UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172020
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file Number001-35066
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 | Trading Symbol(s) | Name of | ||
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.company, or an emerging growth Company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting | ☐ | |||
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell Company (as defined inRule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common shares of the registrant held bynon-affiliates of the registrant, computed by reference to the last sale price of such shares as of the close of trading on June 30, 20172020 was $1,219.7$549.8 million.
As of January 31, 2018,2021, there were 64,902,20158,948,829 common shares of the registrant outstanding.
Document Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement to be filed within 120 days of the close of IMAX Corporation’s fiscal year ended December 31, 2017,2020, with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors and the annual meeting of the stockholders of the registrant (the “Proxy Statement”) are incorporated by reference in Part III of thisForm 10-K to the extent described therein.
IMAX CORPORATION
December 31, 20172020
Table of Contents
Page | ||||||||||
Item 1. | 4 | |||||||||
Item 1A. | 19 | |||||||||
Item 1B. | 31 | |||||||||
Item 2. | 31 | |||||||||
Item 3. | 31 | |||||||||
Item 4. | 31 | |||||||||
Item 5. | 32 | |||||||||
Item 6. | 35 | |||||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 | ||||||||
Item 7A. | 69 | |||||||||
Item 8. | 71 | |||||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 149 | ||||||||
Item 9A. | 149 | |||||||||
Item 9B. | 150 | |||||||||
Item 10. | 151 | |||||||||
Item 11. | 151 | |||||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 151 | ||||||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 151 | ||||||||
Item 14. | 151 | |||||||||
Item 15. | 152 | |||||||||
Item 16. | ||||||||||
155 | ||||||||||
156 | ||||||||||
2
IMAX CORPORATION
EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are expressed in United States (“U.S.”) dollars.Dollars. The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in the City of New York for cable transfers in foreign currencies as certified for customs purposes by the Bank of Canada (the “Noon Buying Rate”). Such rates quoted are the number of U.S. dollarsDollars per one Canadian dollarDollar and are the inverse of rates quoted by the Bank of Canada for Canadian dollarsDollars per U.S. $1.00. The average exchange rate is based on the average of the exchange rates on the last day of each month during such periods. The Noon Buying Rate on December 31, 20172020 was U.S. $0.7971.$0.7854.
Years Ended December 31, |
| Years Ended December 31, |
| |||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||||||||
Exchange rate at end of period | 0.7971 | 0.7448 | 0.7225 | 0.8620 | 0.9402 |
|
| 0.7854 |
|
|
| 0.7699 |
|
|
| 0.7330 |
|
|
| 0.7971 |
|
|
| 0.7448 |
| |||||
Average exchange rate during period | 0.7712 | 0.7558 | 0.7748 | 0.9022 | 0.9713 |
|
| 0.7455 |
|
|
| 0.7536 |
|
|
| 0.7718 |
|
|
| 0.7712 |
|
|
| 0.7558 |
| |||||
High exchange rate during period | 0.8245 | 0.7972 | 0.8527 | 0.9422 | 1.0164 |
|
| 0.7863 |
|
|
| 0.7699 |
|
|
| 0.8138 |
|
|
| 0.8245 |
|
|
| 0.7972 |
| |||||
Low exchange rate during period | 0.7276 | 0.6854 | 0.7148 | 0.8589 | 0.9348 |
|
| 0.6898 |
|
|
| 0.7353 |
|
|
| 0.7330 |
|
|
| 0.7276 |
|
|
| 0.6854 |
|
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this annual report may constitute “forward-looking statements”"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, future capital expenditures (including the amount and nature thereof), plans and references to the future success of IMAX Corporation together with its consolidated subsidiaries (the “Company”)the Company and expectations regarding the Company’sits 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, the impact of COVID-19 on the Company’s business, financial condition and results of operations and on the businesses of the Company’s customers and exhibitor partners; 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 IMAX theater system agreements; conditions, changes and developments in the commercial exhibition industry;industry and broader entertainment industry, including both in-home and out-of-home entertainment markets; risks related to currency fluctuations; the potential impact of increased competition in the markets within which the Company operates;operates, including competitive actions by other companies; the failure to respond to change and advancements in digitalentertainment technology; risks relating to recent consolidation among commercial exhibitors and movie studios; risks related to new business initiatives; conditions in thein-home andout-of-home entertainment industries; the opportunities (or lack thereof)initiatives that may be presented to and pursued by the Company; risks related to cyber-security;cyber-security and data privacy; risks related to the Company’s inability to protect the Company’sits intellectual property; general economic, market or business conditions; the failure to convert IMAX 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 initiative;initiatives; assumptions relating to any of the foregoing; other risks outlined in the Company’s periodic filings with the Securities and Exchange Commission; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this annual 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 forward-looking statements herein are made only as of the date hereof and the Company undertakes no obligation to update publicly or otherwise revise any forward-looking information,statements, whether as a result of new information, future events or otherwise.
IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It In IMAX®,The IMAXExperience®,An IMAXExperience®,An IMAX3D Experience®, IMAX DMR®, DMR®, IMAX nXos®, IMAX think big and Films To The Fullest®, 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
The Company is a Canadian corporation that was formed in March 1994 as a result of an amalgamation between WGIM Acquisition Corp. and the former IMAX Corporation (“Predecessor IMAX”). Predecessor IMAX was incorporated in 1967.
As of December 31, 2020, the Company indirectly owns 69.89% of IMAX China Holding, Inc. (“IMAX China”), whose shares trade on the Hong Kong Stock Exchange. IMAX China is a consolidated subsidiary of the Company.
GENERAL
The Company, together with its consolidated subsidiaries,IMAX is one of the world’s leading entertainment technology companies, specializing in motion picture technologiestechnological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and presentations.specialized equipment, IMAX offers a uniqueend-to-end cinematic solution combining proprietary software, theater architecture and equipment to create the highest-quality, most immersive motion picture experienceand other entertainment event experiences for which the IMAX®IMAX® brand has become known globally.globally known. Top filmmakers and movie studios utilize the cutting-edge visual and sound technology of IMAX theaters to connect with audiences in innovative ways, and as a result, IMAX’s theater network is among the most important and successful theatrical distribution platforms for major event films and other events around the world.
The Company’sCompany leverages its innovative technology and engineering in all aspects of its core business, which principally consists of:
IMAX theater systemsTheater Systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s50-year 53-year history. The Company’s customers who purchase, lease or otherwise acquire the IMAX theater systems through joint revenue sharing arrangements are theater exhibitors that operate commercial theaters (particularly multiplexes), museums, science centers, or destination entertainment sites. The Company generally does not own the theaters in the IMAX theaters,network, but licensessells or leases the use of its trademarksIMAX Theater System along with a license to use its trademarks.
