 

—

 

 

 

 

8,982

 

Joint revenue sharing arrangements – fixed fees

 

 

3,821

 

 

 

 

—

 

 

 

 

—

 

 

 

 

3,821

 

Theater system maintenance

 

 

37,462

 

 

 

 

—

 

 

 

 

—

 

 

 

 

37,462

 

Other theater

 

 

5,707

 

 

 

 

—

 

 

 

 

—

 

 

 

 

5,707

 

 

 

 

101,114

 

 

 

 

5,403

 

 

 

 

—

 

 

 

 

106,517

 

New business

 

 

3,938

 

 

 

 

1,061

 

 

 

 

—

 

 

 

 

4,999

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

6,512

 

 

 

 

—

 

 

 

 

—

 

 

 

 

6,512

 

Film distribution

 

 

—

 

 

 

 

2,644

 

 

 

 

—

 

 

 

 

2,644

 

Other

 

 

50

 

 

 

 

2,210

 

 

 

 

—

 

 

 

 

2,260

 

 

 

 

6,562

 

 

 

 

4,854

 

 

 

 

—

 

 

 

 

11,416

 

Total

$

 

111,614

 

 

$

 

96,904

 

 

$

 

56,919

 

 

$

 

265,437

 

 

13.  Segmented Information

Management, including the Company’s Chief Executive Officer (“CEO”) who is the Company’s Chief Operating Decision Maker (as defined in the Segment Reporting Topic of the FASB ASC), assesses segment performance based on segment revenues and gross margins. Selling, general and administrative expenses, research and development costs, amortization of intangibles, receivables provisions (recoveries), write-downs net of recoveries, interest income, interest expense and tax (provision) recovery are not allocated to the segments.

The Company’s reportable segments are organized under four primary groups identified by nature of product sold or service provided: (1) Network Business, representing variable revenue generated by box office results and which includes the reportable segment of IMAX DMR and contingent rent from the joint revenue sharing arrangements and IMAX systems segments (hybrid joint revenue sharing arrangements, which take the form of a sale are reflected under the IMAX systems segment of Theater Business); (2) Theater Business, representing revenue generated by the sale and installation of theater systems and maintenance services, primarily related to the IMAX Systems and Theater System Maintenance reportable segments, and also includes hybrid (fixed and contingent) revenues and upfront installation costs from sales arrangements previously reported in the joint revenue sharing arrangements segment and after-market sales of projection system parts and 3D glasses from the other segment; (3) New Business, which includes home entertainment, and other new business initiatives that are in the development, start-up and/or wind-up phases, and (4) Other; which includes the film post-production and distribution segments, certain IMAX theaters that the Company owns and operates, camera rentals and other miscellaneous items. The Company is presenting information at a disaggregated level to provide more relevant information to readers, as permitted by the standard. Refer to Item 2 of the Company’s Form 10-Q for additional information regarding the four primary groups mentioned above.

28

 

Transactions between the film production IMAX DMR segment and the film post-production segment are valued at exchange value. Inter-segment profits are eliminated upon consolidation, as well as for the disclosures below.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

 

$

26,665

 

 

$

22,372

 

 

$

93,908

 

 

$

85,586

 

Joint revenue sharing arrangements – contingent rent

 

 

16,546

 

 

 

14,327

 

 

 

59,704

 

 

 

56,919

 

IMAX systems – contingent rent

 

 

32

 

 

 

—

 

 

 

189

 

 

 

—

 

 

 

 

43,243

 

 

 

36,699

 

 

 

153,801

 

 

 

142,505

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

21,003

 

 

 

23,398

 

 

 

50,800

 

 

 

59,527

 

Joint revenue sharing arrangements – fixed fees

 

 

1,438

 

 

 

2,798

 

 

 

6,525

 

 

 

3,821

 

Theater system maintenance

 

 

13,657

 

 

 

12,415

 

 

 

39,815

 

 

 

37,462

 

Other theater

 

 

1,560

 

 

 

2,076

 

 

 

5,766

 

 

 

5,707

 

 

 

 

37,658

 

 

 

40,687

 

 

 

102,906

 

 

 

106,517

 

New business

 

 

596

 

 

 

1,275

 

 

 

1,908

 

 

 

4,999

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

2,185

 

 

 

2,262

 

 

 

6,458

 

 

 

6,512

 

Film distribution

 

 

1,343

 

 

 

800

 

 

 

3,333

 

 

 

2,644

 

Other

 

 

1,365

 

 

 

385

 

 

 

2,979

 

 

 

2,260

 

 

 

 

4,893

 

 

 

3,447

 

 

 

12,770

 

 

 

11,416

 

Total revenues

 

$

86,390

 

 

$

82,108

 

 

$

271,385

 

 

$

265,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR(2)

 

$

17,866

 

 

$

14,461

 

 

$

61,602

 

 

$

57,523

 

Joint revenue sharing arrangements – contingent rent(2)

 

 

9,514

 

 

 

8,081

 

 

 

40,437

 

 

 

39,441

 

IMAX systems – contingent rent

 

 

32

 

 

 

—

 

 

 

189

 

 

 

—

 

 

 

 

27,412

 

 

 

22,542

 

 

 

102,228

 

 

 

96,964

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems(2)

 

 

11,630

 

 

 

13,064

 

 

 

26,874

 

 

 

37,487

 

Joint revenue sharing arrangements – fixed fees(2)

 

 

136

 

 

 

529

 

 

 

1,301

 

 

 

776

 

Theater system maintenance

 

 

6,125

 

 

 

5,996

 

 

 

17,046

 

 

 

17,289

 

Other theater

 

 

505

 

 

 

581

 

 

 

1,821

 

 

 

1,099

 

 

 

 

18,396

 

 

 

20,170

 

 

 

47,042

 

 

 

56,651

 

New business

 

 

541

 

 

 

(298

)

 

 

1,441

 

 

 

139

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film post-production

 

 

810

 

 

 

737

 

 

 

1,576

 

 

 

2,272

 

Film distribution(2)

 

 

(760

)

 

 

(477

)

 

 

(1,093

)

 

 

(1,952

)

Other

 

 

721

 

 

 

(483

)

 

 

619

 

 

 

(787

)

 

 

 

771

 

 

 

(223

)

 

 

1,102

 

 

 

(467

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment margin

 

$

47,120

 

 

$

42,191

 

 

$

151,813

 

 

$

153,287

 

 

(1)

The Company’s largest customer represented 16.6% and 18.9%, respectively, of total revenues for the three and nine months ended September 30, 2019, respectively (2018 —15.5% and 18.4%, respectively).

29

 

(2)

IMAX DMR segment margins include marketing costs of $4.3 million and $17.7 million for the three and nine months ended September 30, 2019, respectively (2018 — $3.1 million and $13.7 million, respectively). Joint revenue sharing arrangements segment margins include advertising, marketing and commission costs of $0.8 million and $1.1 million for the three and nine months ended September 30, 2019, respectively (2018 — $1.0 million and $2.2 million, respectively). IMAX systems segment margins include marketing and commission costs of $0.6 million and $1.5 million for the three and nine months ended September 30, 2019, respectively (2018 — $0.8 million and $2.0 million, respectively). Film distribution segment margins include marketing expense of $0.1 million and $0.7 million for the three and nine months ended September 30, 2019, respectively (2018 — expense of less than $0.1 million and $2.0 million, respectively).

Geographic Information

 

Revenue by geographic area is based on the location of the customer. Revenue related to IMAX DMR is presented based upon the geographic location of the theaters that exhibit the re-mastered films. IMAX DMR revenue is generated through contractual relationships with studios and other third parties and these may not be in the same geographical location as the theater.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

$

26,557

 

 

$

30,480

 

 

$

85,813

 

 

$

81,967

 

United States

 

 

24,316

 

 

 

20,763

 

 

 

84,553

 

 

 

86,476

 

Asia (Excluding Greater China)

 

 

13,534

 

 

 

13,909

 

 

 

32,287

 

 

 

34,510

 

Western Europe

 

 

8,433

 

 

 

6,879

 

 

 

28,809

 

 

 

26,191

 

Latin America

 

 

2,912

 

 

 

2,469

 

 

 

7,725

 

 

 

8,804

 

Russia & the CIS

 

 

2,909

 

 

 

3,142

 

 

 

10,216

 

 

 

7,478

 

Canada

 

 

1,993

 

 

 

2,106

 

 

 

6,485

 

 

 

8,116

 

Rest of the World

 

 

5,736

 

 

 

2,360

 

 

 

15,497

 

 

 

11,895

 

Total

 

$

86,390

 

 

$

82,108

 

 

$

271,385

 

 

$

265,437

 

 

No single country in the Rest of the World, Western Europe, Latin America and Asia (excluding Greater China) classifications comprises more than 10% of the total revenue.

14.  Employee's Pension and Postretirement Benefits

 

(a)

Defined Benefit Plan

The Company has an unfunded U.S. defined benefit pension plan (the “SERP”) covering Richard L. Gelfond, CEO of the Company.

The following table provides disclosure of the pension obligation for the SERP:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Projected benefit obligation:

 

 

 

 

 

 

 

 

Obligation, beginning of period

 

$

17,977

 

 

$

19,003

 

Interest cost

 

 

423

 

 

 

422

 

Actuarial gain

 

 

—

 

 

 

(1,448

)

Obligation, end of period and unfunded status

 

$

18,400

 

 

$

17,977

 

 

30

 

 

 

The following table provides disclosure of pension expense for the SERP:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest cost

 

$

141

 

 

$

105

 

 

$

423

 

 

$

316

 

 

No contributions are expected to be made for the SERP during the remainder of 2019. The Company expects interest costs of to be $0.1 million recognized as a component of net periodic benefit cost during the remainder of 2019.

The accumulated benefit obligation for the SERP was $18.4 million at September 30, 2019 (December 31, 2018 —$18.0 million).

The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2019), although Mr. Gelfond has not informed the Company that he intends to retire at that time.

 

(b)

Defined Contribution Pension Plan

The Company also maintains defined contribution plans for its employees, including its executive officers. The Company makes contributions to these plans on behalf of employees in an amount up to 5% of their base salary subject to certain prescribed maximums. During the three and nine months ended September 30, 2019, the Company contributed and expensed an aggregate of $0.3 million and $0.9 million, respectively (2018 — $0.4 million and $1.0 million respectively) to its Canadian defined contribution plan and an aggregate of $0.1 million and $0.5 million, respectively (2018 —$0.1 million and $0.4 million respectively) to its defined contribution employee plan under Section 401(k) of the U.S. Internal Revenue Code.

 

(c)

Postretirement Benefits – Executives

The Company has an unfunded postretirement plan for Mr. Gelfond and Bradley J. Wechsler, Chairman of the Company’s Board of Directors. The plan provides that the Company will maintain health benefits for Messrs. Gelfond and Wechsler until they become eligible for Medicare and, thereafter, the Company will provide Medicare supplement coverage as selected by Messrs. Gelfond and Wechsler. The postretirement benefits obligation as at September 30, 2019 is $0.7 million (December 31, 2018 — $0.6 million). The Company has expensed less than $0.1 million and less than $0.1 million for the three and nine months ended September 30, 2019, respectively (2018 — less than $0.1 million and less than $0.1 million, respectively).

 

(d)

Postretirement Benefits – Canadian Employees

The Company has an unfunded postretirement plan for its Canadian employees upon meeting specific eligibility requirements. The Company will provide eligible participants, upon retirement, with health and welfare benefits. The postretirement benefits obligation as at September 30, 2019 is $1.5 million (December 31, 2018 — $1.5 million). The Company has expensed less than $0.1 million and less than $0.1 million for the three and nine months ended September 30, 2019, respectively (2018 — less than $0.1 million and less than $0.1 million, respectively).

 

(e)

Deferred Compensation Benefit Plan

The Company maintained a nonqualified deferred compensation benefit plan (the “Retirement Plan”) covering Greg Foster, former CEO of IMAX Entertainment and Senior Executive Vice President of the Company. Under the terms of his Retirement Plan with the Company, the Retirement Plan will vest in full if Mr. Foster incurs a separation from service (as defined therein). In the fourth quarter of 2018, Mr. Foster incurred a separation from service, and as such, his Retirement Plan benefits became fully vested as at December 31, 2018 and the accelerated costs were recognized and reflected in the executive transition costs line on the consolidated statement of operations. As at September 30, 2019, the Company had a funded benefit obligation recorded of $3.6 million (December 31, 2018 — $3.6 million). The Company did not recognize any additional expenses in the three and nine months ended September 30, 2019 (2018 — $0.2 million and $0.6 million, respectively).


31

 

15.  Financial Instruments

 

(a)

Financial Instruments

The Company maintains cash with various major financial institutions. The Company’s cash is invested with highly rated financial institutions.

The Company’s accounts receivables and financing receivables are subject to credit risk. The Company’s accounts receivables and financing receivables are concentrated with the theater exhibition industry and film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. The Company believes it has adequately provided for related exposures surrounding receivables and contractual commitments.

 

(b)

Fair Value Measurements

The carrying values of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due within one year approximate fair values due to the short-term maturity of these instruments. The Company’s other financial instruments are comprised of the following:

 

 

 

As of September 30, 2019

 

 

As at December 31, 2018

 

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents(1)

 

$

102,548

 

 

$

102,548

 

 

$

141,590

 

 

$

141,590

 

Equity securities (3)

 

 

13,660

 

 

 

13,660

 

 

 

1,022

 

 

 

1,022

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net financed sales receivables(2)

 

$

109,844

 

 

$

108,993

 

 

$

117,990

 

 

$

117,428

 

Net investment in sales-type leases (2)

 

 

11,496

 

 

 

11,526

 

 

 

9,442

 

 

 

9,529

 

Convertible loan receivable(2)

 

 

1,500

 

 

 

1,500

 

 

 

1,500

 

 

 

1,500

 

Equity securities(1)

 

 

1,000

 

 

 

1,000

 

 

 

1,000

 

 

 

1,000

 

Foreign exchange contracts — designated forwards(3)

 

 

(350

)

 

 

(350

)

 

 

(1,202

)

 

 

(1,202

)

Borrowings under the Credit Facility(1)

 

 

(20,000

)

 

 

(20,000

)

 

 

(40,000

)

 

 

(40,000

)

 

(1)

Recorded at cost, which approximates fair value.

(2)

Estimated based on discounting future cash flows at currently available interest rates with comparable terms.

(3)

Value determined using quoted prices in active markets.

When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. There were no significant transfers in or out of the Company’s Level 3 assets during the three and nine months ended September 30, 2019 and 2018.

 

(c)

Financing Receivables

The Company’s net investment in leases and its net financed sales receivables are subject to the disclosure requirements of ASC 310 “Receivables”. Due to differing risk profiles of its net investment in leases and its net financed sales receivables, the Company views its net investment in leases and its net financed sale receivables as separate classes of financing receivables. The Company does not aggregate financing receivables to assess impairment.

The Company monitors the credit quality of each customer on a frequent basis through collections and aging analyses. The Company also holds meetings monthly in order to identify credit concerns and whether a change in credit quality classification is required for the customer. A customer may improve in their credit quality classification once a substantial payment is made on overdue balances or the customer has agreed to a payment plan with the Company and payments have commenced in accordance to the payment plan. The change in credit quality indicator is dependent upon management approval.

The Company classifies its customers into four categories to indicate the credit quality worthiness of its financing receivables for internal purposes only:

Good standing — Theater continues to be in good standing with the Company as the client’s payments and reporting are up-to-date.

32

 

Credit Watch — Theater operator has begun to demonstrate a delay in payments, and has been placed on the Company's credit watch list for continued monitoring, but active communication continues with the Company. Depending on the size of outstanding balance, length of time in arrears and other factors, transactions may need to be approved by management. These financing receivables are considered to be in better condition than those receivables related to theaters in the "Pre-approved transactions" category, but not in as good of condition as those receivables in "Good standing".  

Pre-approved transactions only — Theater operator is demonstrating a delay in payments with little or no communication with the Company. All service or shipments to the theater must be reviewed and approved by management. These financing receivables are considered to be in better condition than those receivables related to theaters in the "All transactions suspended" category, but not in as good of condition as those receivables in "Credit Watch". Depending on the individual facts and circumstances of each customer, finance income recognition may be suspended if management believes the receivable to be impaired.

All transactions suspended — Theater is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater is classified as “All transactions suspended” the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped.

The following table discloses the recorded investment in financing receivables by credit quality indicator:

 

 

 

As of September 30, 2019

 

 

As at December 31, 2018

 

 

 

Minimum

Lease

Payments

 

 

Financed

Sales

Receivables

 

 

Total

 

 

Minimum

Lease

Payments

 

 

Financed

Sales

Receivables

 

 

Total

 

In good standing

 

$

11,012

 

 

$

98,408

 

 

$

109,420

 

 

$

8,701

 

 

$

108,574

 

 

$

117,275

 

Credit Watch

 

 

639

 

 

 

10,613

 

 

 

11,252

 

 

 

574

 

 

 

8,723

 

 

 

9,297

 

Pre-approved transactions

 

 

—

 

 

 

589

 

 

 

589

 

 

 

322

 

 

 

565

 

 

 

887

 

Transactions suspended

 

 

—

 

 

 

1,149

 

 

 

1,149

 

 

 

—

 

 

 

967

 

 

 

967

 

 

 

$

11,651

 

 

$

110,759

 

 

$

122,410

 

 

$

9,597

 

 

$

118,829

 

 

$

128,426

 

 

While recognition of finance income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectibility issues are resolved and the customer has returned to being in good standing, the Company will resume recognition of finance income.

The Company’s investment in financing receivables on nonaccrual status is as follows:

 

 

 

As of September 30, 2019

 

 

As at December 31, 2018

 

 

 

Recorded

Investment

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Related

Allowance

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

 

1,149

 

 

 

(805

)

 

 

967

 

 

 

(739

)

Total

 

$

1,149

 

 

$

(805

)

 

$

967

 

 

$

(739

)

 

The Company considers financing receivables with aging between 60-89 days as indications of theaters with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once a theater’s aging exceeds 90 days, the Company’s policy is to review and assess collectibility on the theater’s past due accounts. Over 90 days past due is used by the Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for dispute resolution or for the provision of further information or supporting documentation to the customer.