As of December 31, 2020, there were 1,650 IMAX Theater Systems operating in 84 countries and territories, including 1,562 commercial multiplexes, 12 commercial destinations and 76 institutional locations. This compares to 1,624 IMAX Theater Systems operating in 81 countries and territories as of December 31, 2019 including 1,529 commercial multiplexes, 14 commercial destinations and 81 institutional locations. (See the sale, lease or contributiontable below under “IMAX Network and Backlog” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information on the composition of the IMAX theater system. network.)
The Company refersIMAX Theater System provides the Company’s exhibitor customers with a combination of the following benefits:
• | the ability to exhibit content that has undergone the IMAX DMR® conversion process, 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; |
• | advanced 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, certain movies shown in IMAX theaters are filmed using proprietary IMAX film and IMAX certified digital cameras, which offer filmmakers customized guidance and a workflow process to all theaters using the IMAX theater system as “IMAX theaters”.provide further enhanced and differentiated image quality and a film aspect ratio that delivers up to 26% more image onto a movie screen.
IMAX theater systems combine:4
Together these components cause audiences in IMAX theaters to feel as if they are a part of theon-screen action, creating a more intense, immersive, and exciting experience than a traditional theater.
As a result of the immersivenessengineering and superior image and sound qualityscientific achievements that are a hallmark ofThe IMAXExperience®, 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 incrementalbox-office box office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX theater network. The incrementalbox-office box office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films.
As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology. In 2018, the Company introduced IMAX THEATERwith Laser, a 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 is helping facilitate the next major lease renewal and upgrade cycle for the global IMAX network.
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.
IMPACT OF COVID-19 PANDEMIC
In late January 2020, in response to the public health risks associated with the novel coronavirus and the disease that it causes (“COVID-19”), the Chinese government directed exhibitors in China to temporarily close more than 70,000 movie theaters, including all of the approximately 700 IMAX theaters in mainland China. On March 11, 2020, due to the worsening public health crisis associated with the novel coronavirus, COVID-19 was characterized as a pandemic by the World Health Organization, and in the following weeks, local, state and national governments instituted stay-at-home orders and restrictions on large public gatherings which caused movie theaters in countries around the world to temporarily close, including substantially all of the IMAX theaters in those countries. As a result of the theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms. More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures. As of December 31, 2020, 71% of the theaters in the IMAX commercial multiplex network were open, spanning 41 countries. This included 44% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 53% of the theaters in Rest of World markets. In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance levels despite the continued delay of Hollywood theatrical releases, which typically account for 70% of box office ticket sales in those regions. Management believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and moviegoers feel safe. However, ticket sales have been significantly lower than normal levels in theaters outside of Asia as Hollywood movie studios have further delayed the theatrical release dates for a number of films. As a result, certain theater chains have remained closed or have reduced their operating hours. In addition, theaters in major markets remain temporarily closed.
5
The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the Company’s revenues, earnings and operating cash flows in 2020 as gross box office (“GBO”) results from the Company’s theater customers declined significantly, the installation of certain theater systems was delayed, and maintenance services were generally suspended for theaters that were closed. While there continues to be a lack of new films released by movie studios and a significant number of theaters in the IMAX network are closed, the Company is experiencing a significant decline in earnings and operating cash flows as it is generating significantly lower than normal levels of GBO-based revenue from its joint revenue sharing arrangements and digital remastering services, it is unable to provide normal maintenance services to any of the theaters that remain closed, and while some installation activity is continuing, certain theater system installations have, and may continue to be delayed. In addition, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor customers who are facing financial difficulties as a result of the theater closures. In response, the Company has provided temporary relief to exhibitor customers by waiving or reducing maintenance fees during periods when theaters are closed or operating with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement. In 2020, the Company increased its provision for current expected credit losses by $18.6 million, in part reflecting a reduction in the credit quality of its theater related accounts receivable, financing receivables and variable consideration receivables, which management believes is primarily related to the COVID-19 pandemic and adequately addresses the risk of not collecting these receivables in full.
Management is encouraged by recent box office results in markets like China, Japan and South Korea where the virus is under control and audiences have demonstrated a willingness to return to cinema. However, the Company may continue to be significantly impacted by the COVID-19 global pandemic even after a significant portion or all theaters are reopened. The global economic impact of COVID-19 has led to record levels of unemployment in certain countries, which has led to, and may continue to result in lower consumer spending. The timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s ability to generate significant GBO-based revenue until consumer behavior normalizes and consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough, reducing the working hours of other employees and reducing all non-essential capital expenditures to minimum levels.
The Company has also implemented an active cash management process, which, among other things, requires senior management approval of all outgoing payments. In addition, in the first quarter of 2020, the Company drew down $280.0 million in remaining available borrowing capacity under the Credit Facility provided by its Credit Agreement with Wells Fargo Bank, National Association (both as defined in Part II, Item 7, “Liquidity and Capital Resources”), which was then amended in June 2020 to, among other things,suspend the Senior Secured Net Leverage Ratio financial covenant in the Credit Agreement through the first quarter of 2021 and substitute quarterly EBITDA from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020 to meet the original Senior Secured Net Leverage Ratio financial covenant.
As of December 31, 2020, the Company was in compliance with all of its requirements under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
Furthermore, the Company has applied for and received wage subsidies, tax credits and other financial support under COVID-19 relief legislation that has been enacted in the countries in which it operates. During 2020, the Company recognized $6.4 million in benefits from the Canada Emergency Wage Subsidy (“CEWS”) program and $0.7 million in benefits from the U.S. CARES Act, as reductions to Selling, General and Administrative Expenses ($6.0 million), Costs and Expenses Applicable to Revenues ($1.0 million) and Research and Development ($0.1 million) in the Consolidated Statements of Operations. The CEWS program has been extended to June 2021. The Company will continue to review and apply for additional subsidies and credits for the remaining terms of these programs, where applicable.
6
In the fourth quarter of 2020, the Company performed its annual goodwill impairment test considering the latest available information and determined that its goodwill was not impaired. As of December 31, 2020, the Company’s total Goodwill was $39.0 million, of which $19.1 million relates to the IMAX Systems reporting unit, $13.5 million relates to the Joint Revenue Sharing Arrangement reporting unit, and $6.4 million relates to the IMAX Maintenance reporting unit. The impairment test was performed on a reporting unit level by comparing each unit’s carrying value, including goodwill, to its fair value. The carrying value of each reporting unit is based on a systematic and rational allocation of certain assets and liabilities. The fair value of each reporting unit is assessed using a discounted cash flow model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses are performed. The discount rates used in the cash flow model are derived based on the Company’s estimated weighted average cost of capital. These estimates and the likelihood of future changes in these estimates depend on a number of underlying variables and a range of possible outcomes. Actual results may differ materially from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. (See “Critical Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)
In the fourth quarter of 2020, the Company also updated its recoverability tests of the carrying values of the theater system equipment supporting its joint revenue sharing arrangements, which are recorded within Property, Plant and Equipment. In performing its reviews of recoverability, the Company estimated the undiscounted future cash flows expected to result from the use of the assets. The cash flow estimates used in these tests are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 global pandemic; therefore, management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may differ materially from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. For the year ended December 31, 2020, the Company recorded impairment losses of $0.3 million related to the theater system equipment supporting its joint revenue sharing arrangements. (See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8.)