33

 

The Company’s aged financing receivables are as follows:

 

 

 

As of September 30, 2019

 

 

 

Accrued

and

Current

 

 

30-89

Days

 

 

90+

Days

 

 

Billed

Financing

Receivables

 

 

Related

Unbilled

Recorded

Investment

 

 

Total

Recorded

Investment

 

 

Related

Allowances

 

 

Recorded

Investment

Net of

Allowances

 

Net investment in leases

 

$

99

 

 

$

46

 

 

$

315

 

 

$

460

 

 

$

11,191

 

 

$

11,651

 

 

$

(155

)

 

$

11,496

 

Net financed sales receivables

 

 

1,881

 

 

 

2,117

 

 

 

5,571

 

 

 

9,569

 

 

 

101,190

 

 

 

110,759

 

 

 

(915

)

 

 

109,844

 

Total

 

$

1,980

 

 

$

2,163

 

 

$

5,886

 

 

$

10,029

 

 

$

112,381

 

 

$

122,410

 

 

$

(1,070

)

 

$

121,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at December 31, 2018

 

 

 

Accrued

and

Current

 

 

30-89

Days

 

 

90+

Days

 

 

Billed

Financing

Receivables

 

 

Related

Unbilled

Recorded

Investment

 

 

Total

Recorded

Investment

 

 

Related

Allowances

 

 

Recorded

Investment

Net of

Allowances

 

Net investment in leases

 

$

52

 

 

$

18

 

 

$

253

 

 

$

323

 

 

$

9,274

 

 

$

9,597

 

 

$

(155

)

 

$

9,442

 

Net financed sales receivables

 

 

1,442

 

 

 

2,066

 

 

 

5,241

 

 

 

8,749

 

 

 

110,080

 

 

 

118,829

 

 

 

(839

)

 

 

117,990

 

Total

 

$

1,494

 

 

$

2,084

 

 

$

5,494

 

 

$

9,072

 

 

$

119,354

 

 

$

128,426

 

 

$

(994

)

 

$

127,432

 

 

The Company’s recorded investment in financing receivables with billed amounts past due for which the Company continues to accrue finance income is as follows:

 

 

 

As of September 30, 2019

 

 

 

Accrued

and

Current

 

 

30-89 Days

 

 

90+ Days

 

 

Billed

Financing

Receivables

 

 

Related

Unbilled

Recorded

Investment

 

 

Related

Allowance

 

 

Recorded

Investment

Past Due

and

Accruing

 

Net investment in leases

 

$

51

 

 

$

23

 

 

$

315

 

 

$

389

 

 

$

1,372

 

 

$

—

 

 

$

1,761

 

Net financed sales receivables

 

 

656

 

 

 

1,195

 

 

 

5,533

 

 

 

7,384

 

 

 

32,746

 

 

 

—

 

 

 

40,130

 

Total

 

$

707

 

 

$

1,218

 

 

$

5,848

 

 

$

7,773

 

 

$

34,118

 

 

$

—

 

 

$

41,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at December 31, 2018

 

 

 

Accrued

and

Current

 

 

30-89 Days

 

 

90+ Days

 

 

Billed

Financing

Receivables

 

 

Related

Unbilled

Recorded

Investment

 

 

Related

Allowance

 

 

Recorded

Investment

Past Due

and

Accruing

 

Net investment in leases

 

$

28

 

 

$

9

 

 

$

246

 

 

$

283

 

 

$

1,523

 

 

$

—

 

 

$

1,806

 

Net financed sales receivables

 

 

558

 

 

 

1,472

 

 

 

5,860

 

 

 

7,890

 

 

 

31,507

 

 

 

—

 

 

 

39,397

 

Total

 

$

586

 

 

$

1,481

 

 

$

6,106

 

 

$

8,173

 

 

$

33,030

 

 

$

—

 

 

$

41,203

 

 

34

 

The Company considers financing receivables to be impaired when it believes it to be probable that it will not recover the full amount of principal or interest owing under the arrangement. The Company uses its knowledge of the industry and economic trends, as well as its prior experiences to determine the amount recoverable for impaired financing receivables. The following table discloses information regarding the Company’s impaired financing receivables:

 

 

 

For the Three Months Ended September 30, 2019

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Recorded investment for which there is a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

 

933

 

 

 

216

 

 

 

(805

)

 

 

845

 

 

 

—

 

Recorded investment for which there is no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net financed sales receivables

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total recorded investment in impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

$

933

 

 

$

216

 

 

$

(805

)

 

$

845

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2018

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Recorded investment for which there is a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

 

869

 

 

 

121

 

 

 

(739

)

 

 

869

 

 

 

—

 

Recorded investment for which there is no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net financed sales receivables

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total recorded investment in impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

$

869

 

 

$

121

 

 

$

(739

)

 

$

869

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2019

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Recorded investment for which there is a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

 

933

 

 

 

216

 

 

 

(805

)

 

 

815

 

 

 

—

 

Recorded investment for which there is no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net financed sales receivables

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total recorded investment in impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

$

933

 

 

$

216

 

 

$

(805

)

 

$

815

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2018

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Recorded investment for which there is a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

 

869

 

 

 

121

 

 

 

(739

)

 

 

950

 

 

 

—

 

Recorded investment for which there is no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net financed sales receivables

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total recorded investment in impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment in leases

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Net financed sales receivables

 

$

869

 

 

$

121

 

 

$

(739

)

 

$

950

 

 

$

—

 

 

35

 

The Company’s activity in the allowance for credit losses for the period and the Company’s recorded investment in financing receivables are as follows:

 

 

 

Three Months Ended September 30, 2019

 

 

Nine Months Ended September 30, 2019

 

 

 

Net Investment

 

 

Net Financed

 

 

Net Investment

 

 

Net Financed

 

 

 

in Leases

 

 

Sales Receivables

 

 

in Leases

 

 

Sales Receivables

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

155

 

 

$

839

 

 

$

155

 

 

$

839

 

Charge-offs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Recoveries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Provision

 

 

—

 

 

 

76

 

 

 

—

 

 

 

76

 

Ending balance

 

$

155

 

 

$

915

 

 

$

155

 

 

$

915

 

Ending balance: individually evaluated for

   impairment

 

$

155

 

 

$

915

 

 

$

155

 

 

$

915

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for

   impairment

 

$

11,651

 

 

$

110,759

 

 

$

11,651

 

 

$

110,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

Net Investment

 

 

Net Financed

 

 

Net Investment

 

 

Net Financed

 

 

 

in Leases

 

 

Sales Receivables

 

 

in Leases

 

 

Sales Receivables

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

155

 

 

$

839

 

 

$

155

 

 

$

922

 

Charge-offs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(183

)

Recoveries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Provision

 

 

—

 

 

 

—

 

 

 

—

 

 

 

100

 

Ending balance

 

$

155

 

 

$

839

 

 

$

155

 

 

$

839

 

Ending balance: individually evaluated for

   impairment

 

$

155

 

 

$

839

 

 

$

155

 

 

$

839

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for

   impairment

 

$

8,943

 

 

$

118,369

 

 

$

8,943

 

 

$

118,369

 

 

 

(d)

Foreign Exchange Risk Management

The Company is exposed to market risk from changes in foreign currency rates. A majority of the Company’s revenues is denominated in U.S. dollars while a substantial portion of its costs and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the Company is periodically converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In China and Japan, the Company has ongoing operating expenses related to its operations in Chinese Renminbi and Japanese yen, respectively. Net cash flows are converted to and from U.S. dollars through the spot market. The Company also has cash receipts under leases denominated in Chinese Renminbi, Japanese yen, Canadian dollars and Euros which are converted to U.S. dollars through the spot market. In addition, because IMAX films generate box office in 81 different countries, unfavourable exchange rates between applicable local currencies and the U.S. dollar affect the Company’s reported gross box-office and revenues, further impacting the Company’s results of operations. The Company’s policy is to not use any financial instruments for trading or other speculative purposes.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. Certain of these foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of the FASB ASC at inception, and continue to meet hedge effectiveness tests at September 30, 2019 (the “Foreign Currency Hedges”), with settlement dates throughout 2019, 2020 and 2021. Foreign currency derivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the condensed consolidated statements of operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. The Company currently has cash flow hedging instruments associated with selling, general and administrative expenses and capital expenditures. For foreign currency cash flow hedging instruments related to selling, general and administrative

36

 

expenses, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to the condensed consolidated statements of operations when the forecasted transaction occurs. For foreign currency cash flow hedging instruments related to capital expenditures, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to property, plant and equipment on the balance sheet when the forecasted transaction occurs. The Company currently does not hold any derivatives which are not designated as hedging instruments.

The following tabular disclosures reflect the impact that derivative instruments and hedging activities have on the Company’s condensed consolidated financial statements:

Notional value of foreign exchange contracts:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

Foreign exchange contracts — Forwards

 

$

38,802

 

 

$

50,828

 

 

Fair value of derivatives in foreign exchange contracts:

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2019

 

 

2018

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts — Forwards

 

Other assets

 

$

109

 

 

$

649

 

 

 

Accrued and other liabilities

 

 

(459

)

 

 

(1,851

)

 

 

 

 

$

(350

)

 

$

(1,202

)

 

Derivatives in Foreign Currency Hedging relationships are as follows:

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Foreign exchange contracts

 

Derivative Gain (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

— Forwards

 

Recognized in OCI

 

$

(527

)

 

$

506

 

 

$

(162

)

 

$

(1,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of Derivative Gain (Loss)

 

Three Months Ended September 30,

 

 

Nine months ended September 30,

 

 

 

Reclassified from AOCI

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Foreign exchange contracts

 

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

— Forwards

 

administrative expenses

 

$

(322

)

 

$

47

 

 

$

(983

)

 

$

379

 

 

 

Property, plant and equipment

 

 

—

 

 

 

—

 

 

 

(32

)

 

 

—

 

 

 

 

 

$

(322

)

 

$

47

 

 

 

(1,015

)

 

 

379

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine months ended September 30,

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Foreign exchange contracts

 

Derivative Gain Recognized In

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

— Forwards

 

and Out of OCI

 

$

2

 

 

$

(19

)

 

$

2

 

 

$

27

 

 

The Company's estimated net amount of the existing losses as at September 30, 2019 is $0.4 million, which is expected to be reclassified to earnings within the next twelve months.


37

 

 

(e)

Investments in New Business Ventures

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323, FASB ASC 320 and FASB ASC 321, as appropriate.

As at September 30, 2019, the equity method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2018 — $nil). The Company’s accumulated losses in excess of its equity investment were $1.5 million as at September 30, 2019 and are classified in Accrued and other liabilities. For the three months ended September 30, 2019, gross revenues, cost of revenue and net loss for the Company’s investment was $1.1 million, $0.7 million and $0.3 million, respectively (2018 — $0.3 million, $1.0 million and $0.6 million, respectively). For the nine months ended September 30, 2019, gross revenue, cost of revenue and net loss for the Company’s investment was $1.8 million, $1.1 million and $1.1 million, respectively (2018 — $1.8 million, $2.7 million and $1.6 million, respectively). The Company has determined it is not the primary beneficiary of this VIE, and therefore this entity has not been consolidated. In a prior year, the Company issued a convertible loan of $1.5 million to this entity with a term of three years with an annual effective interest rate of 5.0%. The instrument is classified as an available-for-sale investment due to certain features that allow for conversion to common stock in the entity in the event of certain triggers occurring.

In addition, the Company has an investment in preferred stock of another business venture of $1.5 million which meets the criteria for classification as a debt security under FASB ASC 320 and is recorded at a fair value of $nil at September 30, 2019 (December 31, 2018 — $nil).

Furthermore, the Company has an investment of $1.0 million (December 31, 2018 — $1.0 million) in the shares of an exchange traded fund. This investment is classified as an equity investment.

As at September 30, 2019, the Company held investments with a total value of $3.5 million in the preferred shares of enterprises which meet the criteria for classification as an equity security under FASB ASC 325, carried at historical cost, net of impairment charges. The carrying value of these equity security investments was $1.0 million at September 30, 2019 (December 31, 2018 — $1.0 million).

On January 17, 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, as an investor entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) (as the issuer) and Morgan Stanley Asia Limited (as a sponsor, underwriter and the underwriters’ representative). Pursuant to this agreement, IMAX China (Hong Kong), Limited agreed to invest $15.2 million to subscribe for a certain number of shares of Maoyan at the final offer price pursuant to the global offering of the share capital of Maoyan, and this investment would be subject to a lock-up period of six months following the date of the global offering. On February 4, 2019, Maoyan completed its global offering, upon which, IMAX China (Hong Kong), Limited became a less than 1% shareholder in Maoyan. This investment is classified as an equity security under the FASB ASC 321, with a readily determinable market value through the Hong Kong Stock Exchange. The changes in fair value are recorded in the Change in fair value of equity investment line item in the Company’s condensed consolidated statement of operations. For the three and nine months ended September 30, 2019, the Company has recorded a net unrealized loss of $0.5 million and $2.5 million, respectively.

The total carrying value of investments in new business ventures, as at September 30, 2019 is $2.5 million (December 31, 2018 — $3.5 million) and is recorded in Other assets.

The investment in shares of an exchange traded fund and the investment in Maoyan are recorded in Investment in equity securities.

16.  Non-Controlling Interests

 

(a)

IMAX China Non-Controlling Interest

The Company indirectly owns approximately 69.74% of IMAX China Holding, Inc. (“IMAX China”), whose shares trade on the Hong Kong Stock Exchange. IMAX China remains a consolidated subsidiary of the Company.

 

(b)

Other Non-Controlling Interest

The Company’s Original Film Fund was established in 2014 to co-finance a portfolio of 10 original large-format films. The initial investment in the Original Film Fund was committed to by a third party in the amount of $25.0 million, with the possibility of contributing additional funds. The Company has contributed $9.0 million to the Original Film Fund since 2014 and has reached its maximum contribution. The Company sees the Original Film Fund as a vehicle designed to generate a continuous, steady flow of high-quality documentary content. As at September 30, 2019, the Original Film Fund has invested $22.3 million toward the

38

 

development of original films. The related production, financing and distribution agreement includes put and call rights relating to change of control of the rights, title and interest in the co-financed pictures.

The Company also established its VR Fund among the Company, its subsidiary IMAX China and other strategic investors to help finance the creation of interactive VR content experiences for use across all VR platforms, including in the pilot IMAX VR Centers. The VR Fund helped finance the production of one interactive VR experience, which debuted exclusively in the pilot IMAX VR Centers in November 2017 before being made available to other VR platforms. As at September 30, 2019, the Company invested $4.0 million toward the development of VR content. In December 2018, the Company announced, in connection with its strategic review of its VR pilot initiative, that it had decided to close its remaining VR locations and write-off certain VR content investments. The Company has also decided to dissolve the VR Fund and not actively pursue any additional VR opportunities.

The following summarizes the movement of the non-controlling interest in temporary equity, in the Company’s subsidiary for the nine months ended September 30, 2019:

 

Balance as at December 31, 2018

 

$

6,439

 

Return of capital to non-controlling interests

 

 

(243

)

Share issuance costs from the issuance of subsidiary shares to a non-controlling interest

 

 

1,350

 

Net loss

 

 

(785

)

Balance as at September 30, 2019

 

$

6,761

 

 

17.  Exit costs, restructuring charges and associated impairments

In the prior year, the Company performed a strategic review of its business and decided to exit from certain non-core businesses or initiatives, which included closing its VR locations. In addition, as part of the Company’s ongoing efforts to decrease costs, the Company has reduced certain functions and realigned resources. In the current period, certain costs that did not meet the recognition criteria in 2018 were recognized, including finalization of certain estimated costs.  

The Company recognized the following charges in its condensed consolidated statements of operations:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Restructuring charges

 

$

—

 

 

$

—

 

 

$

628

 

 

$

1,158

 

Costs to exit lease and restore facilities

 

 

—

 

 

 

—

 

 

 

222

 

 

 

—

 

 

 

$

—

 

 

$

—

 

 

$

850

 

 

$

1,158

 

 

Restructuring charges are comprised of employee severance costs including benefits and stock-based compensation, costs of consolidating facilities and contract termination costs. Restructuring charges are based upon plans that have been committed to by the Company but may be refined in subsequent periods. These charges are recognized pursuant to FASB ASC 420. A liability for a cost associated with an exit or disposal activity is recognized and measured at its fair value in the condensed consolidated statement of operations in the period in which the liability is incurred. When estimating the value of facility restructuring activities, assumptions are applied regarding estimated sub-lease payments to be received, which can differ from actual results.

In the current year, the Company incurred $nil and $0.6 million in restructuring charges for the three and nine months ended September 30, 2019, respectively (2018 —$nil and $1.2 million, respectively). A summary of the restructuring costs by reporting groups identified by nature of product sold, or service provided as disclosed in note 13 recognized are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Corporate

 

$

—

 

 

$

—

 

 

$

628

 

 

$

332

 

IMAX DMR

 

 

—

 

 

 

—

 

 

 

—

 

 

 

611

 

Theater system maintenance

 

 

—

 

 

 

—

 

 

 

—

 

 

 

215

 

 

 

$

—

 

 

$

—

 

 

$

628

 

 

$

1,158

 

 

At this time, the Company does not expect to recognize any additional restructuring charges during the remainder of 2019.

39

 

The following table sets forth a summary of restructuring accrual activities for the nine months ended September 30, 2019:

 

 

 

Employee

Severance and

Benefits

 

Balance as at December 31, 2018

 

$

1,936

 

Restructuring charges

 

 

628

 

Cash payments

 

 

(1,573

)

Balance as at September 30, 2019

 

$

991

 

 

In the three and nine months ended September 30, 2019 and 2018, the Company did not recognize any associated impairments.

18.  Prior Period's Figures

In the current year, Variable consideration receivable from contracts and Investment in equity securities are separate lines on the condensed consolidated balance sheet and have been removed from Other Assets. In addition, due to the adoption of ASU 2017-07, non-service pension costs are now recorded in the Retirement benefits non-service expense line item in the condensed consolidated statement of operations. Prior year comparatives, where applicable, have been reclassified to reflect these changes.