In the third quarter of 2020, the Company assessed the recoverability of its deferred tax assets and recorded a $23.7 million valuation allowance to reduce the value of deferred tax assets. The valuation allowance was recorded in the jurisdictions where management could not reliably forecast that future tax liabilities would arise within the next five years, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic. In the fourth quarter of 2020, the Company increased the valuation allowance against its deferred tax assets by $4.9 million due to additional losses recorded in the period. The valuation allowance is expected to reverse when the Company determines it is more likely than not that the deferred tax assets in these jurisdictions will be realized. Despite this valuation allowance, the Company remains entitled to benefit from the tax attributes which currently have a valuation allowance applied to them.
If business conditions deteriorate further, or should they remain depressed for a more prolonged period of time, management’s estimates of operating results and future cash flows for the IMAX Systems and Joint Revenue Sharing Arrangements reporting units may be insufficient to support the goodwill assigned to them, thus requiring impairment charges. The Company will continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate there may be a potential impairment. In addition, estimates related to future expected credit losses and the recoverability of deferred tax assets, as well as the recoverability of joint revenue sharing equipment assets and the realization of variable consideration assets, could also be further impacted by changes in management’s estimates. (see Notes 3, 5 and 12 of Notes to Consolidated Financial Statements in Part II, Item 8).
(See “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” in Part II, Item 7, and Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8.)
IMAX NETWORK
The Company believes the IMAX theater network is one of the most extensive premium theater networks in the world with 1,370 theater systems (1,2721,650 IMAX Theater Systems operating in 84 countries and territories, including 1,562 commercial multiplex, 12 commercial destination 86 institutional) operating in 75 countriesand 76 institutional locations as atof December 31, 2017.
7
The Company currently believes that over time its commercial multiplex theater network could grow to approximately 2,8553,318 IMAX theaters worldwide from the 1,2721,562 commercial multiplex IMAX theaters in operationoperating as of December 31, 2017. While the2020. The Company continues to grow in the United States and Canada, it believes that the majority of its future growth will come from international markets. As atof December 31, 2017, 67.2%2020, 72.8% of IMAX theater systemsTheater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), upan increase from 63.7%71.9% as atof December 31, 2016,2019, and approximately 90.2%86.0% of the new IMAX theater systemsTheater Systems in backlog are scheduled to be installed in international markets, compared to 87.8%85.7% as atof December 31, 2016.2019. Revenues and grossbox-office box office derived from outside the United States and Canadainternational markets continue to exceed revenues and grossbox-office box office from the United States and Canada. This was especially true during 2020 as the pace and extent of the reopening of IMAX theaters in Greater China amidst the COVID-19 global pandemic exceeded that of theaters in Domestic (i.e., United States and Canada) and Rest of World markets. (See “Impact of COVID-19 Pandemic” above.)
Greater China continues to beis the Company’s second-largestlargest market, measured by revenues, with approximately 33%38% and 31% of overall revenues generated from the Company’sits Greater China operations in 2017. As atthe years ended December 31, 2017,2020 and 2019, respectively. As of December 31, 2020, the Company had 544745 theaters operating in Greater China and an additional 309238 new theaters (plus 13 upgrades) in backlog that are scheduled to be installed in Greater China by 2022.2028. The Company’s backlog in Greater China represents 61.9%47.6% of the Company’sits total current backlog.backlog, including upgrades. The Company’s largest single international partnership is in China with Wanda Film formerly Wanda Cinema Line Corporation (“Wanda”). Wanda’s total commitment to the Company is for 359 theater systems, of361 IMAX Theater Systems in Greater China (of which 343 theater systems347 IMAX Theater Systems are under the parties’ joint revenue sharing arrangement.
In 2015,arrangement). (See “Risk Factors – The Company faces risks in connection with its significant presence in China and the Company’s subsidiary, IMAX China Holding, Inc. (“IMAX China”), completed an initial public offeringcontinued expansion of its ordinary shares onbusiness there” in Part I, Item 1A.)
(See “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the Main BoardCOVID-19 global pandemic and its business, financial condition and results of the Hong Kong Stock Exchange Limited (the “IMAX China IPO”). Following the IMAX China IPO, the Company continuesoperations may continue to indirectly own approximately 67.93% of IMAX China, which remains a consolidated subsidiary of the Company.be significantly harmed in future reporting periods” in Part I, Item 1A.)
PRINCIPAL PRODUCTS AND SERVICES
The Company believes it is the world’s largest designer and manufacturer of specialty premium projection and sound system components for large-format theaters around the world, as well asand it is also a significant producer and distributor of large-format films. The Company’s theater systems include specialized IMAX projectors, advanced sound systems and specialty screens.
The Company’s principal products and services are as follows:
• | IMAX DMR – The digital remastering of films and other content into IMAX formats for distribution to the IMAX |
• | IMAX Theater Systems – The sale or lease of premium IMAX Theater Systems to exhibitor customers. |
• | IMAX Maintenance – The provision of proactive and emergency maintenance services to the IMAX network. |
• | New Business Initiatives – Activities principally related to the exploration of new lines of business and new initiatives outside of the Company’s core business that are in the development and/or start-up phases. |
• | Other – The distribution of large-format documentary films, primarily to institutional theaters, the provision of film post-production services, and after-market sales of IMAX projection system parts and 3D glasses. |
These product lines do not fully reflect the nature and sources of revenue, or the manner in which management reviews financial information. The Company’s segmentedsegment information is provided in Part II, Item 7, “Management’s Discussion and note 18Analysis of Financial Condition and Results of Operations” and Note 21 of Notes to the accompanying audited consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form10-K for the Fiscal Year ended December 31, 2017 (this “2017 Form10-K”), which is incorporated by reference into this Item I.8.
DigitalRe-Mastering (IMAX DMR)IMAX DMR
The Company has developed IMAX DMR, a proprietary technology known as IMAX DMR, tothat digitallyre-master remasters Hollywood films into IMAX digital cinema package format or15/70-format film for exhibition in IMAX theaters.formats. 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 whichTheIMAXExperience is known.
The IMAX DMR process involves In addition, the following:
The original soundtrack of a film to be exhibited in the IMAX theater networktheaters isre-mastered remastered for the IMAX digital sound systems in connection with the IMAX DMR release.release of the film. Unlike the soundtracks played in conventional theaters, IMAXre-mastered remastered 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.