 

 

40

 

IMAX CORPORATION

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

IMAX Corporation, together with its consolidated subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies, specializing in technological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and specialized equipment, IMAX offers a unique end-to-end cinematic solution to create the highest-quality, most immersive motion picture for which the IMAX® brand has become known globally. Top filmmakers and studios utilize the cutting-edge visual and sound technology in IMAX theaters to connect with audiences in innovative ways, and, as a result, IMAX’s network is among the most important and successful theatrical distribution platforms for major films around the world. The Company refers to all theaters using the IMAX theater system as “IMAX theaters”. There were 1,568 IMAX theater systems (1,473 commercial multiplexes, 14 commercial destinations, 81 institutional) operating in 81 countries as at September 30, 2019. This compares to 1,443 theater systems (1,346 commercial multiplexes, 13 commercial destinations, 84 institutional) operating in 79 countries as of September 30, 2018.

The Company leverages its innovative technology and engineering in all aspects of its core business, which consists of:

 

 

•

the Digital Re-Mastering (“DMR”) of films and other presentations into the IMAX format by enhancing their image resolution and sound quality for exhibition in the IMAX theater network in exchange for a certain percentage of contingent box office receipts from studios; and

 

•

the provision of IMAX premium theater systems (“IMAX theater systems”) to exhibitor customers through sales, long-term leases or joint revenue sharing arrangements.

IMAX theater systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s 51-year history and combine:

 

 

•

the ability to exhibit content that has undergone IMAX DMR® conversion, which results in higher image and sound fidelity than conventional cinema experiences;

 

•

advanced, high-resolution projectors with specialized equipment and automated theater control systems, which generate significantly more contrast and brightness than conventional theater systems;

 

•

large screens and proprietary theater geometry, which result in a substantially larger field of view so that the screen extends to the edge of a viewer’s peripheral vision and creates more realistic images;  

 

•

sound system components, which deliver more expansive sound imagery and pinpointed origination of sound to any specific spot in an IMAX theater;

 

•

specialized theater acoustics, which result in a four-fold reduction in background noise; and

 

•

a license to the globally recognized IMAX brand.

In addition, many IMAX movies are filmed using proprietary IMAX film and digital cameras, which offer filmmakers a suite of premium tools and provide further enhanced and differentiated image quality and a film aspect ratio that delivers up to 26% more image onto a movie screen.

Together these components cause audiences in IMAX theaters to feel as if they are a part of the on-screen action, creating a more intense, immersive and exciting experience than in a traditional theater.

As a result of the engineering and scientific achievements that are a hallmark of The IMAX Experience®, the Company’s exhibitor customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX theater network. The incremental box office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films.


41

 

As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology. The Company recently introduced IMAX with Laser, the Company’s next-generation laser projection system designed for IMAX theaters in commercial multiplexes, which represents a further evolution of IMAX’s proprietary technology. The Company believes that IMAX with Laser delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today. The Company further believes that IMAX with Laser can help facilitate the next major lease renewal and upgrade cycle for the global commercial IMAX network.

To date the Company has signed IMAX with Laser agreements with leading, global exhibitors such as AMC Entertainment Holdings, Inc. (“AMC”), Cineworld Group PLC (“Cineworld”), CGV Holdings Limited (CGV) and Les Cinémas Pathé Gaumont (“Pathé”) (among others), which includes new theaters, upgrades to existing IMAX theaters, and upgrades to existing backlog arrangements. As at September 30, 2019, the Company’s backlog had 145 new IMAX with Laser systems and 119 upgrades to IMAX with Laser systems and expects to have approximately 135 IMAX with Laser systems installed by the end of 2019.

The Company is also experimenting with new technologies and new content as a way to deepen consumer engagement and brand loyalty, which includes curating unique, differentiated alternative content to be exhibited in IMAX theaters, particularly during those periods when Hollywood blockbuster film content is not available.  In 2019 to date, the Company has piloted filmed events including Anima, a one-night only event in June featuring music from Radiohead’s Thom Yorke, and Soundgarden: Live from the Artist’s Den: The IMAX Experience, in July and August, in select IMAX theaters.

SOURCES OF REVENUE

The primary revenue sources for the Company can be categorized into four main groups: network business, theater business, new business and other.

For additional details regarding the Company’s sources of revenue, refer to the Company’s 2018 Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, utilizing the modified retrospective transition method with a cumulative catch-up adjustment. The Company will review the variable interest assets on an ongoing basis.

Network Business: Digital Re-Mastering (IMAX DMR) and Joint Revenue Sharing Arrangements

Digital Re-Mastering (IMAX DMR)

The Company has developed a proprietary technology, known as IMAX DMR, to digitally re-master Hollywood films into IMAX digital cinema package format or 15/70-format film for exhibition in IMAX theaters. IMAX DMR digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. In a typical IMAX DMR film arrangement, the Company receives a percentage, which in recent years has averaged approximately 12.5%, of net box office receipts, defined as gross box office receipts less applicable sales taxes, of any commercial films released outside of Greater China in return for converting them to the IMAX DMR format and distributing them through the IMAX theater network. Within Greater China, the Company receives a lower percentage of box office receipts for certain Hollywood films. The original soundtrack of a film to be exhibited in the IMAX theater network is re-mastered for the IMAX digital sound systems in connection with the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAX re-mastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in an optimal listening position.

IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release, and filmmakers and studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting films with IMAX cameras to increase the audience’s immersion in the film and taking advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a movie screen. Avengers: Endgame, the highest-grossing film in history, released in April 2019, was shot entirely using IMAX cameras. Collectively, the Company refers to those enhancements as “IMAX DNA”. In addition, to date in 2019 Alita: Battle Angel, Captain Marvel and Disney’s The Lion King were all released with select scenes specifically formatted for IMAX screens.


42

 

The Company believes that the growth in international box office remains an important driver of future growth for the Company. To support continued growth in international markets, the Company has sought to bolster its international film strategy, supplementing the Company’s film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets (particularly in China). During 2018, 25 local language IMAX DMR films, including 18 in China, three in India, one in each of France, South Korea, Japan and Russia, were released to the IMAX theater network. During the nine months ended September 30, 2019, 16 local language IMAX DMR films, including 12 in China, one in each of Japan, South Korea, India and Russia, were released to the IMAX theater network. The blockbuster Ne Zha: the IMAX experience was released in China in July 2019 and it is the Company’s first Chinese animated local language film title. The Company expects to announce additional local language IMAX DMR films to be released to the IMAX theater network in the remainder of 2019 and beyond. In March 2019, the Company released an IMAX original production, Superpower Dogs.

In addition to the 47 IMAX DMR films released to the IMAX theater network during the nine months ended September 30, 2019, 12 additional IMAX DMR films have been announced so far to be released in the remainder of 2019 to the global IMAX theater network. The following dates noted for film release are subject to change and may vary by territory.

 

 

•

Joker: The IMAX Experience (Warner Bros. Pictures, October 2019);  

 

•

Gemini Man: The IMAX Experience (Paramount Pictures, October 2019);

 

•

Maleficent: Mistress of Evil: The IMAX Experience (Walt Disney Studios, October 2019);

 

•

Jesus is King: The IMAX Experience (IMAX Corporation and West Brands, October 2019);     

 

•

Terminator: Dark Fate: The IMAX Experience (Paramount Pictures (domestic)/Walt Disney Pictures (international), October (international)/November (domestic) 2019);

 

•

The Aeronauts: The IMAX Experience (Amazon Studios, November 2019, select international markets); 

 

•

Ford v Ferrari: The IMAX Experience (Walt Disney Studios, November 2019);

 

•

Charlie’s Angels: The IMAX Experience (Sony Pictures, November 2019);

 

•

Frozen 2: The IMAX Experience (Walt Disney Studios, November 2019);

 

•

Wings Over Everest: The IMAX Experience (Spring Era Films, November 2019, China);

 

•

Jumanji: The Next Level: The IMAX Experience (Sony Pictures, December 2019); and

 

•

Star Wars: The Rise of Skywalker: The IMAX Experience (Walt Disney Studios, December 2019).

To date, the Company has announced the following 11 titles to be released in 2020 to the IMAX theater network:

 

•

1917: The IMAX Experience (Universal Pictures, January 2020);

 

•

Detective Chinatown 3: The IMAX Experience (Wanda Studios, January 2020, China);

 

•

Birds of Prey: The IMAX Experience (Warner Bros. Pictures, February 2020);

 

•

The King’s Man: The IMAX Experience (Walt Disney Studios, February 2020);

 

•

Godzilla vs. Kong: The IMAX Experience (Warner Bros. Pictures, March 2020);

 

•

Mulan: The IMAX Experience (Walt Disney Studios, March 2020);

 

•

No Time to Die (Bond 25): The IMAX Experience (United Artists Releasing (domestic) and Universal Pictures (international), April 2020);

 

•

Fast & Furious 9: The IMAX Experience (Universal Pictures, May 2020);

 

•

Wonder Woman 1984: The IMAX Experience (Warner Bros. Pictures, June 2020);

 

•

Top Gun: Maverick: The IMAX Experience (Paramount Pictures, June 2020);

 

•

Tenet: The IMAX Experience (Warner Bros. Pictures, July 2020).

The Company remains in active negotiations with all the major Hollywood studios for additional films to fill out its short and long-term film slate for the IMAX theater network in 2019.

As noted above, the Company is also engaged in discussions regarding new technologies and new content in connection with bringing unique events outside of movies to the global IMAX theater network.

Joint Revenue Sharing Arrangements – Contingent Rent

The Company provides IMAX theater systems to certain of its exhibitor customers under joint revenue sharing arrangements (“JRSA”). The Company has two basic types of joint revenue sharing arrangements: traditional and hybrid.

For additional details regarding the two types of joint revenue sharing arrangements the Company has entered into with its exhibitor customers, refer to the Company’s 2018 Form 10-K.

43

 

IMAX Systems – Contingent Rent

Certain sales-type lease arrangements include contingent rent in excess of fixed minimum ongoing payments. This contingent rent, which is included in the Company’s network business operations, is recognized after the fixed minimum amount per annum is exceeded as driven by box office performance. Contingent payments in excess of fixed minimum ongoing payments of sales or sales-type lease arrangements are recognized as revenue when reported by theater operators, provided collectability is reasonably assured. In addition, contingent rent includes amounts realized for changes in rent and maintenance payments which are indexed to a local consumer price index.

Theater Business: IMAX Systems, Theater System Maintenance and Fixed Fees from Joint Revenue Sharing Arrangements

IMAX Systems

Sales of IMAX theater systems, which include the proprietary IMAX technology embedded in its projectors, patented software, specialized equipment and automated theater control systems, represent another segment of the Company’s business. Under the Company’s sales agreements, title to the theater system equipment components passes to the customer. In certain instances, however, the Company retains title or a security interest in the equipment until the customer has made all payments required under the agreement. Under the terms of a sales-type lease agreement, title to the theater system equipment components remains with the Company. The Company has the right to remove the equipment for non-payment or other defaults by the customer.

Under hybrid joint revenue sharing arrangements that take the form of sales arrangements, title and control of the projection system transfer to the customer at the point of revenue recognition, which is the earlier of client acceptance of the theater installation, including projectionist training, and theater opening to the public. Under the new revenue recognition standard, the percentage payment is considered variable consideration that must be estimated and recognized at the time of initial revenue recognition. Using box office projections and the Company’s history with theater and box office experience in different territories, the Company estimates the amount of percentage payment earned over the life of the arrangement, subject to sufficient constraint such that there is not a risk of significant revenue reversal. Under the previous recognition standard, these amounts were recognized as reported by exhibitors (or customers) in future periods. As a result, the Company’s hybrid sales arrangements are grouped with the traditional sales segment since the total consideration received and the revenue recognition timing at transfer of control of the assets now resemble those of the traditional sale arrangements.

Joint Revenue Sharing Arrangements – Fixed Fees

As discussed in joint revenue sharing arrangements above, under a hybrid joint revenue sharing arrangement that takes the form of a lease arrangement, the customer is responsible for making upfront payments prior to the delivery and installation of the IMAX theater system for an amount that is typically half of what the Company would receive from a straight sale transaction. These fixed upfront payments are included in the Company’s theater business operations.

Theater System Maintenance

For all IMAX theaters, theater owners or operators are also responsible for paying the Company an annual maintenance and extended warranty fee. Under these arrangements, the Company provides proactive and emergency maintenance services to every theater in its network to ensure that each presentation is up to the highest IMAX quality standard. Annual maintenance fees are paid throughout the duration of the term of the theater agreements.

Other Theater Revenues

Additionally, the Company generates revenues from the sale of after-market parts and 3D glasses.

Revenues from theater business arrangements are recognized at a different time from when cash is collected. For additional details regarding the policy for revenue recognition, refer to the Company’s 2018 Form 10-K.


44

 

New Business

In recent years, the Company has been exploring several new lines of business outside of its core business to leverage its proprietary innovative technologies, its leadership position in the entertainment technology space and its unique relationship with content creators. 

For additional details regarding the Company’s new business initiatives, refer to the Company’s 2018 Form 10-K.

IMAX Home Entertainment Technologies and Services

In September 2018, the Company announced a new home entertainment licensing and certification program called IMAX Enhanced. This initiative was launched along with audio leader DTS (an Xperi subsidiary), capitalizing on the companies’ decades of combined expertise in image and sound science. The certification program combines high-end consumer electronics products with IMAX digitally re-mastered 4K high dynamic range (HDR) content and DTS audio technologies to offer consumers immersive sight and sound experiences for the home.

To be accepted into the program, leading consumer electronics manufacturers must design 4K HDR televisions, A/V receivers, sound systems and other home theater equipment to meet a carefully prescribed set of audio and video performance standards, set by a certification committee of IMAX and DTS engineers and some of Hollywood’s leading technical specialists.

The program will digitally re-master content to produce more vibrant colors, greater contrast and sharper clarity, and will also deliver an IMAX signature sound experience.

IMAX Enhanced Program device partners include Sony Electronics, Denon, Marantz, Pioneer, TCL (among others) and studio partners include Sony Pictures and Paramount Pictures.

In 2013, the Company established a joint venture with TCL Multimedia Technology Holding Limited (“TCL”) to design, develop, manufacture and sell a premium home theater system. The Company does not intend to invest significant capital into the joint venture going forward, and instead expects any additional funding to be provided through third party capital.

Connected Theaters

 

The Company is currently exploring new technologies and forms of content as a way to deepen consumer engagement and brand loyalty. As such, the Company is currently engaged in discussions regarding new technologies to further connect the IMAX theater network and to facilitate bringing more unique content, including live events, to IMAX theater audiences. The Company believes such additional connectivity can provide more innovative content to the IMAX theater network and in turn permit the Company to engage audiences in new ways.

The Company continues to believe that the IMAX network serves as a valuable platform to launch and distribute original content, especially during shoulder periods.

Other

The Company is also a distributor of large-format films, primarily for its institutional theater partners. The Company generally distributes films which it produces or for which it has acquired distribution rights from independent producers. The Company receives either a percentage of the theater box office receipts or a fixed amount as a distribution fee.

In addition, the Company also provides film post-production and quality control services for large-format films (whether produced internally or externally), and digital post-production services. The Company derives a small portion of its revenues from other sources including: one owned and operated IMAX theater; a commercial arrangement with one theater resulting in the sharing of profits and losses; the provision of management services to four other theaters; renting its proprietary 2D and 3D large-format film and digital cameras to third-party production companies; and also offering production advice and technical assistance to both documentary and Hollywood filmmakers. In January 2019, the Company closed its owned and operated theater in Minneapolis, Minnesota and now has one remaining owned and operated theater in Sacramento, California.

45

 

IMAX Theater Network and Backlog

The following table outlines the breakdown of the IMAX theater network by type and geographic location as at September 30:

 

 

 

2019 Theater Network Base

 

 

2018 Theater Network Base

 

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

United States

 

 

369

 

 

 

4

 

 

 

33

 

 

 

406

 

 

 

365

 

 

 

4

 

 

 

33

 

 

 

402

 

Canada

 

 

39

 

 

 

2

 

 

 

7

 

 

 

48

 

 

 

39

 

 

 

2

 

 

 

7

 

 

 

48

 

Greater China(1)

 

 

666

 

 

 

—

 

 

 

15

 

 

 

681

 

 

 

578

 

 

 

—

 

 

 

17

 

 

 

595

 

Western Europe

 

 

107

 

 

 

4

 

 

 

10

 

 

 

121

 

 

 

94

 

 

 

4

 

 

 

10

 

 

 

108

 

Asia (excluding Greater China)

 

 

115

 

 

 

2

 

 

 

2

 

 

 

119

 

 

 

107

 

 

 

2

 

 

 

3

 

 

 

112

 

Russia & the CIS

 

 

65

 

 

 

—

 

 

 

—

 

 

 

65

 

 

 

62

 

 

 

—

 

 

 

—

 

 

 

62

 

Latin America(2)

 

 

49

 

 

 

1

 

 

 

12

 

 

 

62

 

 

 

45

 

 

 

—

 

 

 

12

 

 

 

57

 

Rest of the World

 

 

63

 

 

 

1

 

 

 

2

 

 

 

66

 

 

 

56

 

 

 

1

 

 

 

2

 

 

 

59

 

Total

 

 

1,473

 

 

 

14

 

 

 

81

 

 

 

1,568

 

 

 

1,346

 

 

 

13

 

 

 

84

 

 

 

1,443

 

 

(1)

Greater China includes China, Hong Kong, Taiwan and Macau.

(2)

Latin America includes South America, Central America and Mexico.

The Company currently believes that over time its commercial multiplex theater network could grow to approximately 2,855 IMAX theaters worldwide from 1,473 commercial multiplex IMAX theaters operating as at September 30, 2019. The Company believes that the majority of its future growth will come from international markets. As at September 30, 2019, 71.0% of IMAX theater systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 68.8% as at September 30, 2018. Revenues and gross box office derived from outside the United States and Canada continue to exceed revenues and gross box office from the United States and Canada. Risks associated with the Company’s international business are outlined in “Risk Factors – The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects” in Item 1A of the Company’s 2018 Form 10-K and in Item 1A Risk Factors of this Form 10-Q.

Greater China is currently the Company’s largest market, measured by revenues, with approximately 31.6% of overall revenues generated from the Company’s Greater China operations in the nine months ended September 30, 2019. As at September 30, 2019, the Company had 681 theaters operating in Greater China with an additional 286 theaters in backlog that are scheduled to be installed by 2022. The Company’s backlog in Greater China represents 47.1% of the Company’s current backlog including upgrades. The Company’s largest single international partnership is in China with Wanda Film (“Wanda”). Wanda’s total commitment to the Company is for 359 theater systems in Greater China (of which 344 theater systems are under the parties’ joint revenue sharing arrangement). See “Risk Factors – The Company faces risks in connection with the continued expansion of its business in China” in Item 1A of the Company’s 2018 Form 10-K.

46

 

The following table outlines the breakdown of the Commercial Multiplex theater network by arrangement type and geographic location as at September 30:

 

 

 

2019

 

 

 

IMAX Commercial Multiplex Theater Network

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Total

JRSA

 

 

Sale / Sales-

type lease

 

 

Total

 

Domestic Total (United States & Canada)

 

 

276

 

 

 

5

 

 

 

281

 

 

 

127

 

 

 

408

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

339

 

 

 

103

 

 

 

442

 

 

 

224

 

 

 

666

 

Asia (excluding Greater China)

 

 

34

 

 

 

1

 

 

 

35

 

 

 

80

 

 

 

115

 

Western Europe

 

 

42

 

 

 

26

 

 

 

68

 

 

 

39

 

 

 

107

 

Russia & the CIS

 

 

—

 

 

 

—

 

 

 

—

 

 

 

65

 

 

 

65

 

Latin America

 

 

1

 

 

 

—

 

 

 

1

 

 

 

48

 

 

 

49

 

Rest of the World

 

 

14

 

 

 

—

 

 

 

14

 

 

 

49

 

 

 

63

 

International Total

 

 

430

 

 

 

130

 

 

 

560

 

 

 

505

 

 

 

1,065

 

Worldwide Total

 

 

706

 

 

 

135

 

 

 

841

 

 

 

632

 

(1)

 

1,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

IMAX Commercial Multiplex Theater Network

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Total

JRSA

 

 

Sale / Sales-

type lease

 

 

Total

 

Domestic Total (United States & Canada)

 

 

272

 

 

 

5

 

 

 

277

 

 

 

127

 

 

 

404

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

289

 

 

 

88

 

 

 

377

 

 

 

201

 

 

 

578

 

Asia (excluding Greater China)

 

 

29

 

 

 

1

 

 

 

30

 

 

 

77

 

 

 

107

 

Western Europe

 

 

37

 

 

 

22

 

 

 

59

 

 

 

35

 

 

 

94

 

Russia & the CIS

 

 

—

 

 

 

—

 

 

 

—

 

 

 

62

 

 

 

62

 

Latin America

 

 

—

 

 

 

—

 

 

 

—

 

 

 

45

 

 

 

45

 

Rest of the World

 

 

14

 

 

 

—

 

 

 

14

 

 

 

42

 

 

 

56

 

International Total

 

 

369

 

 

 

111

 

 

 

480

 

 

 

462

 

 

 

942

 

Worldwide Total

 

 

641

 

 

 

116

 

 

 

757

 

 

 

589

 

 

 

1,346

 

 

As at September 30, 2019, 281 (2018 — 277) of the 841 (2018 — 757) theaters under joint revenue sharing arrangements in operation, or 33.4% (2018 — 36.6%), were located in the United States and Canada, with the remaining 560 (2018 — 480) or 66.6% (2018 — 63.4%) of theaters being located in international markets.


47

 

Sales Backlog

The Company’s current sales backlog is as follows:

 

 

 

September 30, 2019

 

 

 

September 30, 2018

 

 

 

 

Number of

 

 

 

Dollar Value

 

 

 

Number of

 

 

 

Dollar Value

 

 

 

 

Systems

 

 

 

(in thousands)

 

 

 

Systems

 

 

 

(in thousands)

 

 

Sales and sales-type lease arrangements

 

 

205

 

 

 

$

247,526

 

(1)

 

 

189

 

 

 

$

246,193

 

(1)

Joint revenue sharing arrangements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hybrid lease arrangements

 

 

149

 

(2)

 

 

108,405

 

 

 

 

119

 

 

 

 

66,125

 

 

Traditional arrangements

 

 

253

 

(3)

 

 

7,400

 

(4)

 

 

327

 

 

 

 

6,313

 

(4)

 

 

 

607

 

(5)

 

$

363,331

 

 

 

 

635

 

(6)

 

$

318,631

 

 

 

(1)

Includes a variable consideration estimate of $19.1 million (2018 — $17.8 million).

(2)

Includes 75 theaters where the theater system could change between IMAX with Laser and digital projection systems based on the site selection for the theaters.

(3)

Includes 50 theater systems where the customer has the option to convert from a joint revenue sharing arrangement to a sales arrangement.

(4)

Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box office results.

(5)

Includes 155 new laser projection system configurations and 125 upgrades of existing locations to laser projection system configurations (119 of the 125 upgrades are for the IMAX with Laser projection system configurations).

(6)

Includes 93 new laser projection system configurations and 112 upgrades of existing locations to laser projection system configurations (110 of the 112 upgrades are for the IMAX with Laser projection system configurations).

The number of theater systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new theater system arrangements signed from year to year, which adds to backlog and the installation and acceptance of theater systems and the settlement of contracts, both of which reduce backlog. Sales backlog typically represents the fixed contracted revenue under signed theater system sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated theater, as well as a variable consideration estimate, however it excludes amounts allocated to maintenance and extended warranty revenues. The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases or long-term conditional theater commitments. The value of theaters under joint revenue sharing arrangements is excluded from the dollar value of sales backlog, although certain theater systems under joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments. The Company believes that the contractual obligations for theater system installations that are listed in sales backlog are valid and binding commitments.

From time to time, in the normal course of its business, the Company will have customers who are unable to proceed with a theater system installation for a variety of reasons, including the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the agreement with the customer is terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or fees that the customer previously made to the Company are recognized as revenue.

Certain of the Company’s contracts contain options for the customer to elect to upgrade system type during the term or to alter the contract structure (for example, from JRSA to sale model) after signing but before installation.  Current backlog information reflects all known elections.

 

48

 

The following table outlines the breakdown of the total backlog by arrangement type and geographic location as at September 30:

 

 

2019

 

 

 

 

IMAX Theater Backlog

 

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Total

JRSA

 

 

Sale / Lease

 

 

Total

 

 

Domestic Total (United States & Canada)

 

 

143

 

 

 

3

 

 

 

146

 

 

 

17

 

 

 

163

 

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

76

 

 

 

130

 

 

 

206

 

 

 

80

 

 

 

286

 

 

Asia (excluding Greater China)

 

 

12

 

 

 

—

 

 

 

12

 

 

 

42

 

 

 

54

 

 

Western Europe

 

 

16

 

 

 

16

 

 

 

32

 

 

 

10

 

 

 

42

 

 

Russia & the CIS

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14

 

 

 

14

 

 

Latin America

 

 

1

 

 

 

—

 

 

 

1

 

 

 

9

 

 

 

10

 

 

Rest of the World

 

 

5

 

 

 

—

 

 

 

5

 

 

 

33

 

 

 

38

 

 

International Total

 

 

110

 

 

 

146

 

 

 

256

 

 

 

188

 

 

 

444

 

 

Worldwide Total

 

 

253

 

 

 

149

 

 

 

402

 

 

 

205

 

 

 

607

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

IMAX Theater Backlog

 

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Total

JRSA

 

 

Sale / Lease

 

 

Total

 

 

Domestic Total (United States & Canada)

 

 

154

 

 

 

3

 

 

 

157

 

 

 

8

 

 

 

165

 

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

128

 

 

 

102

 

 

 

230

 

 

 

79

 

 

 

309

 

 

Asia (excluding Greater China)

 

 

7

 

 

 

—

 

 

 

7

 

 

 

42

 

 

 

49

 

 

Western Europe

 

 

31

 

 

 

14

 

 

 

45

 

 

 

9

 

 

 

54

 

 

Russia & the CIS

 

 

—

 

 

 

—

 

 

 

—

 

 

 

18

 

 

 

18

 

 

Latin America

 

 

2

 

 

 

—

 

 

 

2

 

 

 

12

 

 

 

14

 

 

Rest of the World

 

 

5

 

 

 

—

 

 

 

5

 

 

 

21

 

 

 

26

 

 

International Total

 

 

173

 

 

 

116

 

 

 

289

 

 

 

181

 

 

 

470

 

 

Worldwide Total

 

 

327

 

 

 

119

 

 

 

446

 

 

 

189

 

 

 

635

 

(2)

 

(1)

Includes 145 new IMAX with Laser projection system configurations and 119 upgrades of existing locations to IMAX with Laser projection system configurations.

(2)

Includes 79 new IMAX with Laser projection system configurations and 110 upgrades of existing locations to IMAX with Laser projection system configurations.

Approximately 73.1% of IMAX theater system arrangements in backlog as at September 30, 2019 are scheduled to be installed in international markets (2018 – 74.0%).

49

 

Signings and Installations

The following reflects the Company’s signings and installations:

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Theater System Signings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full new sales and sales-type lease arrangements

 

 

22

 

 

 

 

22

 

 

 

 

38

 

 

 

 

46

 

New traditional joint revenue sharing arrangements

 

 

—

 

 

 

 

1

 

 

 

 

4

 

 

 

 

54

 

New hybrid joint revenue sharing lease arrangements

 

 

—

 

 

 

 

2

 

 

 

 

48

 

 

 

 

10

 

Total new theaters

 

 

22

 

 

 

 

25

 

 

 

 

90

 

 

 

 

110

 

Upgrades of IMAX theater systems

 

 

8

 

 

 

 

12

 

 

 

 

36

 

 

 

 

110

 

Total theater signings

 

 

30

 

 

 

 

37

 

 

 

 

126

 

 

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Theater System Installations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full new sales and sales-type lease arrangements

 

 

14

 

(1)

 

 

15

 

 

 

 

29

 

(1)

 

 

37

 

New traditional joint revenue sharing arrangements

 

 

12

 

 

 

 

15

 

 

 

 

29

 

 

 

 

37

 

New hybrid joint revenue sharing lease arrangement

 

 

4

 

 

 

 

6

 

 

 

 

13

 

 

 

 

8

 

Total new theaters

 

 

30

 

 

 

 

36

 

 

 

 

71

 

 

 

 

82

 

Upgrades of IMAX theater systems

 

 

9

 

 

 

 

1

 

 

 

 

20

 

 

 

 

2

 

Total theater installations

 

 

39

 

 

 

 

37

 

 

 

 

91

 

 

 

 

84

 

 

(1)

Includes 1 IMAX digital theater system that was relocated from a previous location. This installation is incremental to the IMAX theater network but full revenue for the digital theater system was not received.

 

The Company anticipates that it will install a total of approximately 185 to 190 theater systems during 2019. The Company cautions, however, that theater system installations may change from period to period over the course of the Company’s business, usually for reasons beyond its control.  


50

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company prepares its condensed consolidated financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

The preparation of these consolidated financial statements requires management to make estimates and judgments under its accounting policies that affect the financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes.  

Management bases its estimates on historical experience, future expectations and other assumptions that are believed to be reasonable at the date of the condensed consolidated financial statements. Actual results may differ from these estimates due to uncertainty involved in measuring, at a specific point in time, events which are continuous in nature, and differences may be material. The Company’s significant accounting policies are discussed in Item 7 of the Company’s 2018 Form 10-K.

On January 1, 2019, the Company adopted ASC Topic 842 “Leases”.  The standard was issued to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC Topic 842, utilizing the modified retrospective transition method, which allowed the Company to adopt the standard as of the date of initial application. Prior year comparative amounts are not required to be restated and are presented in accordance with ASC Topic 840, “Leases” or other applicable standards effective prior to January 1, 2019. The Company has elected the ‘package of practical expedients’ permitted under the transition guidance within ASC Topic 842, which permits the Company to carry forward the historical lease classification and not reassess whether any expired or existing contracts are or contain leases. In addition, the Company is not required to reassess initial direct costs for any existing leases. The Company did not elect the land easements and the use of hindsight practical expedients in determining the lease term for existing leases. ASC Topic 842 also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases with a term of less than 12 months, it will not recognize right-of-use assets or lease liabilities. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases regardless of whether the Company is the lessee or a lessor to the lease.

The Company’s estimates as a lessee the term of the Company’s leases and the determination of the incremental borrowing rate to be used. The Company assumed that it was reasonably certain that the renewal options on its warehouse leases would be exercised based on previous history and knowledge, current understanding of future business needs and level of investment in leasehold improvements among other considerations. The incremental borrowing rate used in the calculation of the lease liability is based on the location of each leased property. Please see notes 3 and 4 to the condensed consolidated financial statements in Item 1 for additional information regarding the adoption of ASC Topic 842.

Impact of Recently Issued Accounting Pronouncements

Please see notes 2 and 3 to the condensed consolidated financial statements in Item 1 for information regarding the Company’s recent changes in accounting policies and the impact of all recently issued accounting pronouncements.


51

 

NON-GAAP FINANCIAL MEASURES

In this report, the Company presents certain data which are not recognized under U.S. GAAP and are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission rules. Specifically, the Company presents the following non-GAAP financial measures as supplemental measures of its performance:

 

 

•

Adjusted net income;

 

•

Adjusted net income per diluted share;

 

•

Adjusted net income attributable to common shareholders;

 

•

Adjusted net income attributable to common shareholders per diluted share; and

 

•

EBITDA and Adjusted EBITDA per Credit Facility.

The Company presents adjusted net income and adjusted net income per diluted share, which excludes stock-based compensation, exit costs, restructuring charges and associated impairments, legal arbitration award, change in fair value of equity investment and the related tax impact of these adjustments, because it believes that they are important supplemental measures of the Company’s comparable controllable operating performance. Although stock-based compensation is an important aspect of the Company’s employee and executive compensation packages, it is mostly a non-cash expense and is excluded from certain internal business performance measures, and the Company wants to ensure that its investors fully understand the impact of its stock-based compensation (net of any related tax impact) and non-recurring charges on net income.

In addition, the Company presents adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share because it believes that they are important supplemental measures of its comparable financial results. Without the presentation of these adjusted presentation measures the Company believes it could potentially distort the analysis of trends in business performance and it wants to ensure that its investors fully understand the impact of net income attributable to non-controlling interests, its stock-based compensation, exit costs, restructuring charges, associated impairments. legal arbitration award and change in fair value of equity investment (net of any related tax impact) in determining net income attributable to common shareholders.

Management uses these measures for internal reporting and forecasting purposes in order to review operating performance on a comparable basis from period to period. However, these non-GAAP measures may not be comparable to similarly titled amounts reported by other companies. The Company’s non-GAAP measures should be considered in addition to, and not as a substitute for, or superior to, net income and net income attributable to common shareholders and other measures of financial performance reported in accordance with U.S. GAAP.

In addition, management uses “EBITDA”, as such term is defined in the Company’s credit agreement (and which is referred to herein as “Adjusted EBITDA per Credit Facility”, as the credit agreement includes additional adjustments beyond interest, taxes, depreciation and amortization) to evaluate, assess and benchmark the Company’s operational results. The Company believes that Adjusted EBITDA per Credit Facility presents relevant and useful information widely used by analysts, investors and other interested parties in the Company’s industry. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of its operating performance and to provide additional information with respect to the Company’s ability to comply with its credit agreement requirements. EBITDA is defined as net income with adjustments for depreciation and amortization, interest income (expense)-net, and income tax provision (benefit). Adjusted EBITDA per Credit Facility is defined as EBITDA plus adjustments for loss from equity accounted investments, stock and other non-cash compensation, exit costs, restructuring charges and associated impairments, change in fair value of equity investment, legal arbitration award, executive transition costs and adjusted EBITDA attributable to non-controlling interests.

 


52

 

RESULTS OF OPERATIONS

Important factors that the Company’s Chief Executive Officer (“CEO”) Richard L. Gelfond uses in assessing the Company’s business and prospects include:

 

 

•

the signing, installation and financial performance of theater system arrangements (particularly its joint revenue sharing arrangements and new IMAX with Laser projection systems);

 

•

film performance and the securing of new film projects (particularly IMAX DMR films);

 

•

the continuing ability to invest in and improve the Company’s technology to enhance its differentiation of presentation versus other cinematic experiences;

 

•

revenue and gross margins from the Company’s segments;

 

•

earnings from operations as adjusted for unusual items that the Company views as non-recurring;

 

•

the overall execution, reliability and consumer acceptance of The IMAX Experience;

 

•

the success of new business initiatives; and

 

•

short- and long-term cash flow projections.

Management, including the Company’s CEO, who is the Company’s Chief Operating Decision Maker (“CODM”) (as defined in the Segment Reporting Topic of the FASB ASC), assesses segment performance based on segment revenues and gross margins. Selling, general and administrative expenses, research and development costs, amortization of intangibles, receivables provisions (recoveries), write-downs net of recoveries, interest income, interest expense and tax (provision) recovery are not allocated to the segments. The Company has the following eight reportable segments: IMAX DMR; joint revenue sharing arrangements; IMAX systems; theater system maintenance; other; new business; film distribution; and film post-production. The Company is presenting the following information at a disaggregated level to provide more relevant information to readers, as permitted by the standard, and adjusted for the adoption of the new revenue recognition standard:

 

 

•

Network Business

 

•

Theater Business

 

•

New Business

 

•

Other

The Company’s Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations has been organized by the Company into four primary groups – Network Business, Theater Business, New Business and Other. Each of the Company’s reportable segments, as identified above, has been classified into one of these broader groups for purposes of MD&A discussion. The Company believes that this approach is consistent with how the CODM reviews the financial performance of the business and makes strategic decisions regarding resource allocation and investments to meet long-term business goals. Management believes that a discussion and analysis based on these groups is significantly more relevant and useful to readers, as the Company’s condensed consolidated statements of operations captions combine results from several segments. For additional details regarding the four primary groups above, please refer to the Company’s 2018 Form 10-K.