8
The IMAX DMR process involves:
• | in certain instances, scanning, at the highest possible resolution, each individual frame of the movie and converting it into a digital image; |
• | optimizing the image using proprietary image enhancement tools; |
• | enhancing the digital image using techniques such as sharpening, color correction, grain and noise removal and the elimination of unsteadiness and removal of unwanted artifacts; |
• | recording the enhanced digital image into an IMAX digital cinema package (“DCP”) format or onto IMAX 15/70-format film; and |
• | specially remastering the soundtrack to take full advantage of the unique sound system of IMAX Theater Systems. |
IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release of the film. Collectively, the Company refers to these enhancements as “IMAX DNA”. Filmmakers and filmmakers andmovie studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting select scenesfilms 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.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. In 2020, Universal Pictures’ 1917 was released with select scenes specifically formatted for IMAX screens, Warner Bros. Pictures’ Tenet was filmed with IMAX cameras, and Warner Bros. Pictures’ Wonder Woman 1984, released globally in December 2020, was partially shot with IMAX cameras. In addition, the upcoming filmsMarvel’s Avengers: Infinity War and the Untitled Avengers Sequel are expected to be shot in their entireties using IMAX cameras.
In 2017, 60 films were converted through the IMAX DMR process and released to theaters in the IMAX network by film studios as compared to 51 films in 2016. In addition, in 2017, in conjunction with Marvel and Disney|ABC Television Group, the Companyco-produced and exclusively premiered theatrically the television series “Marvel’s Inhumans” in IMAX theaters.
To date, the Company has announced the following 31 DMR titles to beBona Film’s The Rescue, which was released in 2018China in December 2020, has an expanded aspect ratio that is exclusive to the IMAX theater network:IMAX.
In addition, the Company in conjunction with Panda Productions will be releasing an IMAX original production,Pandas, in April 2018.
The Company remains in active negotiations with all of the major Hollywood studios for additional films to fill out its short and long-term film slate for the IMAX network. However, as a result of the theater closures associated with the COVID-19 global pandemic, Hollywood movie studios have postponed the theatrical release of most films originally scheduled for release in 2020 and anticipates that the number of IMAX DMR filmsearly 2021, including many scheduled to be shown in IMAX theaters, while several other films have been released directly or concurrently to streaming platforms. Accordingly, as of the IMAX theater network in 2018 will be similar tofiling of this report, there remains uncertainty around the 60 IMAX DMR films released to the IMAX theater network in 2017.release dates of certain major films.
IMAX Theater Systems
The Company’s primary products are its theater systems.IMAX Theater Systems, which are either sold or leased to exhibitor customers along with a license for the use of the globally recognized IMAX brand. The Company’s digital projection systems include a projector that offers superior image quality and stability and a digital theater control system; a digital audio system delivering up to 12,000 watts of sound; a screen with a proprietary coating technology, and, if applicable, 3D glasses cleaning equipment. IMAX’s digital projection system also operates without the need for analog film prints. Traditional IMAX film-based theater systems contain the same components as the digital projection systems but include a rolling loop15/70-format projector and require the use of analog film prints. Since its introduction in 2008, the vast majority of the Company’s theater sales have been digital systems. Furthermore, a majority of the Company’s existing film-based theater systems have been upgraded, at a cost to the exhibitor, to an IMAX digital system. As part of the arrangement to sell or lease its theater systems,IMAX Theater Systems, the Company provides extensive advice on theater planning and design, and supervision of installation services. Theater systems are also leased or sold with a license for the use of the globally recognized IMAX brand.
The Company’s digital projection systemsystems provides a premium and differentiated experience to moviegoers that is consistent with what they have come to expect from the IMAX brand, while providing forexhibitor customers with the compelling economics and flexibility that digital technology affords.
The terms of each sale or lease arrangement vary according to the configuration of the theater system provided,IMAX Theater System, as well as the cinema market and the film distribution marketmarkets relevant to the geographic location of the customer.
Revenue from theater business arrangements issale or lease of IMAX Theater Systems may be recognized at a different time from when cash is collected. Seecollected from the exhibitor customer. (See “Critical Accounting Policies”Policies and Estimates” in Part II, Item 7 and Note 20 of Notes to Consolidated Financial Statements in Part II, Item 8 for further discussion on the Company’s revenue recognition policies.)
IMAX Theater Backlog
9
The following table provides information about the Company’s backlog as of December 31, 2020 and Network2019:
The Company’s sales backlog is as follows:
|
| December 31, 2020 |
|
|
| December 31, 2019 |
|
| ||||||||||||||||||||||||||||||||
|
| Number of |
|
|
| Dollar Value |
|
|
| Number of |
|
|
| Dollar Value |
|
| ||||||||||||||||||||||||
|
| Systems |
|
|
| (in thousands) |
|
|
| Systems |
|
|
| (in thousands) |
|
| ||||||||||||||||||||||||
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
| ||||||||
Sales and sales-type lease arrangements |
|
| 175 |
|
|
|
| 10 |
|
|
|
| 200,296 |
|
|
| $ | 13,135 |
|
|
|
| 168 |
|
|
|
| 10 |
|
|
|
| 205,574 |
|
|
| $ | 12,874 |
|
|
Hybrid joint revenue sharing arrangements |
|
| 140 |
|
|
|
| 7 |
|
|
|
| 99,911 |
|
|
|
| 5,560 |
|
|
|
| 133 |
|
|
|
| 7 |
|
|
|
| 97,736 |
|
|
|
| 5,560 |
|
|
Traditional joint revenue sharing arrangements |
|
| 115 |
| (1) |
|
| 80 |
| (1) |
|
| 200 |
| (2) |
|
| 5,500 |
| (2) |
|
| 133 |
| (1) |
|
| 80 |
| (1) |
|
| 400 |
| (2) |
|
| 5,800 |
| (2) |
|
|
| 430 |
|
|
|
| 97 |
|
|
|
| 300,407 |
|
|
| $ | 24,195 |
|
|
|
| 434 |
|
|
|
| 97 |
|
|
|
| 303,710 |
|
|
| $ | 24,234 |
|
|
December 31, 2017 | December 31, 2016 | |||||||||||||||
Number of Systems | Fixed Contractual Dollar Value (in thousands) | Number of Systems | Fixed Contractual Dollar Value (in thousands) | |||||||||||||
Sales and sales-type lease arrangements | 162 | $ | 205,001 | 143 | $ | 175,331 | ||||||||||
Joint revenue sharing arrangements | ||||||||||||||||
Hybrid arrangements | 121 | 64,328 | (1) | 92 | 48,658 | (1) | ||||||||||
Traditional arrangements | 216 | 11,942 | (1) | 263 | 3,680 | (1) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
499 | (2) | $ | 281,271 | 498 | (3) | $ | 227,669 | |||||||||
|
|
|
|
|
|
|
|
(1) | Includes 46 IMAX Theater Systems (2019 ― 47) where the customer has the option to convert from a joint revenue sharing arrangement to a sales arrangement. |
(2) | Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box office results. |
The number of theater systemsIMAX 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,year-to-year, which adds to backlog, and the installation and acceptance of theater systemsIMAX Theater Systems and the settlement of contracts, both of which reduce backlog. Sales backlogBacklog typically represents the fixed contracted revenue under signed theater systemIMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present valuesystem, as well as an estimate of contractual ongoing fees due over the term,variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues as well as fees (contingent fees) in excess of contractual ongoing fees that may be received in the future.
revenues. The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases letters of intent orand long-term conditional theater commitments. The value of theatersTheaters under joint revenue sharing arrangements is excluded from thedo not usually have dollar value of sales backlog, although certain theater systemsIMAX 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 systemIMAX 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 systeman IMAX 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.