53

 

Three Months Ended September 30, 2019 versus Three Months Ended September 30, 2018

The Company reported net income of $10.9 million, or $0.18 per basic and diluted share, for the third quarter of 2019 as compared to net income of $7.5 million, or $0.12 per basic and diluted share for the third quarter of 2018.

Net income for the third quarter of 2019 includes a $5.5 million charge, or $0.09 per diluted share (2018— $5.6 million or $0.08 per diluted share), for stock-based compensation and a loss of $0.5 million, or $nil per diluted share, adjustment for the change in fair value of equity investment (2018 — $nil).

Adjusted net income, which consists of net income excluding the impact of stock-based compensation, the change in fair value of equity investment and the related tax impact of these adjustments, was $14.9 million, or $0.24 per diluted share, for the third quarter of 2019 as compared to adjusted net income of $11.6 million, or $0.18 per diluted share, for the third quarter of 2018.

The Company reported net income attributable to common shareholders of $9.0 million, or a $0.15 per basic and diluted share for the third quarter of 2019 (2018 — $5.0 million, or $0.08 per basic and diluted share).

Adjusted net income attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation, the change in fair value of equity investment and the related tax impact of these adjustments, was $12.8 million, or $0.21 per diluted share, for the third quarter of 2019 as compared to adjusted net income attributable to common shareholders of $9.0 million, or $0.14 per diluted share, for the third quarter of 2018.

A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net income per diluted share, adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:

 

(In thousands of U.S. dollars, except per share amounts)

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

 

Net Income

 

 

Diluted EPS

 

 

Net Income

 

 

Diluted EPS

 

Reported net income

 

$

10,896

 

 

$

0.18

 

 

$

7,502

 

 

$

0.12

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

5,527

 

 

 

0.09

 

 

 

5,562

 

 

 

0.08

 

Change in fair value of equity investment

 

 

490

 

 

 

—

 

 

 

—

 

 

 

—

 

Tax impact on items listed above

 

 

(1,984

)

 

 

(0.03

)

 

 

(1,500

)

 

 

(0.02

)

Adjusted net income

 

 

14,929

 

 

 

0.24

 

 

 

11,564

 

 

 

0.18

 

Net income attributable to non-controlling interests(1)

 

 

(1,863

)

 

 

(0.03

)

 

 

(2,482

)

 

 

(0.04

)

Stock-based compensation (net of tax of less than

   $0.1 million and less than $0.1 million, respectively)(1)

 

 

(106

)

 

 

—

 

 

 

(75

)

 

 

—

 

Change in fair value of equity investment(1)

 

 

(149

)

 

 

—

 

 

 

—

 

 

 

—

 

Adjusted net income attributable to common shareholders

 

$

12,811

 

 

$

0.21

 

 

$

9,007

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

 

61,479

 

 

 

 

 

 

 

62,793

 

 

(1)

Reflects amounts attributable to non-controlling interests.

 

 

 

54

 

The following table sets forth the breakdown of revenue and gross margin by nature for the three months ended September 30:

 

(In thousands of U.S. dollars)

 

Revenue

 

 

Gross Margin

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Network business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

 

$

26,665

 

 

$

22,372

 

 

$

17,866

 

 

$

14,461

 

Joint revenue sharing arrangements – contingent rent

 

 

16,546

 

 

 

14,327

 

 

 

9,514

 

 

 

8,081

 

IMAX systems – contingent rent

 

 

32

 

 

 

—

 

 

 

32

 

 

 

—

 

 

 

 

43,243

 

 

 

36,699

 

 

 

27,412

 

 

 

22,542

 

Theater business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases(1)

 

 

18,100

 

 

 

20,427

 

 

 

8,775

 

 

 

10,141

 

Ongoing fees and finance income(2)

 

 

2,903

 

 

 

2,971

 

 

 

2,855

 

 

 

2,923

 

Joint revenue sharing arrangements – fixed fees

 

 

1,438

 

 

 

2,798

 

 

 

136

 

 

 

529

 

Theater system maintenance

 

 

13,657

 

 

 

12,415

 

 

 

6,125

 

 

 

5,996

 

Other theater

 

 

1,560

 

 

 

2,076

 

 

 

505

 

 

 

581

 

 

 

 

37,658

 

 

 

40,687

 

 

 

18,396

 

 

 

20,170

 

New business

 

 

596

 

 

 

1,275

 

 

 

541

 

 

 

(298

)

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film distribution and post-production

 

 

3,528

 

 

 

3,062

 

 

 

50

 

 

 

260

 

Other

 

 

1,365

 

 

 

385

 

 

 

721

 

 

 

(483

)

 

 

 

4,893

 

 

 

3,447

 

 

 

771

 

 

 

(223

)

 

 

$

86,390

 

 

$

82,108

 

 

$

47,120

 

 

$

42,191

 

 

(1)

Includes initial payments and the present value of fixed minimum payments from equipment, sales and sales-type lease transactions, and the present value of estimates of variable consideration from equipment sales transactions.

(2)

Includes rental income from operating leases and finance income.

Revenues and Gross Margin

The Company’s revenues for the third quarter of 2019 increased 5.2% to $86.4 million from $82.1 million in the third quarter of 2018, primarily due to an increase in the network business segments, partially offset by a decrease in the theater business and the new business segments. The gross margin across all segments in the third quarter of 2019 was $47.1 million, or 54.5% of total revenue, compared to $42.2 million, or 51.4% of total revenue in the third quarter of 2018.

Network Business

Gross box office generated by IMAX DMR films increased by 19.1% to $246.1 million in the third quarter of 2019 from $206.5 million in the third quarter of 2018. In the third quarter of 2019, gross box office was generated primarily by the exhibition of 26 films (20 new and 6 carryovers), as compared to 29 films (24 new and 5 carryovers) exhibited in the third quarter of 2018.

Network business revenue increased by 17.8% to $43.2 million in the third quarter of 2019 from $36.7 million in the third quarter of 2018 due to an increase in both IMAX DMR revenue and contingent rent received from joint revenue sharing arrangements due to the success of The Lion King: The IMAX Experience, Spider-Man: Far From Home: The IMAX Experience, Hobbs & Shaw: The IMAX Experience and the local language blockbuster Ne Zha: The IMAX Experience in China. The gross margin experienced by the Company’s network business in the third quarter of 2019 was $27.4 million, or 63.4% of network business revenue, compared to $22.5 million, or 61.4% in the third quarter of 2018. The Company’s network business performance is impacted by box office performance, as well as other factors including the timing of a film release to the IMAX theater network, the commercial success of the film, marketing spend, the Company’s take rates under its DMR and joint revenue sharing arrangements, and the distribution window for the exhibition of films in the IMAX theater network. These arrangements are reflected under the IMAX systems segment of Theater Business. Other factors impacting performance include fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations.

55

 

IMAX DMR revenues increased by 19.2% to $26.7 million in the third quarter of 2019 from $22.4 million in the third quarter of 2018. The increase in the current year was facilitated by the blockbuster performance of The Lion King: The IMAX Experience, Spider-Man: Far From Home: The IMAX Experience, Hobbs & Shaw: The IMAX Experience and the local language blockbuster Ne Zha: the IMAX Experience in China.  IMAX DMR gross margins increased to $17.9 million in the third quarter of 2019 as compared to $14.5 million in the third quarter of 2018. Margin is a function of the costs associated with the respective films exhibited in the period, and can vary particularly with respect to marketing expenses. DMR marketing expenses in the third quarter of 2019 were $4.3 million, as compared to $3.1 million in the third quarter of 2018.

Contingent rent revenues from joint revenue sharing arrangements were $16.5 million in the third quarter of 2019, as compared to   $14.3 million for the third quarter of 2018. The Company ended the third quarter of 2019 with 841 theaters operating under joint revenue sharing arrangements, as compared to 757 theaters at the end of the third quarter of 2018, an increase of 11.1%. Gross box office generated by the joint revenue sharing arrangements was higher at $121.9 million in the third quarter of 2019 from $105.8 million in the third quarter of 2018. The Company’s joint revenue sharing arrangement performance is impacted by box office performance, as well as the take rates under each of its joint revenue sharing agreements and where a film is exhibited. Other factors impacting performance include fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations.  

The gross margin from joint revenue sharing arrangements increased to $9.5 million in the third quarter of 2019 from $8.1 million in the third quarter of 2018. Included in the calculation of gross margin for the third quarter of 2019 was depreciation of $5.9 million, as compared to $5.3 million in the third quarter of 2018, as a result of the 11.1% increase in the number of joint revenue sharing arrangement theaters in operation compared to the third quarter of 2018. Also included in gross margin were certain advertising, marketing and commission costs primarily associated with new theater launches of $0.8 million, as compared to $1.0 million during the third quarter of 2018. Margin is a function of the costs associated with each theater, such as the increase in depreciation on new IMAX with Laser systems and costs incurred for the upgrade of theater systems from a digital-xenon system to an IMAX with Laser system.

Contingent rent revenue from IMAX systems consists of variable payments received in excess of the fixed minimum ongoing payments which are primarily driven by box office performance reported by theater operators. The Company expects this revenue stream to be minimal on a go-forward basis. Contingent rent revenue of less than $0.1 million was recognized in the third quarter of 2019, compared to $nil in the third quarter of 2018.

Theater Business

The primary drivers of this line of business are theater system installations and the Company’s maintenance contracts that accompany each theater installation.  For the third quarter of 2019, theater business revenue decreased $3.0 million, or 7.4%, to $37.7 million as compared to the third quarter of 2018. The decrease in theater business revenue in 2019 as compared to 2018 was primarily due to one fewer system installations under sales and sales-type lease arrangements.

Theater business gross margin decreased 8.8% to $18.4 million in the third quarter of 2019 as compared to $20.2 million in the third quarter of 2018, primarily due to:

 

•

one fewer system installation under sales and sales-type lease arrangements; and

 

•

two fewer theater systems contracted as hybrid joint revenue sharing lease arrangements.

As well, there has been an increase to sustained engineering costs related to the IMAX with Laser roll-out and continued development and support.

56

 

The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangements (see discussion below) installations by theater system configuration for September 30 is outlined in the table below:

 

 

 

For the Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

Number of

Systems

 

 

Revenue

 

 

Number of

Systems

 

 

Revenue

 

New IMAX theater systems — installed and recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-types lease arrangements(1)

 

 

14

 

 

$

17,282

 

(2)

 

15

 

 

$

19,866

 

Joint revenue sharing arrangements — hybrid

 

 

4

 

 

 

1,544

 

 

 

6

 

 

 

2,796

 

Total new theater systems

 

 

18

 

 

 

18,826

 

 

 

21

 

 

 

22,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX theater system upgrades — installed and recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-types lease arrangements

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total theater systems installed and recognized

 

 

18

 

 

$

18,826

 

 

 

21

 

 

$

22,662

 

 

 

(1)

The arrangements for the sale of projection systems include indexed minimum payment increases over the term of the arrangement, as well as provision for additional payments in excess of the minimum agreed payments in situations where the theater exceeds certain box office thresholds.  

 

(2)

Includes 1 IMAX digital theater system that was relocated from a previous location. This installation is incremental to the IMAX theater network but full revenue for the digital theater system was not received.

The average revenue per full, new theater system under a sales and sales-type lease arrangement varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location or other various factors. Average revenue per full, new theater system under a sales and sales-type lease arrangement was at $1.2 million for the third quarter of 2019 from $1.3 million the third quarter of 2018, respectively.

Theater system maintenance revenue increased 10% to $13.7 million in the third quarter of 2019 from $12.4 million in the third quarter of 2018. Theater system maintenance gross margin was $6.1 million in the third quarter of 2019 versus $6.0 million in the third quarter of 2018. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.

Ongoing fees and finance income were $2.9 million in the third quarter of 2019 compared to $3.0 million in the third quarter of 2018. Gross margin for ongoing fees and finance income was consistent at $2.9 million in the third quarter of 2019 as compared to $2.9 million in the third quarter of 2018. The costs associated with ongoing fees are minimal as it usually consists of depreciation on the Company’s theaters under operating lease agreements and/or marketing.

Other theater revenue decreased to $1.6 million in the third quarter of 2019 as compared to $2.1 million in the third quarter of 2018. Other theater revenue primarily includes revenue generated from the Company’s after-market sales of projection system parts and 3D glasses. The gross margin recognized from other theater revenue was $0.5 million in the third quarter of 2019 as compared to $0.6 million in the third quarter of 2018.

New Business

Revenue earned from the Company’s new business initiatives was $0.6 million and the new business segment experienced a gross margin of $0.5 million in the third quarter of 2019, as compared to revenue of $1.3 million and margin loss of $0.3 million in the third quarter of 2018. In the third quarter of 2019 revenue in the new business segment is attributable to the IMAX Enhanced program which was launched at the end of 2018 and started generating revenue in the current year as compared to the prior year quarter where the income was primarily derived from IMAX VR and the final contractual payment owed to IMAX related to the IMAX VR camera. The increase in gross margin is primarily attributable to the increase in IMAX Enhanced revenue compared to the third quarter of 2018.


57

 

Other

Film distribution and post-production revenues were $3.5 million in the third quarter of 2019, as compared to $3.1 million in the third quarter of 2018. Film distribution and post-production gross margin was less than $0.1 million in the third quarter of 2019, as compared to a gross margin of $0.3 million in the third quarter of 2018.

Other revenue was $1.4 million in the third quarter of 2019, as compared to $0.4 million in the third quarter of 2018. Other revenue primarily includes revenue generated from the Company’s theater operations and camera rental business. The increase in revenue is primarily the result of an increase in camera rental revenue.

The gross margin recognized from other revenue was a gross margin of $0.7 million in the third quarter of 2019, as compared to a margin loss of $0.5 million in the third quarter of 2018.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $29.5 million in the third quarter of 2019, as compared to $26.7 million in the third quarter of 2018. Selling, general and administrative expenses excluding the impact of stock-based compensation were $24.5 million in the third quarter of 2019, as compared to $21.8 million in the third quarter of 2018.

The following reflects the significant items impacting selling, general and administrative expenses for the third quarter of 2019 and 2018:

 

 

 

2019

 

 

2018

 

 

2019 versus 2018

 

 

Staff costs

 

$

16,628

 

 

$

14,469

 

 

$

2,159

 

 

 

14.9

 

%

Stock-based compensation

 

 

4,983

 

 

 

4,840

 

 

 

143

 

 

 

3.0

 

%

Consulting and professional fees

 

 

2,905

 

 

 

2,374

 

 

 

531

 

 

 

22.4

 

%

Marketing

 

 

1,548

 

 

 

2,653

 

 

 

(1,105

)

 

 

(41.7

)

%

Foreign exchange loss (gain)

 

 

667

 

 

 

(428

)

 

 

1,095

 

 

 

255.8

 

%

Other general corporate expenditures

 

 

2,751

 

 

 

2,746

 

 

 

5

 

 

 

0.2

 

%

Total

 

$

29,482

 

 

$

26,654

 

 

$

2,828

 

 

 

10.6

 

%

 

Other general corporate expenditures include professional fees, travel and entertainment. Selling, general and administrative expenses also includes asset impairment charges and write-offs, if any, and miscellaneous items, other than interest.

Research and Development Expenses

Research and development expenses decreased to $1.4 million in the third quarter of 2019, as compared to $4.0 million in the third quarter of 2018. The decrease is primarily due to decreased spending on the Company’s updated laser-based digital projection system compared to the third quarter of 2018.

A significant portion of the Company’s research and development efforts over the past several years have been focused on IMAX with Laser, the Company’s next-generation laser-based projection system, which the Company believes delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today. The Company expects that research and development expense will continue to decrease in 2019, as the initial roll-out of IMAX with Laser occurred in the prior year.

The Company intends to continue research and development in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors, certifying more IMAX cameras, enhancing the Company’s image quality, expanding the applicability of the Company’s digital technology in both theater and home entertainment, improvements to the DMR process.


58

 

Receivable Provisions, Net of Recoveries

Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision of $0.6 million in the third quarter of 2019 as compared to a net provision of $0.9 million in the third quarter of 2018.

The Company’s accounts receivables and financing receivables are subject to credit risk, as a result of geographical location, exchange rate fluctuations, and other unforeseeable financial difficulties. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractual commitments.

Interest Income and Expense

Interest income was $0.5 million in the third quarter of 2019, as compared to $0.6 million in the third quarter of 2018.

Interest expense was $0.5 million in the third quarter of 2019, as compared to $1.0 million in the third quarter of 2018. Included in interest expense is the amortization of deferred finance costs in the amount of $0.1 million in the third quarter of 2019, as compared to $0.4 million in the third quarter of 2018. The Company’s policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider, over the life of the debt instrument.

Change in fair value of equity investment

In the first quarter of 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) and purchased equity securities for $15.2 million. These equity securities are traded on the Hong Kong Stock Exchange, and the Company is required to adjust the fair value of the securities each period to reflect the current market value. This adjustment will fluctuate based on the closing market price at the end of each period. In the third quarter of 2019, a loss of $0.5 million was recognized in the Condensed Consolidated Statements of Operations.

Income Taxes

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, including the impact of the Tax Act, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations.

As at September 30, 2019, the Company had a gross deferred income tax asset of $29.9 million, against which the Company is carrying a $0.2 million valuation allowance. For the three months ended September 30, 2019, the Company recorded an income tax provision of $3.0 million, which includes a recovery of $0.7 million related to its provision for uncertain tax positions. In addition, the three months ended September 30, 2019 there were no amounts included in the provision for income taxes for tax shortfalls related to stock-based compensation costs.

The Company’s Chinese subsidiary has made inquiries of the Chinese State Administration of Taxation regarding the potential deductibility of certain stock-based compensation for stock options issued by the Chinese subsidiary’s parent company, IMAX China.  In addition, Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed transactions before they can be completed. There may be a requirement for future investment of funds into China in order to secure the deduction. Should the Company proceed, any such future investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary. The Company’s Chinese Subsidiary has treated the stock-based compensation as deductible and has set up related deferred tax assets of $1.5 million (December 31, 2018 ─ $1.2 million).


59

 

Equity-Accounted Investments

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. As at September 30, 2019, the equity method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2018 ─ $nil). The Company’s accumulated losses in excess of its equity investment were $1.5 million as at September 30, 2019. For the three months ended September 30, 2019, gross revenues, cost of revenue and net loss for these investments were $1.1 million, $0.7 million and $0.3 million, respectively (2018 ─ $0.3 million, $1.0 million and $0.6 million, respectively). The Company recorded its proportionate share of the net gain which amounted to $0.2 million in the third quarter of 2019, as compared to a net loss of $0.2 million in the third quarter of 2018.

Non-Controlling Interests

The Company’s condensed consolidated financial statements include a non-controlling interest in the net income of IMAX China as well as the impact of non-controlling interests in its subsidiaries created for the Original Film Fund and VR Content Fund activity. For the three months ended September 30, 2019 the net income attributable to non-controlling interests of the Company’s subsidiaries was $1.9 million (2018 ─ $2.5 million).


60

 

Nine Months Ended September 30, 2019 versus Nine Months Ended September 30, 2018

The Company reported net income of $37.2 million, or $0.61 per basic and diluted share, for the nine months ended September 30, 2019 as compared to net income of $29.8 million, or $0.47 per basic and diluted share for the nine months ended September 30, 2018.

Net income for the nine months ended September 30, 2019, includes a $16.9 million charge, or 0.27 per diluted share (2018 — $17.2 million or $0.26 per diluted share), for stock-based compensation, a $0.9 million charge, or $0.01 per diluted share for exit costs, restructuring charges and associated impairments (2018 — $1.2 million, or $0.02 per diluted share) and a loss of $2.5 million, or $0.03 per diluted share, adjustment for the change in fair value of equity investment (2018 — $nil). The nine months ended September 30, 2018 includes a $7.5 million charge, or $0.12 per diluted share, for a legal arbitration award related to one of the Company’s litigation matters from 2006.

Adjusted net income, which consists of net income excluding the impact of stock-based compensation, exit costs, restructuring charges and associated impairments, the legal arbitration award, the change in fair value of equity investment and the related tax impact of these adjustments, was $53.0 million, or $0.86 per diluted share, for the nine months ended September 30, 2019, as compared to adjusted net income of $50.4 million, or $0.79 per diluted share, for the nine months ended September 30, 2018.

The Company reported net income attributable to common shareholders of $28.7 million, or $0.47 per basic and diluted share for the nine months ended September 30, 2019 (2018 — $21.2 million, or $0.33 per basic and diluted share).

Adjusted net income attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation, exit costs, restructuring charges and associated impairments, the legal arbitration award, the change in fair value of equity investment and the related tax impact of these adjustments, was $43.3 million, or $0.70 per diluted share, for the nine months ended September 30, 2019, as compared to adjusted net income attributable to common shareholders of $41.4 million, or $0.65 per diluted share, for the nine months ended September 30, 2018.

A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net income per diluted share, adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:

 

(In thousands of U.S. dollars, except per share amounts)

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

 

Net Income

 

 

Diluted EPS

 

 

Net Income

 

 

Diluted EPS

 

Reported net income

 

$

37,219

 

 

$

0.61

 

 

$

29,824

 

 

$

0.47

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

16,916

 

 

 

0.27

 

 

 

17,165

 

 

 

0.26

 

Exit costs, restructuring charges and associated impairments

 

 

850

 

 

 

0.01

 

 

 

1,158

 

 

 

0.02

 

Legal arbitration award

 

 

—

 

 

 

—

 

 

 

7,500

 

 

 

0.12

 

Change in fair value of equity investment

 

 

2,543

 

 

 

0.03

 

 

 

—

 

 

 

—

 

Tax impact on items listed above

 

 

(4,519

)

 

 

(0.06

)

 

 

(5,287

)

 

 

(0.08

)

Adjusted net income

 

 

53,009

 

 

 

0.86

 

 

 

50,360

 

 

 

0.79

 

Net income attributable to non-controlling interests(1)

 

 

(8,524

)

 

 

(0.14

)

 

 

(8,674

)

 

 

(0.14

)

Stock-based compensation (net of tax of $0.1 million and

   $0.1 million, respectively) (1)

 

 

(368

)

 

 

(0.01

)

 

 

(279

)

 

 

—

 

Change in fair value of equity investment

 

 

(801

)

 

 

(0.01

)

 

 

—

 

 

 

—

 

Adjusted net income attributable to common shareholders

 

$

43,316

 

 

$

0.70

 

 

$

41,407

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

 

61,509

 

 

 

 

 

 

 

63,580

 

 

(1)

Reflects amounts attributable to non-controlling interests.


61

 

The following table sets forth the breakdown of revenue and gross margin by nature for the nine months ended September 30:

 

(In thousands of U.S. dollars)

 

Revenue

 

 

Gross Margin

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Network Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX DMR

 

$

93,908

 

 

$

85,586

 

 

$

61,602

 

 

$

57,523

 

Joint revenue sharing arrangements - contingent rent

 

 

59,704

 

 

 

56,919

 

 

 

40,437

 

 

 

39,441

 

IMAX systems - contingent rent

 

 

189

 

 

 

—

 

 

 

189

 

 

 

—

 

 

 

 

153,801

 

 

 

142,505

 

 

 

102,228

 

 

 

96,964

 

Theater Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-type leases(1)

 

 

42,212

 

 

 

50,545

 

 

 

18,429

 

 

 

28,648

 

Ongoing fees and finance income(2)

 

 

8,588

 

 

 

8,982

 

 

 

8,445

 

 

 

8,839

 

Joint revenue sharing arrangements – fixed fees

 

 

6,525

 

 

 

3,821

 

 

 

1,301

 

 

 

776

 

Theater system maintenance

 

 

39,815

 

 

 

37,462

 

 

 

17,046

 

 

 

17,289

 

Other theater

 

 

5,766

 

 

 

5,707

 

 

 

1,821

 

 

 

1,099

 

 

 

 

102,906

 

 

 

106,517

 

 

 

47,042

 

 

 

56,651

 

New Business

 

 

1,908

 

 

 

4,999

 

 

 

1,441

 

 

 

139

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film distribution and post-production

 

 

9,791

 

 

 

9,156

 

 

 

483

 

 

 

320

 

Other

 

 

2,979

 

 

 

2,260

 

 

 

619

 

 

 

(787

)

 

 

 

12,770

 

 

 

11,416

 

 

 

1,102

 

 

 

(467

)

 

 

$

271,385

 

 

$

265,437

 

 

$

151,813

 

 

$

153,287

 

 

(1)

Includes initial payments and the present value of fixed minimum payments from equipment, sales and sales-type lease transactions, and in 2018, includes the present value of estimates of variable consideration from equipment sales transactions.

(2)

Includes rental income from operating leases and finance income.

Revenues and Gross Margin

The Company’s revenues for the nine months ended September 30, 2019 increased by 2.2% to $271.4 million from $265.4 million for the nine months ended September 30, 2018, primarily due to an increase in revenues from the Company’s network business segment, partially offset by a decrease in the theater business and the new business segments. The gross margin across all segments in the nine months ended September 30, 2019 was $151.8 million, or 55.9% of total revenue, compared to $153.3 million, or 57.7% of total revenue in the nine months ended September 30, 2018.

Network Business

Gross box office generated by IMAX DMR films increased 9.0% to $867.3 million in the nine months ended September 30, 2019 from $795.4 million in the nine months ended September 30, 2018. In the nine months ended September 30, 2019, gross box office was generated primarily by the exhibition of 59 films (47 new and 12 carryovers), as compared to 58 films (48 new and 10 carryovers) exhibited in the nine months ended September 30, 2018.

Network business revenue increased by 7.9% to $153.8 million in the nine months ended September 30, 2019 from $142.5 million in the nine months ended September 30, 2018, due to an increase in the number of films exhibited. The gross margins experienced by the Company’s network business in the nine months ended September 30, 2019 was $102.2 million, or 66.5% of network business revenue, compared to $97.0 million, or 68.0% in the nine months ended September 30, 2018. The Company’s network business performance is impacted by box office performance, as well as other factors including the timing of a film release to the IMAX theater network, the commercial success of the film, marketing spend, the Company’s take rates under its DMR and joint revenue sharing arrangements, and the distribution window for the exhibition of films in the IMAX theater network. These arrangements are reflected under the IMAX systems segment of Theater Business. Other factors impacting performance include fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations.

62

 

IMAX DMR revenues increased 9.7% to $93.9 million in the nine months ended September 30, 2019 from $85.6 million in the nine months ended September 30, 2018, due to an increase in the number of films exhibited and stronger film performance, which includes the blockbuster performances of Captain Marvel: The IMAX Experience, Avengers: Endgame: The IMAX Experience, The Lion King: The IMAX Experience, Spider-Man: Far From Home: The IMAX Experience, Hobbs & Shaw: The IMAX Experience and the local language blockbusters The Wandering Earth: The IMAX Experience in China and Ne Zha: The IMAX Experience in China in the nine months ended September 30, 2019. The nine months ended September 30, 2018 included the blockbuster performances of Black Panther: The IMAX Experience and Avengers: Infinity War: The IMAX Experience and the local language blockbuster Operation Red Sea: The IMAX Experience in China. The gross margin from the IMAX DMR segment was $61.6 million and $57.5 million in the nine months ended September 30, 2019 and 2018, respectively. DMR marketing expenses in the nine months ended September 30, 2019 were $17.7 million, as compared to $13.7 million in the nine months ended September 30, 2018.

Contingent rent revenues from joint revenue sharing arrangements increased to $59.7 million in the nine months ended September 30, 2019 from $56.9 million in the nine months ended September 30, 2018. The Company ended the current period with 841 theaters operating under joint revenue sharing arrangements, as compared to 757 theaters at the end of the nine months ended September 30, 2018, an increase of 11.1%. Gross box office generated by the joint revenue sharing arrangements was 5.2% higher at $441.6 million in the nine months ended September 30, 2019 from $419.8 million in the nine months ended September 30, 2018. The Company’s joint revenue sharing arrangement performance is impacted by box office performance, as well as the take rates under each of its joint revenue sharing arrangements and where a film is exhibited. Other factors impacting performance include fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations.

The gross margin from joint revenue sharing arrangements increased by 2.5% to $40.4 million in the nine months ended September 30, 2019 from $39.4 million in the nine months ended September 30, 2018. Included in the calculation of gross margin for the nine months ended September 30, 2019 was depreciation of $17.2 million, as compared to $15.3 million in the nine months ended September 30, 2018. Also included in gross margin were certain advertising, marketing and commission costs primarily associated with new theater launches of $1.1 million, as compared to $2.2 million during the nine months ended September 30, 2018. Margin is a function of the costs associated with each theater, such as the increase in depreciation on new IMAX with Laser systems and costs incurred for the upgrade of theater systems from a digital-xenon system to an IMAX with Laser system.

Contingent rent revenue from IMAX systems consists of variable payments received in excess of the fixed minimum ongoing payments which are primarily driven by box office performance reported by theater operators. The Company expects this revenue stream to be minimal on a go-forward basis. Contingent rent revenue of $0.2 million was recognized in the nine months ended September 30, 2019, compared to $nil in the nine months ended September 30, 2018.

Theater Business

The primary drivers of this line of business are theater system installations and the Company’s maintenance contract that accompanies each theater installation.  In the nine months ended September 30, 2019, theater business revenue decreased $3.6 million, or 3.4% to $102.9 million as compared to $106.5 million in nine months ended September 30, 2018. The decrease in theater business revenue was primarily due to:

 

•

eight fewer system installations under sales and sales-type lease arrangements; offset by

 

•

five additional theater systems contracted as hybrid joint revenue sharing lease arrangements; and

 

•

two additional installation of system upgrades;

Theater business gross margin decreased 17.0% to $47.0 million in the nine months ended September 30, 2019, as compared to $56.7 million in the nine months ended September 30, 2018 due to the mix of systems installed under sales and sales-type leases and joint revenue sharing lease arrangements.

As well, there has been an increase to sustained engineering costs related to the IMAX with Laser roll-out and continued development and support. 

63

 

The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangement (see discussion below) installations by theater system configuration is outlined in the table below:

 

 

 

2019

 

 

2018

 

 

 

Number of

Systems

 

 

Revenue

 

 

Number of

Systems

 

 

Revenue

 

New IMAX theater systems — installed and recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-types lease arrangements(1)

 

 

29

 

 

$

37,224

 

(2)

 

37

 

 

$

48,945

 

Joint revenue sharing arrangements — hybrid

 

 

13

 

 

 

6,608

 

 

 

8

 

 

 

3,840

 

Total new theater systems

 

 

42

 

 

 

43,832

 

 

 

45

 

 

 

52,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMAX theater system upgrades — installed and recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and sales-types lease arrangements

 

 

2

 

 

 

2,028

 

 

 

—

 

 

 

—

 

Total theater systems installed and recognized

 

 

44

 

 

$

45,860

 

 

 

45

 

 

$

52,785

 

 

(1)

The arrangements for the sale of projection systems include indexed minimum payment increases over the term of the arrangement, as well as provision for additional payments in excess of the minimum agreed payments in situations where the theater exceeds certain box office thresholds.  

(2)

Includes 1 IMAX digital theater system that was relocated from a previous location. This installation is incremental to the IMAX theater network but full revenue for the digital theater system was not received.

The average revenue per full, new theater system under a sales and sales-type lease arrangement varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location or other various factors. Average revenue per full, new theater system under a sales and sales-type lease arrangement was consistent for the nine months ended September 30, 2019 and nine months ended September 30, 2018 at $1.3 million. The average revenue per full, new theater system under a sales and sales-type lease arrangement varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location or other various factors. The average value is driven by the recognition of variable consideration at the time of recognition versus over the term of the arrangement.

Theater system maintenance revenue increased 6.3% to $39.8 million in the nine months ended September 30, 2019 from $37.5 million in the nine months ended September 30, 2018. Theater system maintenance gross margin was $17.0 million in the nine months ended September 30, 2019 versus $17.3 million in the nine months ended September 30, 2018. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.

Ongoing fees and finance income was $8.6 million in the nine months ended September 30, 2019 compared to $9.0 million in the nine months ended September 30, 2018. Gross margin for ongoing rent and finance income decreased to $8.4 million in the nine months ended September 30, 2019 from $8.8 million in the nine months ended September 30, 2018. The costs associated with ongoing fees are minimal as it usually consists of depreciation on the Company’s theaters under operating lease agreements and/or marketing.  

Other theater revenue increased to $5.8 million in the nine months ended September 30, 2019 as compared to $5.7 million in the nine months ended September 30, 2018. Other theater revenue primarily includes revenue generated from the Company’s after-market sales of projection system parts and 3D glasses. The gross margin recognized from other theater revenue was $1.8 million in the nine months ended September 30, 2019, as compared to $1.1 million in the nine months ended September 30, 2018.

New Business

Revenue earned from the Company’s new business initiatives was $1.9 million and the new business segment experienced gross margin of $1.4 million in the nine months ended September 30, 2019, as compared to $5.0 million and gross margin of $0.1 million in the nine months ended September 30, 2018. Revenue in the nine months ended September 30, 2019 is attributable to the IMAX Enhanced program which was launched at the end of 2018 and other residual income from prior initiatives. In the nine months ended September 30, 2018 the revenue was primarily attributable to final contractual payments owed to IMAX related to the previously announced VR camera, which were received in the prior year comparative period. The increase in gross margin is primarily attributable to the increase in IMAX Enhanced revenue.

64

 

The Company is evaluating its new business initiatives separately from its core business as the nature of its activities is separate and distinct from its ongoing operations, and as a result the Company views it as helpful to discuss items beyond that of gross margin. The Company recognized a net earnings before tax from its new business initiatives for the nine months ended September 30, 2019, of $1.0 million, which includes exit costs and restructuring charges of $0.1 million, amortization of $0.1 million and an equity loss of $0.1 million. In addition, the earnings includes selling, general and administrative costs of $0.2 million and research and development costs of $0.1 million. In the prior year comparative period, the net loss of $1.9 million, included amortization of $3.9 million and an equity loss of $0.5 million, selling, general and administrative expenses of $1.1 million and research and development costs of $0.3 million.

Other

Film distribution and post-production revenues were $9.8 million in the nine months ended September 30, 2019, as compared to $9.2 million in the nine months ended September 30, 2018. Film distribution and post-production gross margin was $0.5 million in the nine months ended September 30, 2019 as compared to gross margin of $0.3 million in the nine months ended September 30, 2018.

Other revenue increased to $3.0 million in the nine months ended September 30, 2019, as compared to $2.3 million in the nine months ended September 30, 2018. Other revenue primarily includes revenue generated from the Company’s theater operations and camera rental business. The increase in revenue is primarily the result of an increase in camera rental revenue in the nine months ended September 30, 2019, as compared to the prior year comparative period, partially offset by a decrease in theater operations revenue, including one less owned and operated theater.

The gross margin recognized from other revenue was a gross margin of $0.6 million in the nine months ended September 30, 2019, as compared to margin loss of $0.8 million in the nine months ended September 30, 2018.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $89.3 million in the nine months ended September 30, 2019, as compared to $87.1 million in the nine months ended September 30, 2018. Selling, general and administrative expenses excluding the impact of stock-based compensation were $73.9 million in the nine months ended September 30, 2019, as compared to $71.6 million in the nine months ended September 30, 2018.