10
The following chart showstable presents the number of the Company’s theater systemsIMAX Theater Systems that are open and in backlog, by configuration, opened theater networkas of December 31, 2020 and backlog as at December 31:2019:
|
| December 31, 2020 |
|
|
| December 31, 2019 |
|
| ||||||||||||||||||||||||||||||||||
| Theater |
|
|
|
|
|
|
|
|
|
|
| Theater |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
2017 | 2016 |
| Network |
|
| New |
|
| Upgrade |
|
|
| Network |
|
| New |
|
| Upgrade |
|
| |||||||||||||||||||||
Theater Network | Backlog | Theater Network | Backlog |
| Base |
|
| Backlog |
|
| Backlog |
|
|
| Base |
|
| Backlog |
|
| Backlog |
|
| |||||||||||||||||||
Flat Screen (2D) | 5 | — | 9 | — |
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
| |||||||||||||
Dome Screen (2D) | 41 | — | 45 | — |
|
| 28 |
|
|
| — |
|
|
| — |
|
|
| 34 |
|
|
| — |
|
|
| — |
|
| |||||||||||||
IMAX 3D Dome (3D) | 2 | — | 2 | — |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
| |||||||||||||
IMAX 3D GT (3D) | 14 | — | 18 | — |
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
| |||||||||||||
IMAX 3D SR (3D) | 7 | — | 9 | — |
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
| |||||||||||||
IMAX Digital: Xenon (3D) | 1,250 | 467 | 1,093 | 478 |
|
| 1,377 |
|
|
| 273 |
|
|
| — |
|
|
|
| 1,374 |
|
|
| 281 |
|
|
| — |
|
| ||||||||||||
IMAX Digital: Laser (3D) | 51 | 32 | (1) | 39 | 20 | (2) | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||||
IMAX Digital: GT Laser (3D) |
|
| 66 |
|
|
| 9 |
|
|
| 2 |
|
|
|
| 63 |
|
|
| 9 |
|
|
| 5 |
|
| ||||||||||||||||
IMAX Digital: IMAX with Laser (3D) |
|
| 160 |
|
|
| 148 |
|
|
| 95 |
|
|
|
| 130 |
|
|
| 144 |
|
|
| 92 |
|
| ||||||||||||||||
Total | 1,370 | 499 | 1,215 | 498 |
|
| 1,650 |
|
|
| 430 |
|
|
| 97 |
|
|
| 1,624 |
|
|
| 434 |
|
|
| 97 |
|
| |||||||||||||
|
|
|
|
The Company estimates that it will install approximately 145 new theater systems (excluding upgrades) in 2018. The Company cautions, however, that theater system installations may slip from period to period over the course of the Company’s business, usually for reasons beyond its control.
IMAX theater systems consist of the following configurations:
IMAX Digital: Xenon Theater Systems. The vast majority of the Company’s theater system signings have been for the Company’s proprietary xenon-based digital systems. The Company believes that its xenon-based digital projection system delivers high quality imagery compared with other digital systems. As at December 31, 2017, the Company had installed 1,250 xenon-based digital theater systems and has an additional 467 xenon-based digital theater systems in its backlog.
IMAX Digital: Laser Theater Systems. The Company introduced its laser-based digital projection system at the end of 2014. The Company believes the IMAX laser-based digital projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology, capable of illuminating the largest screens in the IMAX theater network. As at December 31, 2017, the Company had installed 51 laser-based digital systems. The Company is in the process of developing an updated laser-based projection system, which is targeted primarily for screens in commercial multiplexes.
IMAX Flat Screen and IMAX Dome Theater Systems.
IMAX flat screen and IMAX dome systems primarily have been installed primarily in institutions such as museums and science centers. Flat screen IMAX theaters were introduced in 1970, while IMAX dome theaters, which are designed for tilted dome screens, were introduced in 1973. There have been several significant proprietary and patented enhancements to these systems since their introduction. As atof December 31, 2017,2020, there were 4833 IMAX flat screen and IMAX dome theater systems in the IMAX network, as compared to 5640 IMAX flat screen and IMAX dome theater systems as atof December 31, 2016.2019. With the introduction of thedigital IMAX digital theater systems,Theater Systems, there has been a decrease in the number of IMAX flat screen and IMAX dome theater systemstheaters in the network.
IMAX 3D GT and IMAX 3D SR Theater Systems.Systems
IMAX 3D theaters utilize a flat screen 3D system, which produces realistic 3D images on an IMAX screen. As atof December 31, 2017,2020, there were 2114 IMAX 3D GT and IMAX 3D SR theater systemsTheater Systems in operation compared to 2717 IMAX 3D GT and IMAX 3D SR theater systemsTheater Systems in operation as atof December 31, 2016.2019. The decrease in the number of 3D GT and 3D SR theater systemsTheater Systems is largely attributable to theater closures during the conversionyear.
IMAX Digital: Xenon Theater Systems
The Company believes that its xenon-based digital projection system delivers high quality imagery compared with other xenon systems. As of existing 3D GT and 3D SRDecember 31, 2020, the Company had 1,377 xenon-based digital theater systems to IMAXin the network and had an additional 273 xenon-based digital theater systems.systems in its backlog.
IMAX Digital: Laser Theater Systems
At the end of 2014, the Company introduced its laser-based digital projection system. As a result of continued research and development aimed at creating a solution that is more affordable for its commercial multiplex partners, the Company rolled out IMAX with Laser in 2018, the Company’s laser projection system designed for IMAX theaters in commercial multiplexes. The Company believes IMAX laser-based digital projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, consume less power and last longer than other digital projection technologies, and are capable of illuminating the largest screens in the IMAX network. As of December 31, 2020, the Company had 66 GT laser-based digital systems as compared to 63 as of December 31, 2019 in the IMAX network. As of December 31, 2020, the Company had 160 IMAX with Laser systems as compared to 130 as of December 31, 2019 in the IMAX network.
IMAX 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. (See “Maintenance and Extended Warranty Services” below.)
11
New Business Initiatives
The New Business Initiatives segment includes activities related to the exploration of new lines of business and new initiatives outside of the Company’s core business, which seek to leverage its proprietary, innovative technologies, its leadership position in the entertainment technology space and its unique relationship with content creators. Such new business initiatives currently include IMAX Enhanced and Connected Theaters, as discussed below.
IMAX Enhanced
The Company has developed 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. IMAX Enhanced brings IMAX digitally re-mastered 4K high dynamic range (HDR) content and DTS audio technologies to premier streaming platforms and best-in-class consumer electronics devices worldwide, offering consumers high-fidelity sight and sound experiences for the home.
To be certified, leading consumer electronics manufacturers spanning 4K/8K televisions, projectors, A/V receivers, loudspeakers, subwoofers and soundbars must 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.
IMAX Enhanced global device partners include Sony Electronics, Hisense, TCL, Phillips, Sound United among others. By March 2021, IMAX Enhanced will have over six million certified devices in-market. IMAX Enhanced content is now available on six streaming platforms worldwide, with partners that include Sony Pictures Entertainment, Paramount Pictures, Huayi Brothers, Bona Film Group, Tencent Video, iQIYI and FandangoNOW, with more on the way.
Connected Theaters
The Company is currently exploring new linestechnologies and forms of business outside of its core business, with a focus on alternative location-based entertainment experiences, investments in original content as well as premiuma way to deepen consumer engagement and brand loyalty, including new technologies to further connect the IMAX home entertainment technologiesnetwork and services.
Virtual Reality
to facilitate bringing more unique content, including live events, to IMAX theater audiences. The Company is piloting a comprehensive virtual reality (“VR”) strategybelieves such additional connectivity can provide more innovative content to develop a premium, location-based VR offering that delivers immersive, multi-dimensional experiences, including entertainment content and games, to branded VR centers (“the IMAX VR Centers”). Pilot IMAX VR Centers are located in a stand-alone venuenetwork and in several multiplexes, and are retrofitted with proprietary VR pods thatturn permit interactive, moveable VR experiences. The Company’s VR initiative is premised on a unique combination of premium content, proprietary design andbest-in-class technology.
In January 2017, the Company launched its flagship pilot IMAX VR Centerto engage audiences in Los Angeles. Since that time, the Company has opened six pilot IMAX VR Centers (two in New York City, one in Toronto, one in Manchester, England, one in Shanghai, China and one in Bangkok, Thailand.) The Company continues to evaluate its pilot VR strategy based on several factors, including the overall customer experience, pricing models, throughput, types of content featured and differences in geographic areas.
The Company has also established a virtual reality fund (the “VR Fund”) among the Company, its subsidiary IMAX China and other strategic investors. The VR Fund will help finance the creation of interactive VR content experiences over the next three years for use across all VR platforms, including in the pilot IMAX VR Centers. The VR Fund recently 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.
Original Content
In 2017, the Company partnered with Marvel Television Inc. (“Marvel”) and Disney|ABC Television Group toco-produce and premiere theatrically the television series “Marvel’s Inhumans” in IMAX theaters. The first two episodes of the series ran worldwide in IMAX theaters for two weeks in September 2017 and subsequently the series premiered on the ABC network in the U.S. and across other networks internationally. As part of the investment, the Company shares in the economics across the venture, including in both the theatrical and television platforms.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. However,periods between peak and off-peak seasons, known as "shoulder periods".
Other
Through the Film Distribution segment, the Company expects that future investments in originallicenses film content will be less capital intensive to the Company than its investment in “Marvel’s Inhumans”.
The Company has also created two film funds to help finance the production of original content. The Company is forming the IMAX China Film Fund (the “China Film Fund”) with its subsidiary IMAX China Holding Inc. (“IMAX China”), its partner CMC and several other large investors to help fund Mandarin language commercial films. The China Film Fund, which is expected initially to be capitalized with over $80.0 million, will target productions that can leverage the Company’s brand, relationships, technology and release windows in China. The China Film Fund is expected toco-finance approximately 15 Mandarin-language tent-pole films over three years, and will target contributions of between $3.0 million and $7.0 million per film. The China Film Fund will operate under an IMAXChina-CMC controlled greenlight committee.
In addition, the Company’s IMAX Original Film Fund (the “Original Film Fund”) was established in 2014 toco-finance a portfolio of 10 original large format films. The Original Film Fund, which is intended to be capitalized with up to $50.0 million, will finance an ongoing supply of original films that the Company believes will be more exciting and compelling than traditional documentaries. The initial investment in the 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 agreed to contribute $9.0 million to the Original Film Fund over five years starting in 2014 and sees the Original Film Fund as a self-perpetuating vehicle designed to generate a continuous flow of high-qualitydistributes large-format documentary content. As at December 31, 2017, the Original Film Fund has invested $13.4 million toward the development of original films.
IMAX Home Entertainment Technologies and Services
The Company has also announced home theater initiatives, including a joint venture with TCL Multimedia Technology Holding Limited (“TCL”) to design, develop, manufacture and sell a premium home theater system. The joint venture has signed agreements with end users for the sale of more than 170 premium home theater systems, and has signed agreements with distributors for the sale of more than 470 home theater systems. 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.
Beyond its premium home theater, the Company has also developed other components of a broader home entertainment platform designed to permit customers to view content on a premiumvideo-on-demand basis in their home theaters.
Other
The Company is also a distributor of large-format films, primarily for its institutional theater partners.
Films produced by The Company receives as its distribution fee either a fixed amount or a fixed percentage of the theater box office receipts and following the Company’s recoupment of its costs the Company are typically financed through third parties, wherebyis entitled to receive an additional percentage of gross revenues as participation revenues. The Company released the Company will generally receive a filmIMAX original production, feeAsteroid Hunters, in exchange for producing the film and a distribution fee for distributing the film. October 2020.
The ownership rights to such films may be held by the film sponsors, the film investors and/or the Company. As atof December 31, 2017,2020, the Company currently has distribution rights with respect to 46 of52 such films, which cover such subjects such as space, wildlife, music, sports, history and natural wonders.
Several more recent large-format films that have been distributed byThrough the Company include:A Beautiful Planet, which was released in April 2016 and has grossed over $19.3 million as atFilm Post-Production segment, the end of 2017;Voyage of Time, which was released in October 2016 and has grossed over $0.5 million as at the end of 2017;Island of Lemurs: Madagascar, which was released in April 2014 and has grossed over $13.8 million as at the end of 2017;Journey to the South Pacific, which was released in 2013 has grossed $13.6 million as at the end of 2017. Large-format films have significantly longer exhibition periods than conventional commercial films and many of the films in the large-format library have remained popular for many decades, including the filmsSPACE STATION,Hubble 3DandT-REX: Back to the Cretaceous.