The following reflects the significant items impacting selling, general and administrative expenses as compared to the prior year comparative period:

 

 

 

2019

 

 

2018

 

 

2019 versus 2018

 

 

Staff costs

 

$

48,023

 

 

$

44,570

 

 

$

3,453

 

 

 

7.7

 

%

Stock-based compensation

 

 

15,371

 

 

 

15,499

 

 

 

(128

)

 

 

(0.8

)

%

Consulting and professional fees

 

 

8,813

 

 

 

7,928

 

 

 

885

 

 

 

11.2

 

%

Marketing

 

 

4,927

 

 

 

7,097

 

 

 

(2,170

)

 

 

(30.6

)

%

Foreign exchange loss

 

 

1,074

 

 

 

652

 

 

 

422

 

 

 

(64.7

)

%

Other general corporate expenditures

 

 

11,059

 

 

 

11,351

 

 

 

(292

)

 

 

(2.6

)

%

Total

 

$

89,267

 

 

$

87,097

 

 

$

2,170

 

 

 

2.5

 

%

 

Other general corporate expenditures include professional fees, travel and entertainment. Selling, general and administrative expenses also includes asset impairment charges and write-offs, if any, and miscellaneous items, other than interest.

Research and Development

Research and development expenses decreased to $3.7 million in the nine months ended September 30, 2019 compared to $11.5 million in the nine months ended September 30, 2018. The decrease is primarily due to lower spending on new business initiatives compared to the nine months ended September 30, 2018.

A significant portion of the Company’s research and development efforts over the past several years have been focused on IMAX with Laser, the Company’s next-generation laser-based projection system, which the Company believes delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today. The Company expects that research and development expense will continue to decrease in 2019, as the initial roll-out of IMAX with Laser occurred in the prior year.

65

 

The Company intends to continue research and development in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors, certifying more IMAX cameras, enhancing the Company’s image quality, expanding the applicability of the Company’s digital technology in both theater and home entertainment, improvements to the DMR process.

Receivable Provisions, Net of Recoveries

Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision of $2.0 million in the nine months ended September 30, 2019 as compared to a net provision of $1.7 million in the nine months ended September 30, 2018.

The Company’s accounts receivables and financing receivables are subject to credit risk, as a result of geographical location, exchange rate fluctuations, and other unforeseeable financial difficulties. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractual commitments.

Interest Income and Expense

Interest income was $1.6 million in the nine months ended September 30, 2019, as compared to $1.1 million in the nine months ended September 30, 2018.

Interest expense was $1.8 million in the nine months ended September 30, 2019, as compared to $2.3 million in the nine months ended September 30, 2018. Included in interest expense is the amortization of deferred finance costs in the amount of $0.4 million in the nine months ended September 30, 2019 as compared to $1.0 million in the nine months ended September 30, 2018. The Company’s policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider, over the life of the debt instrument.

Legal arbitration award

In the nine months ended September 30, 2018, the Company recorded a charge of $7.5 million for a legal arbitration award related to one of the Company’s litigation matters from 2006. There were no legal arbitration award charges in the third quarter of 2019.

Change in fair value of equity investment

In the nine months ended September 30, 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) and purchased equity securities for $15.2 million. These equity securities are traded on the Hong Kong Stock Exchange, and the Company is required to adjust the fair value of the securities each period to reflect the current market value. This adjustment will fluctuate based on the closing market price at the end of each period. In the nine months ended September 30, 2019, a loss of $2.5 million was recognized in the Condensed Consolidated Statements of Operations.

Exit costs, restructuring charges and associated impairments

Exit costs, restructuring charges and associated impairments were $0.9 million in the nine months ended September 30, 2019, for employee severance costs, as compared to the nine months ended September 30, 2018 an expense of $1.2 million was recognized for employee severance costs.


66

 

Income Taxes

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, including the impact of the Tax Act, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations.

As at September 30, 2019, the Company had a gross deferred income tax asset of $29.9 million, against which the Company is carrying a $0.2 million valuation allowance. For the nine months ended September 30, 2019, the Company recorded an income tax provision of $12.0 million, which includes a recovery of $0.2 million related to its provision for uncertain tax positions. In addition, included in the provision for income taxes was a $0.3 million expense for tax shortfalls related to stock-based compensation costs recognized in the period.

The Company’s Chinese subsidiary has made inquiries of the Chinese State Administration of Taxation regarding the potential deductibility of certain stock-based compensation for stock options issued by the Chinese subsidiary’s parent company, IMAX China.  In addition, Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed transactions before they can be completed. There may be a requirement for future investment of funds into China in order to secure the deduction. Should the Company proceed, any such future investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary. The Company’s Chinese Subsidiary has treated the stock-based compensation as deductible and has set up related deferred tax assets of $1.5 million (December 31, 2018 ─ $1.2 million).

Equity-Accounted Investments

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. As at September 30, 2019, the equity method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2018 ─ $nil). The Company’s accumulated losses in excess of its equity investment were $1.5 million as at September 30, 2019. For the nine months ended September 30, 2019, gross revenues, cost of revenue and net loss for the Company’s investments were $1.8 million, $1.1 million and $1.1 million, respectively (2018 ─ $1.8 million, $2.7 million and $1.6 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $0.1 million in the nine months ended September 30, 2019, compared to a net loss of $0.5 million experienced in the nine months ended September 30, 2018.

Non-Controlling Interests

The Company’s condensed consolidated financial statements include a non-controlling interest in the net income of IMAX China as well as the impact of non-controlling interests in its subsidiaries created for the Original Film Fund and VR Content Fund activity. For the nine months ended September 30, 2019, the net income attributable to non-controlling interests of the Company’s subsidiaries were $8.5 million (2018 ─ $8.7 million).


67

 

LIQUIDITY AND CAPITAL RESOURCES

On June 28, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as agent, and a syndicate of lenders party thereto. The Credit Agreement expands the Company’s revolving borrowing capacity from $200.0 million to $300.0 million, and also contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to $440.0 million or greater, depending on the mix of revolving and term loans comprising the incremental facility. The facility (the “Credit Facility”) matures on June 28, 2023.

The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries (the “Guarantors”) and are secured by first-priority security interests in substantially all the assets of the Company and the Guarantors.

The Company used a portion of the proceeds under the facility to repay the outstanding term loan debt incurred to finance the construction of our West Coast headquarters and intends to use the remaining proceeds under the facility to finance ongoing working capital requirements and for other general corporate purposes. The Credit Facility, coupled with recurring cash generated by the Company’s theater network, is expected to provide enhanced flexibility as the Company continues with the global expansion of its business and pursues other avenues to increase shareholder value.

Total amounts drawn and available under the Credit Facility at September 30, 2019 were $20.0 million and $280.0 million, respectively (December 31, 2018 – $40.0 million and $260.0 million, respectively). The effective interest rate for the three and nine months ended September 30, 2019 was 3.34% and 3.50%, respectively (2018 ― 3.28%, and 3.28%).

The Credit Facility requires that the Company maintain a Senior Secured Net Leverage Ratio, as at the last day of any Fiscal Quarter (as defined in the Credit Agreement) of no greater than 3.25:1.0. The Company was in compliance with this requirement at September 30, 2019. The Senior Secured Net Leverage Ratio (as defined in the Credit Agreement) was 0.00:1 as at September 30, 2019, where Total Debt (as defined in the Credit Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar instruments, net of up to $75.0 million in unrestricted cash and cash equivalents outside of the People’s Republic of China (“PRC”), was $nil. Adjusted EBITDA per Credit Facility is calculated as follows:

 

 

For the

 

 

For the

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

Adjusted EBITDA per Credit Facility:

September 30, 2019

 

 

September 30, 2019(1)

 

 

(In thousands of U.S. Dollars)

 

 

 

 

 

 

 

 

 

 

Net income

$

 

10,896

 

 

$

 

40,990

 

 

Add (subtract):

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

3,030

 

 

 

 

11,964

 

 

Interest income, net of interest expense

 

 

(133

)

 

 

 

(68

)

 

Depreciation and amortization, including film asset amortization

 

 

15,696

 

 

 

 

60,953

 

 

EBITDA

$

 

29,489

 

 

$

 

113,839

 

 

Stock and other non-cash compensation

 

 

5,687

 

 

 

 

22,880

 

 

Change in fair value of equity investment

 

 

490

 

 

 

 

2,543

 

 

Write-downs, net of recoveries including asset impairments and receivable provisions

 

 

1,118

 

 

 

 

5,781

 

 

Exit costs, restructuring charges and associated impairments

 

 

—

 

 

 

 

9,234

 

 

Legal arbitration award

 

 

—

 

 

 

 

4,237

 

 

Executive transition costs

 

 

—

 

 

 

 

2,994

 

 

(Gain) Loss from equity accounted investments

 

 

(166

)

 

 

 

41

 

 

Adjusted EBITDA before non-controlling interests

$

 

36,618

 

 

$

 

161,549

 

 

Adjusted EBITDA attributable to non-controlling interests(2)

 

 

(4,188

)

 

 

 

(22,797

)

 

Adjusted EBITDA per Credit Facility

$

 

32,430

 

 

$

 

138,752

 

 

 

(1)

Senior Secured Net Leverage Ratio calculated using twelve months ended Adjusted EBITDA per Credit Facility.

(2)

The Adjusted EBITDA per Credit Facility calculation includes the reduction in Adjusted EBITDA per Credit Facility from the Company’s non-controlling interests.


68

 

Working Capital Loan

On July 5, 2018, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, entered into an unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.0 million USD) to fund ongoing working capital requirements. Subsequent to June 30, 2019 this facility was renewed. The total amounts drawn and available under the working capital loan at September 30, 2019 and December 31, 2018 were nil and 200.0 million Renminbi, respectively.

Letters of Credit and Other Commitments

As at September 30, 2019, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2018 — $nil), under the Credit Facility.

Prior to September 30, 2019, the Company had a $10.0 million facility for advance payment guarantees and letters of credit through the Bank of Montreal for use solely in conjunction with guarantees fully insured by Export Development Canada (the “Bank of Montreal Facility”). The Bank of Montreal Facility was unsecured and included typical affirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year. As at September 30, 2019, the Company did not have any letters of credit outstanding and advance payment guarantees outstanding (December 31, 2018 ― $nil), under the Bank of Montreal Facility. The Bank of Montreal Facility expired as of September 30, 2019 and was not renewed. On October 28, 2019, the Company entered into a $5.0 million facility for advance payment guarantees and letters of credit through the National Bank of Canada for use solely in conjunction with guarantees fully insured by Export Development Canada (the “NBC Facility”) to replace the Bank of Montreal Facility. The NBC Facility contains substantially the same terms as the Bank of Montreal Facility.  As such, the NBC Facility is unsecured and includes typical affirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year.

Cash and Cash Equivalents

As at September 30, 2019, the Company’s principal sources of liquidity included cash and cash equivalents of $102.5 million, the Credit Facility, anticipated collection from trade accounts receivable of $81.7 million including receivables from theaters under joint revenue sharing arrangements and DMR agreements with studios, anticipated collection from financing receivables due in the next 12 months of $29.3 million and payments expected in the next 12 months on existing backlog deals. As at September 30, 2019, the Company had drawn $20.0 million on the Credit Facility (remaining availability of $280.0 million). There were no letters of credit and advance payment guarantees outstanding under the Credit Facility or the Bank of Montreal Facility. Cash held outside of North America as at September 30, 2019 was $84.2 million (December 31, 2018 — $121.9 million), of which $63.5 million was held in the PRC (December 31, 2018 — $54.7 million). The Company's intent is to permanently reinvest these amounts outside of Canada and the Company does not currently anticipate that it will need funds generated from foreign operations to fund North American operations. In the event funds from foreign operations are needed to fund operations in North America and if withholding taxes have not already been previously provided, the Company would be required to accrue and pay these additional withholding tax amounts on repatriation of funds from China to Canada. The Company currently estimates this amount to be $10.2 million.

During the nine months ended September 30, 2019, the Company used cash of $39.0 million. The Company used cash of $53.7 million to fund capital expenditures, of which $31.1 million was invested in equipment for use in the Company’s joint revenue sharing arrangements with exhibitors and $15.2 million was used to purchase an investment in equity securities of Maoyan. In addition, $7.4 million was used to purchase other intangible assets and to purchase property, plant and equipment. Based on management’s current operating plan for 2019, the Company expects to continue to use cash to deploy additional theater systems under joint revenue sharing arrangements, to fund DMR agreements with studios, and to potentially make share repurchases. Cash flows from joint revenue sharing arrangements are derived from the theater box-office and concession revenues and the Company invested directly in the roll out of 29 new theater systems under joint revenue sharing arrangements during the nine months ended September 30, 2019, which were capitalized by the Company.

In 2017, the Company's Board of Directors announced a new share repurchase program which authorizes the repurchase of up to $200.0 million of its common shares by June 30, 2020. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. During the nine months ended September 30, 2019, the Company repurchased 134,384 common shares at an average price of $19.76 per share, excluding commission.

69

 

The Company’s operating cash flow will be adversely affected if management’s projections of future signings for theater systems and film performance, theater installations and film productions are not realized. The Company forecasts its short-term liquidity requirements on a quarterly and annual basis. Since the Company’s future cash flows are based on estimates and there may be factors that are outside of the Company’s control (see “Risk Factors” in Item 1A in the Company’s 2018 Form 10-K), there is no guarantee that the Company will continue to be able to fund its operations through cash flows from operations. Under the terms of the Company’s typical sale and sales-type lease agreement, the Company receives substantial cash payments before the Company completes the performance of its obligations. Similarly, the Company receives cash payments for some of its film productions in advance of related cash expenditures. Based on the Company’s cash flow from operations and facilities, it expects to have sufficient capital and liquidity to fund its operations in the normal course for the next 12 months.

Operating Activities

The Company’s net cash used in or provided by operating activities is affected by a number of factors, including the proceeds associated with new signings of theater system lease and sale agreements in the year, costs associated with contributing systems under joint revenue sharing arrangements, the box-office performance of films distributed by the Company and/or released to IMAX theaters, increases or decreases in the Company’s operating expenses, including research and development and new business initiatives, and the level of cash collections received from its customers.

Cash provided by operating activities amounted to $67.3 million for the nine months ended September 30, 2019. Changes in other non-cash operating assets and liabilities as compared to December 31, 2018 include:

 

 

For the

 

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

Decrease (increase) in:

 

 

 

 

Accounts receivable

$

 

9,613

 

Financing receivables

 

 

6,184

 

Inventories (1)

 

 

(13,422

)

Prepaid expenses

 

 

(1,163

)

Variable consideration receivable

 

 

(1,096

)

Other assets

 

 

(4,298

)

Increase (decrease) in:

 

 

 

 

Accounts payable

 

 

(8,001

)

Accrued and other liabilities (2)

 

 

(9,504

)

Deferred revenue

 

 

(2,599

)

 

$

 

(24,286

)

 

(1)

The build-up for future IMAX theater system installations under sales or sales-type lease arrangements exceeded amounts relieved from inventory for systems recognized and service parts used.

(2)

Includes the $17.4 million impact of adopting ASC Topic 842.

Investing Activities

Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, other intangible assets and investments in film assets were $53.9 million for the nine months ended September 30, 2019 as compared to $55.5 million for the nine months ended September 30, 2018. The Company expects its investment in capital expenditures to remain fairly consistent as the nature of these cash outlays in particular, joint revenue sharing arrangements and film assets, exist to strengthen operational performances.

Net cash used in investing activities amounted to $53.7 million in the nine months ended September 30, 2019, which includes an investment in joint revenue sharing equipment of $31.1 million, purchases of $5.5 million in property, plant and equipment, an investment in other intangible assets of $1.9 million, and the purchase by IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China of equity securities in Maoyan for $15.2 million.

Financing Activities

Net cash used in financing activities in the nine months ended September 30, 2019 amounted to $53.4 million as compared to $60.0 million in the nine months ended September 30, 2018.

70

 

In the nine months ended September 30, 2019, the Company made repayments of $55.0 million, partially offset by borrowings of $35.0 million under the Company’s Credit Facility.

In addition, the Company paid $10.2 million to purchase treasury stock for the settlement of restricted share units and options, $2.7 million for the repurchase of common shares under the Company’s share repurchase program, $19.2 million for the repurchase of common shares under the IMAX China share repurchase program and $0.5 million of taxes were withheld and paid on vested employee stock option awards. The Company also paid $4.4 million in dividends to the non-controlling interest shareholders of IMAX China. These cash outlays were offset by $2.4 million received from the issuance of common shares resulting from stock option exercises and $1.1 million received from third party capital contributions to the Original Film Fund.

CONTRACTUAL OBLIGATIONS

Payments to be made by the Company under contractual obligations as at September 30, 2019 are as follows:

 

 

 

Payments Due by Period

 

(In thousands of U.S. Dollars)

 

Total

Obligation

 

 

1 Year

 

 

> 1 - 3 years

 

 

> 3 - 5 years

 

 

Thereafter

 

Purchase obligations(1)

 

$

28,649

 

 

$

28,001

 

 

$

648

 

 

$

—

 

 

$

—

 

Pension obligations(2)

 

 

18,831

 

 

 

18,831

 

 

 

—

 

 

 

—

 

 

 

—

 

Operating lease obligations(3)

 

 

22,564

 

 

 

2,972

 

 

 

7,240

 

 

 

4,340

 

 

 

8,012

 

Credit Facility(4)

 

 

20,000

 

 

 

—

 

 

 

—

 

 

 

20,000

 

 

 

—

 

Postretirement benefits obligations

 

 

2,113

 

 

 

118

 

 

 

263

 

 

 

259

 

 

 

1,473

 

 

 

$

92,157

 

 

$

49,922

 

 

$

8,151

 

 

$

24,599

 

 

$

9,485

 

 

(1)

The Company’s total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered but yet to be invoiced.

(2)

The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2019), although Mr. Gelfond has not informed the Company that he intends to retire at that time.

(3)

The Company’s total minimum annual rental payments to be made under operating leases, mostly consisting of rent at the Company’s property in New York and at the various owned and operated theaters.

(4)

The Company is not required to make any minimum payments on its Credit Facility, which matures on June 28, 2023.

Pension and Postretirement Obligations

The Company has an unfunded defined benefit pension plan, the SERP, covering Mr. Gelfond. As at September 30, 2019, the Company had an unfunded and accrued projected benefit obligation of approximately $18.4 million (December 31, 2018— $18.0 million) in respect of the SERP.

Pursuant to an employment agreement dated November 8, 2016, the term of Mr. Gelfond’s employment was extended through December 31, 2019, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of the arrangement, no compensation earned beginning in 2011 is to be included in calculating his entitlement under the SERP.

The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As at September 30, 2019, the Company had an unfunded benefit obligation of $1.5 million (December 31, 2018 — $1.5 million).

In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s former Co-CEO and current Chairman of its Board of Directors, upon retirement. As at September 30, 2019, the Company had an unfunded benefit obligation of $0.7 million (December 31, 2018 — $0.6 million).

The Company maintained a nonqualified deferred compensation benefit plan (the “Retirement Plan”) covering Greg Foster, former CEO of IMAX Entertainment and Senior Executive Vice President of the Company. Under the terms of his Retirement Plan with the Company, the Retirement Plan will vest in full if Mr. Foster incurs a separation from service (as defined therein). In the fourth quarter of 2018, Mr. Foster incurred a separation from service, and as such, his Retirement Plan benefits became fully vested as at December 31, 2018 and the accelerated costs were recognized and reflected in the executive transition costs line on the consolidated statement of operations. As at September 30, 2019, the Company had a funded benefit obligation recorded of $3.6 million (December 31, 2018 — unfunded benefit obligation of $3.6 million).

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OFF-BALANCE SHEET ARRANGEMENTS

There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. Market risk is the potential change in an instrument’s value caused by, for example, fluctuations in interest and currency exchange rates. The Company’s primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S. dollar, the Canadian dollar and the Chinese Yuan Renminbi. The Company does not use financial instruments for trading or other speculative purposes.

Foreign Exchange Rate Risk

A majority of the Company’s revenue is denominated in U.S. dollars while a significant portion of its costs and expenses is denominated in Canadian dollars. A portion of the Company’s net U.S. dollar cash flows is converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In addition, IMAX films generate box office in 81 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S. dollar could have an impact on the Company’s reported gross box office and revenues. The Company has incoming cash flows from its revenue generating theaters and ongoing operating expenses in China through its majority-owned subsidiary IMAX (Shanghai) Multimedia Technology Co., Ltd. In Japan, the Company has ongoing Yen-denominated operating expenses related to its Japanese operations. Net Renminbi and Japanese Yen cash flows are converted to U.S. dollars through the spot market. The Company also has cash receipts under leases denominated in Renminbi, Japanese Yen, Euros and Canadian dollars.

The Company manages its exposure to foreign exchange rate risks through the Company’s regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce earnings and cash flow volatility resulting from shifts in market rates.

Certain of the Company’s subsidiaries held approximately 449.0 million Renminbi ($63.5 million U.S. dollars) in cash and cash equivalents as at September 30, 2019 (December 31, 2018 — 375.7 million Renminbi or $54.7 million U.S. dollars) and are required to transact locally in Renminbi. Foreign currency exchange transactions, including the remittance of any funds into and out of the PRC, are subject to controls and require the approval of the China State Administration of Foreign Exchange to complete. Any developments relating to the Chinese economy and any actions taken by the China government are beyond the control of the Company; however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements.

For the three and nine months ended September 30, 2019, the Company recorded a foreign exchange net loss of $0.7 million and a net loss of $1.1 million, respectively, as compared to a foreign exchange net gain of $0.4 million and a net loss of $0.7 million for the three and nine months ended September 30, 2018, respectively, associated with the translation of foreign currency denominated monetary assets and liabilities.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. The forward contracts have settlement dates throughout 2019, 2020 and 2021. Foreign currency derivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the consolidated statements of operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. All foreign currency forward contracts held by the Company as at September 30, 2019, are designated and qualify as foreign currency cash flow hedging instruments. The Company currently has cash flow hedging instruments associated with selling, general and administrative expenses and capital expenditures. For foreign currency cash flow hedging instruments related to selling, general and administrative expenses, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to the condensed consolidated statements of operations when the forecasted transaction occurs. For foreign currency cash flow hedging instruments related to capital expenditures, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to property, plant and equipment on the balance sheet when the forecasted transaction occurs. The notional value of foreign currency cash flow hedging instruments at September 30, 2019 was $38.8 million (December 31, 2018 — $50.8 million). A loss of $0.5 million and a loss of $0.2 million was recorded to Other Comprehensive Income with respect to the change in fair value of these contracts for the three and nine months ended September 30, 2019, respectively (2018 — gain of $0.5 million and loss of $1.2 million, respectively). A loss of $0.3 million and a loss of $1.0 million was reclassified from Accumulated Other Comprehensive Income to selling, general and administrative expenses for the three

72

 

and nine months ended September 30, 2019, respectively (2018 — gain of less than $0.1 million and gain of $0.4 million, respectively). The Company's estimated net amount of the existing losses as at September 30, 2019 is $0.4 million, which is expected to be reclassified to earnings within the next twelve months. Appreciation or depreciation on forward contracts not meeting the requirements for hedge accounting in the Derivatives and Hedging Topic of the FASB Accounting Standards Codification are recorded to selling, general and administrative expenses.

For all derivative instruments, the Company is subject to counterparty credit risk to the extent that the counterparty may not meet its obligations to the Company. To manage this risk, the Company enters into derivative transactions only with major financial institutions.

At September 30, 2019, the Company’s financing receivables and working capital items denominated in Canadian dollars, Renminbi, Yen and Euros translated into U.S. dollars was $107.2 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at September 30, 2019, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $10.7 million. A significant portion of the Company’s selling, general, and administrative expenses is denominated in Canadian dollars. Assuming a 1% appreciation or depreciation in foreign currency exchange rates at September 30, 2019, the potential change in the amount of selling, general, and administrative expenses would be approximately $0.2 million.

Interest Rate Risk Management

The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash, and its interest expense from variable-rate borrowings under the Credit Facility.  

As at September 30, 2019, the Company had drawn down $20.0 million on its Credit Facility (December 31, 2018 — $40.0 million).

The Company’s largest exposure with respect to variable rate debt comes from changes in the LIBOR. The Company had variable rate debt instruments representing 8.0% and 14.6% of its total liabilities as at September 30, 2019 and December 31, 2018, respectively. If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by approximately $0.1 million and interest income from cash would increase by approximately $0.2 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable rate debt and cash balances at September 30, 2019.

Item 4.  Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods and that such information is accumulated and communicated to management, including the CEO and Chief Financial Officer (“CFO”), to allow timely discussions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

The Company’s management, with the participation of its CEO and its CFO, has evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as at September 30, 2019 and has concluded that, as at the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. The Company will continue to periodically evaluate its disclosure controls and procedures and will make modifications from time to time as deemed necessary to ensure that information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal control over financial reporting which occurred during the three months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

73

 

PART II. OTHER INFORMATION

See note 7 to the accompanying condensed consolidated financial statements in Item 1 for information regarding legal proceedings involving the Company.

Item 1A. Risk Factors

This Form 10-Q should be read together with the Item 1A. Risk Factors in the Company’s 2018 Form 10-K, which describes various risks and uncertainties to which the Company is or may become subject. The risks described below and in the Company’s 2018 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results.

 

The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects.

A significant portion of the Company’s revenues and gross box office are generated by customers located outside the United States and Canada. Approximately 66%, 61% and 62% of the Company’s revenues were derived outside of the United States and Canada in 2018, 2017 and 2016, respectively. As at September 30, 2019, approximately 73.1% of IMAX theater systems arrangements in backlog are scheduled to be installed in international markets. The Company’s network currently spans 81 different countries, and the Company expects its international operations to continue to account for an increasingly significant portion of its revenues in the future. There are a number of risks associated with operating in international markets that could negatively affect the Company’s operations, sales and future growth prospects. These risks include:

 

 

•

new restrictions on access to markets, both for theater systems and films;

 

•

unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements, including censorship of content that may restrict what films our theaters can present;

 

•

fluctuations in the value of foreign currency versus the U.S. dollar and potential currency devaluations;

 

•

new tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions and other trade barriers;

 

•

imposition of foreign exchange controls in such foreign jurisdictions;

 

•

dependence on foreign distributors and their sales channels;

 

•

reliance on local partners, including in connection with joint revenue sharing arrangements;

 

•

difficulties in staffing and managing foreign operations;

 

•

inability to complete installations of or collect full payment on installations of theater systems;

 

•

local business practices that can present challenges to compliance with applicable anti-corruption and bribery laws;

 

•

difficulties in establishing market-appropriate pricing;

 

•

less accurate and/or less reliable box office reporting;

 

•

adverse changes in monetary and/or tax policies, and/or difficulties in repatriating cash from foreign jurisdictions (including with respect to China, where approval of the State Administration of Foreign Exchange is required);

 

•

poor recognition of intellectual property rights;

 

•

difficulties in enforcing contractual rights;

 

•

inflation;

 

•

requirements to provide performance bonds and letters of credit to international customers to secure system component deliveries;

 

•

harm to the IMAX brand from operating in countries with records of controversial government action, including human rights abuses; and

 

•

political, economic and social instability. 


74

 

In addition, changes in United States or Canadian foreign policy can present additional risks or uncertainties as the Company continues to expand its international operations. The Company recently entered into an agreement with AMC and the sovereign wealth fund of Saudi Arabia for a 12-theater deal. The Company previously announced a partnership with VOX Cinemas to open at least four theaters in Saudi Arabia. Opening and operating theaters in markets that have experienced geopolitical or sociopolitical unrest or controversy, including through partnerships with local entities, exposes the Company to the risks listed above as well as additional risks of operating in a volatile region.  Such risks may negatively impact our business operations in such regions and may also harm our brand. Moreover, a deterioration of the diplomatic relations between the United States or Canada and a given country may impede our ability to operate theaters in such countries and have a negative impact on our financial condition and future growth prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In 2017, the Company’s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common shares. The share repurchase program expires on June 30, 2020. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. During the three months ended September 30, 2019, the Company repurchased 46,615 shares at an average price of $20.35 per share. As at September 30, 2019, the company has $125.9 million available under its approved repurchase program.

The Company’s common share repurchase program activity for the three months ended September 30, 2019 was as follows:

 

 

Total number of shares purchased

 

 

Average price paid per share

 

 

Total number of shares purchased as part of publicly announced program

 

 

Maximum value of shares that may yet be purchased under the program

 

July 1 through July 31, 2019

 

27,515

 

 

$

 

19.96

 

 

 

27,515

 

 

$

 

126,334,372

 

August 1 through August 31, 2019

 

19,100

 

 

 

 

20.91

 

 

 

19,100

 

 

 

 

125,935,013

 

September 1 through September 30, 2019

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

125,935,013

 

Total

 

46,615

 

 

$

 

20.35

 

 

 

46,615

 

 

 

 

 

 

In 2018, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to repurchase shares of IMAX China in an amount not to exceed 10% of the total number of issued shares of IMAX China as at May 3, 2018 (35,818,112 shares). The share purchase program expired on June 6, 2019.  In 2019, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to repurchase shares of IMAX China in an amount not to exceed 10% of the total number of issued shares of IMAX China as at June 6, 2019 (35,605,560 shares). The share repurchase program expires on the date of the 2020 annual general meeting of IMAX China. The repurchases may be made in the open market or through other means permitted by applicable laws. IMAX China has no obligation to repurchase its shares and the share repurchase program may be suspended or discontinued by IMAX China at any time. In the three and nine months ended September 30, 2019, IMAX China repurchased 1,025,800 and 8,051,500 common shares, respectively at an average price of HKD 17.90 per share and HKD 18.63, respectively (U.S. $2.29 and U.S. $2.38 per share, respectively).

The total number of shares purchased during the three and nine months ended September 30, 2019, under both the Company and IMAX China’s repurchase plans, does not include any shares received in the administration of employee share-based compensation plans.

75

 

Item 6.  Exhibits

 

 

Exhibit

No.

 

Description

10.41

 

Amendment to Employment Agreement, dated August 2, 2019, between IMAX Corporation and Patrick McClymont.

 

 

 

10.42

 

Second Amendment to Employment Agreement, dated October 21, 2019, between IMAX Corporation and Patrick McClymont.

 

 

 

31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 31, 2019, by Richard L. Gelfond.

 

 

 

31.2

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 31, 2019, by Patrick McClymont.

 

 

 

32.1

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated October 31, 2019, by Richard L. Gelfond.

 

 

 

32.2

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated October 31, 2019, by Patrick McClymont.

 

 

101.INS

 

XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

76

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

IMAX CORPORATION

 

 

Date: October 31, 2019

By:

/s/ PATRICK MCCLYMONT

 

 

Patrick McClymont

 

 

Executive Vice-President & Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

Date: October 31, 2019

By:

/s/ JEFFREY VANCE

 

 

Jeffrey Vance

 

 

Senior Vice-President, Finance & Controller

 

 

(Principal Accounting Officer)

 

77

 

 

IMAX CORPORATION

Exhibit 10.41

 

AMENDMENT TO EMPLOYMENT AGREEMENT

This AMENDMENT TO EMPLOYMENT AGREEMENT (the “Amendment”) dated as of August 2, 2019 is entered into by and between IMAX CORPORATION, a corporation organized under the laws of Canada (the “Company”), and PATRICK MCCLYMONT (the “Executive”).

WHEREAS, the Company and the Executive wish to amend that certain Employment Agreement between them dated as of June 6, 2016 (the “Agreement”), as hereinafter set forth.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

1.Term.  Section 2 of the Agreement is hereby amended by deleting the first sentence thereof in its entirety and replacing it with the following:  

“The Executive’s employment pursuant to this Agreement shall be effective as of August 8, 2016 (the “Effective Date”), and shall terminate upon the earlier to occur of (i) the Executive’s termination of employment pursuant to Section 4 hereunder and (ii) November 8, 2019 (the “End Date”).”

2.No Further Changes. Except with respect to the change made by Section 1 above, all of the terms and conditions of the Agreement remain in full force and effect.

3.Counterparts. This Amendment may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

IN WITNESS WHEREOF, the Company and the Executive have duly executed this Amendment as of August 2, 2019.

 

IMAX CORPORATION

 

 

 

PATRICK MCCLYMONT

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Kenneth Weissman

 

 

 

/s/ Patrick McClymont

Name:

Kenneth Weissman

 

 

 

 

Title:

SVP, Legal Affairs and

 

 

 

 

Corporate Secretary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Carrie Lindzon-Jacobs

 

 

 

 

Name:

Carrie Lindzon-Jacobs

 

 

 

 

Title:

Chief Human Resources Officer and

 

 

 

 

Executive Vice President

 

 

 

 

 

 

 

IMAX CORPORATION

Exhibit 10.42

 

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

This SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the “Second Amendment”) dated as of October 21, 2019 is entered into by and between IMAX CORPORATION, a corporation organized under the laws of Canada (the “Company”), and PATRICK MCCLYMONT (the “Executive”).

WHEREAS, the Company and the Executive wish to amend that certain Employment Agreement between them dated as of June 6, 2016, as previously amended by an Amendment to Employment Agreement dated as of August 2, 2019 (collectively, the “Agreement”), as hereinafter set forth.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

1.Term.  Section 2 of the Agreement is hereby amended by deleting the first sentence thereof in its entirety and replacing it with the following:  

“The Executive’s employment pursuant to this Agreement shall be effective as of August 8, 2016 (the “Effective Date”), and shall terminate upon the earlier to occur of (i) the Executive’s termination of employment pursuant to Section 4 hereunder and (ii) December 8, 2019 (the “End Date”).”

2.No Further Changes. Except with respect to the change made by Section 1 above, all of the terms and conditions of the Agreement remain in full force and effect.

3.Counterparts. This Second Amendment may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

IN WITNESS WHEREOF, the Company and the Executive have duly executed this Second Amendment as of October 21, 2019.

 

IMAX CORPORATION

 

 

 

PATRICK MCCLYMONT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Robert D. Lister

 

 

 

/s/ Patrick McClymont

Name:

Robert D. Lister

 

 

 

 

Title:

Chief Legal Officer,

 

 

 

 

Senior Executive Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Kenneth I. Weissman

 

 

 

 

Name:

Kenneth I. Weissman

 

 

 

 

Title:

Senior Vice President,

 

 

 

 

Legal Affairs & Corporate Secretary

 

 

 

 

 

 

 

 

IMAX CORPORATION

Exhibit 31.1

 

 

Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

I, Richard L. Gelfond, certify that:

 

 

1.

I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 of the registrant, IMAX Corporation;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:

 

October 31, 2019

 

By:

 

/s/ Richard L. Gelfond

 

 

 

 

Name:

 

Richard L. Gelfond

 

 

 

 

Title:

 

Chief Executive Officer

 

 

 

 

 

 

 

 

IMAX CORPORATION

Exhibit 31.2

 

 

Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

I, Patrick McClymont, certify that:

 

 

1.

I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 of the registrant, IMAX Corporation;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:

 

October 31, 2019

 

By:

 

/s/ Patrick McClymont

 

 

 

 

Name:

 

Patrick McClymont

 

 

 

 

Title:

 

Chief Financial Officer &

 

 

 

 

 

 

Executive Vice President

 

 

IMAX CORPORATION

Exhibit 32.1

 

CERTIFICATIONS

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (A) and (B) of Section 1350, Chapter 63 of Title 18, United States Code)

 

 

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Richard L. Gelfond, Chief Executive Officer & Director of IMAX Corporation, a Canadian corporation (the “Company”), hereby certify, to my knowledge, that:

 

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:

 

October 31, 2019

 

By:

 

/s/ Richard L. Gelfond

 

 

 

 

Name:

 

Richard L. Gelfond

 

 

 

 

Title:

 

Chief Executive Officer

 


 

 

 

 

 

IMAX CORPORATION

Exhibit 32.2

 

CERTIFICATIONS

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (A) and (B) of Section 1350, Chapter 63 of Title 18, United States Code)

 

 

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Patrick McClymont, Chief Financial Officer & Executive Vice President of IMAX Corporation, a Canadian corporation (the “Company”), hereby certify, to my knowledge, that:

 

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:

 

October 31, 2019

 

By:

 

/s/ Patrick McClymont

 

 

 

 

Name:

 

Patrick McClymont

 

 

 

 

Title:

 

Chief Financial Officer &

 

 

 

 

 

 

Executive Vice President