The Company also provides film post-production and quality control services for large-format films (whether produced internallyby IMAX or externally)third parties), and digital post-production services.
As at December 31, 2017, theThe Company had twoderives a small portion of its revenues from other sources including: one owned and operated IMAX theaters (December 31, 2016 — two owned and operated IMAX theaters). In addition, the Company hastheater in Sacramento, California; a commercial arrangement with one theater resulting in the sharing of profits and losses and provideslosses; the provision of management services to three other theaters. The Company also rentstheaters; renting its proprietary 2D and 3D large-format film and digital cameras to third partythird-party production companies. The Company maintains cameras and other film equipmentcompanies; and also offersoffering production advice and technical assistance to both documentary and Hollywood filmmakers.
12
MARKETING AND CUSTOMERS
The Company markets its theater systemsIMAX Theater Systems through a direct sales force and marketing staff located in offices in Canada, the United States, Greater China, Europe and Asia. In addition, the Company has agreements with consultants, business brokers and real estate professionals to locate potential customers and theater sites for the Company on a commission basis.
The commercialCommercial multiplex theater segmenttheaters are the largest part of the IMAX theater network, is the Company’s largest segment, comprising 1,2721,562 IMAX theaters, or 92.8%94.7%, of the 1,3701,650 IMAX theaters openin the IMAX network as atof December 31, 2017.2020. The Company’s institutional customers include science and natural history museums, zoos, aquaria and other educational and cultural centers. The Company also sells or leases its theater systemsIMAX Theater Systems to commercial destinations such as theme parks, private home theaters, tourist destination sites, fairs and expositions (the Commercial Destination segment). Atexpositions. As of December 31, 2017,2020, approximately 67.2%72.8% of all openedopen IMAX theaters were in locations outside of the United States and Canada.
The following table outlinesprovides detailed information about the breakdown of the theaterIMAX network by type and geographic location as atof December 31:31, 2020 and 2019:
2017 Theater Network | 2016 Theater Network |
| December 31, 2020 |
|
| December 31, 2019 |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Multiplex | Commercial Destination | Institutional | Total | Commercial Multiplex | Commercial Destination | Institutional | Total |
| Commercial Multiplex |
|
| Commercial Destination |
|
| Institutional |
|
| Total |
|
| Commercial Multiplex |
|
| Commercial Destination |
|
| Institutional |
|
| Total |
| |||||||||||||||||||||||||||||||||
United States | 364 | 4 | 35 | 403 | 349 | 5 | 41 | 395 |
|
| 367 |
|
|
| 4 |
|
|
| 30 |
|
|
| 401 |
|
|
| 371 |
|
|
| 4 |
|
|
| 33 |
|
|
| 408 |
| ||||||||||||||||||||||||
Canada | 37 | 2 | 7 | 46 | 37 | 2 | 7 | 46 |
|
| 39 |
|
|
| 1 |
|
|
| 7 |
|
|
| 47 |
|
|
| 39 |
|
|
| 2 |
|
|
| 7 |
|
|
| 48 |
| ||||||||||||||||||||||||
Greater China(1) | 527 | — | 17 | 544 | 407 | — | 17 | 424 |
|
| 729 |
|
|
| — |
|
|
| 16 |
|
|
| 745 |
|
|
| 702 |
|
|
| — |
|
|
| 15 |
|
|
| 717 |
| ||||||||||||||||||||||||
Western Europe |
|
| 115 |
|
|
| 4 |
|
|
| 8 |
|
|
| 127 |
|
|
| 115 |
|
|
| 4 |
|
|
| 10 |
|
|
| 129 |
| ||||||||||||||||||||||||||||||||
Asia (excluding Greater China) | 100 | 1 | 3 | 104 | 93 | 2 | 3 | 98 |
|
| 123 |
|
|
| 2 |
|
|
| 2 |
|
|
| 127 |
|
|
| 119 |
|
|
| 2 |
|
|
| 2 |
|
|
| 123 |
| ||||||||||||||||||||||||
Western Europe | 88 | 4 | 10 | 102 | 76 | 6 | 10 | 92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Russia & the CIS | 58 | — | — | 58 | 56 | — | — | 56 |
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| 68 |
|
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| 68 |
| ||||||||||||||||||||||||
Latin America(2) | 42 | — | 12 | 54 | 38 | — | 12 | 50 |
|
| 51 |
|
|
| 1 |
|
|
| 11 |
|
|
| 63 |
|
|
| 50 |
|
|
| 1 |
|
|
| 12 |
|
|
| 63 |
| ||||||||||||||||||||||||
Rest of the World | 56 | 1 | 2 | 59 | 51 | 1 | 2 | 54 |
|
| 70 |
|
|
| — |
|
|
| 2 |
|
|
| 72 |
|
|
| 65 |
|
|
| 1 |
|
|
| 2 |
|
|
| 68 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 1,272 | 12 | 86 | 1,370 | 1,107 | 16 | 92 | 1,215 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| �� |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total(3) |
|
| 1,562 |
|
|
| 12 |
|
|
| 76 |
|
|
| 1,650 |
|
|
| 1,529 |
|
|
| 14 |
|
|
| 81 |
|
|
| 1,624 |
|
(1) | Greater China includes |
(2) | Latin America includes South America, Central America and Mexico. |
(3) | Period-to-period changes in the tables above are reported net of the effect of permanently closed theaters. |
(For information on revenue breakdown by geographic area, see note 18Note 21 of Notes to the accompanying audited consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this 2017 Form10-K. The Company’s foreign operations are subject to certain risks.8. See “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” and “Risk Factors – The Company faces risks in connection with its significant presence in China and the continued expansion of its business in China”there” in Item 1A. The Company’s largest customerscustomer, Wanda, as atof December 31, 2017, collectively represent 34.1%2020, represents 35.1% (2019 ― 33.9%) of the Company’s network of theaters, 28.5%19.0% (2019 ― 25.6%) of the Company’s theater system backlog and 13.2%16.4% (2019 ― 16.5%) of its revenues.)
INDUSTRY OVERVIEW
Competition
Theout-of-home entertainment industry is very competitive, and the Company faces a number of competitive challenges. In recent years, for instance, exhibitors and entertainment technology companies have introduced their own branded, large-screen 3D auditoriums or other proprietary theater systems, some of which include laser-based projectors, and in many cases, have marketed those auditoriums or theater systems as having the samesimilar quality or attributes asto an IMAX theater.Theater System. The Company believes that all of these alternative formats deliver images and experiences that are inferior toThe IMAXExperience.
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The Company may continue to face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources to develop and support them. The Company also facesin-home competition from a number of alternative motion picture distribution channels such as home video,pay-per-view,subscription streaming services, transactional video-on-demand DVD, Internet (both rentals and syndicatedsales), advertiser-supported video-on-demand, pay-per-view, Blu-ray Disc, and broadcast and cable television. During the COVID-19 pandemic, with theaters closed in many global markets, certain movie studios have released several high-profile films directly or concurrently to streaming platforms rather than exclusively to theaters within the traditional theatrical release window. While there can be no assurances whether or when this practice will end once the effects of the COVID-19 pandemic recede, several Hollywood studios have recently reiterated their commitment to maintaining exclusive theatrical release windows. The Company further competes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater, social media and restaurants.
The Company believes that its competitive strengths include the value of the IMAX brand name, the premium IMAX consumer experience, the design, quality and historic reliability rate of IMAX theater systems,Theater Systems, the return on investment of an IMAX theater,Theater System for exhibitors, the number and quality of IMAX films that it distributes, the relationships the Company maintains with prominent Hollywood and international filmmakers a(a number of whom desire to film portions of their movies with IMAX cameras,cameras) the quality of the sound system components included with thean IMAX theater,Theater System, the availability of Hollywood and international event films to IMAX theaters through IMAX DMR technology, consumer loyalty and the level of the Company’s service and maintenance and extended warranty efforts. The Company believes that its laser-based projection system increases further the technological superiority of the consumer experience it delivers. As a result, the Company believes that virtually all of the best performing premium theaters in the world are IMAX theaters.
Exhibitor Consolidation
The Company’s primary customers are commercial multiplex exhibitors. The commercial exhibition industry has undergone significant consolidation, in recent years, with Dalian Wanda’s acquisitions of AMC Entertainment Holdings Inc. (“AMC”) and Hoyts Group in 2012 and 2015, respectively, and AMC’s acquisition of Carmike Cinemas and Odeon & UCI Cinemas Group (“Odeon”), which includes Nordic Cinema Group (“Nordic”), in 2016. TheIn recent years, the industry continueshas continued to consolidate, as evidenced by Cineworld Group’s planned acquisition of Regal Entertainment Group (“Regal”), the Company’s second largest customer.
The Company believes that recent exhibitor consolidation has helped facilitate the growth of the Company’s theaterIMAX network. The Company has historically enjoyed strong relationships with large commercial exhibitor chains, which have greater capital to purchase, lease or otherwise acquire IMAX theater systems.Theater Systems. As larger commercial chains such as AMC have purchased smaller chains, those smaller chains have in turn become part of the IMAX theater network. For instance, following AMC’s acquisition of Odeon and Nordic, the Company and AMC entered into an agreement for 25 new IMAX theater systemsTheater Systems across the Odeon and Nordic theater network. This deal represented the largest single European agreement in the Company’s history. The Company believes that continued consolidation could facilitate further signings and other strategic benefits going forward.
However, exhibitor consolidation has also resulted in individual exhibitor chains constituting a material portion of the Company’s revenue and network. Continued industry consolidation, (asas well as consolidation in the movie studio industry)industry, may present risks to the Company. See(See “Risk Factors”Factors – Consolidation among commercial exhibitors and studios reduces the breadth of the Company’s customer base, and could result in a narrower market for the Company’s products and reduced negotiating leverage. A deterioration in the Company’s relationship with key partners could materially, adversely affect the Company’s business, financial condition or results of operation. In addition, an adverse economic impact on a significant customer’s business operations could have a corresponding material adverse effect on the Company.” in Part I, Item 1.A of this 2017 Form10-K.1A.)
THE IMAX BRAND
IMAX is a world leader in entertainment technology. The Company relies on its brand to communicate its leadership and singular goal of creating entertainment experiences that exceed all expectations. Top filmmakers and studios use the IMAX brand to message that a film will connect with audiences in unique and extraordinary ways. In 2020, IMAX launched the “Filmed in IMAX” program, a new partnership with the world's leading camera manufacturers to meet filmmaker demand for The IMAX Experience. Through the program, IMAX will certify high-end, best-in-class digital cameras with leading brands including ARRI, Panavision, RED Digital Cinema and Sony to work in the IMAX format when paired with its proprietary post-production process.
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The IMAX brand is a promise to deliver what today’s movie audiences crave — a memorable, more emotionally engaging, more thrilling and shareable experience. Consumer research conducted in six countries worldwide by a leading third-party research firm shows that the IMAX brand has near universal awareness, creates a special experience and is one of the most differentiated movie-going brands. On a standardized measure of brand equity, the IMAX brand ranged from two to 10 times more powerful than other exhibition and entertainment technology brands. The Company believes that its strong brand equity supports consumers’ predisposition to choose IMAX over competing brands and to pay a premium forThe IMAXExperience now and into the future.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world’s leading entertainment technology companies with significant proprietary expertise in digital and film-based projection and sound system component design, engineering and imaging technology, particularly in laser-based technology. In recent years, the Company has increased its level of research and development in order to developlaser-based projection systems. The Company rolled out its flagship laser-based projection system at the end of 2014, which is capable of illuminating the largest screens in the Company’s network. TheThis laser-based projection system provides greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, while consuming less power and lasting longer than existing digital technology, to ensure that the Company continues to provide the highest quality, premier movie going experience available to consumers. However,In 2018, the Company has experienced lower than expected margins fromrolled-out IMAX with Laser, the installation of these laser-based projection systems. As a result, over the past several years, the Company has focused its research and development efforts on an updatedCompany’s next generation laser-based projection system, which is targeted primarily for screens in commercial multiplexes.
Recent With most of the laser development completed, the related research and development activityspending has also focused on the exploration of a comprehensive VR strategy to deliver immersive and interactive experiences to consumers through pilot IMAX VR Centers. The Company also has made progress deploying its proprietary expertisedeclined in image technology and 3D technology, as well as its proprietary film content and the IMAX brand, for applications in itsin-home entertainment technology initiatives, including its premium home theater system with TCL. The premium home theater system incorporates 4K projection technology, together with security and delivery technology to enable the viewing of current theatrical releases that have been digitallyre-mastered with IMAX enhancement technology.recent years.
Going forward, theThe Company plans to continue research and development activity in the future in other areas considered important to the Company’sits continued commercial success, including further improving the reliability of and costs associated with its projectors; enhancing the Company’s 2D and 3Dits image quality; expanding the applicability of the Company’sits digital technology;technology in both theater and home entertainment; developing IMAX theater systems’ capabilities;Theater Systems’ capabilities, including through its Connected Theaters initiative; and improving the Company’sits proprietary tuning system and mastering processes. Furthermore, due to the increasing
success major Hollywood filmmakers have experienced with IMAX cameras, theDMR process. The Company has identified the development and manufacture of additional IMAX cameras as an importantexpects its research and development initiative.efforts to center around innovation projects and DMR enhancements in 2021.
For the years endedAs of December 31, 2017, 2016, and 2015, the Company recorded research and development expenses of $20.9 million, $16.3 million and $12.7 million, respectively. As at December 31, 2017, 812020, 45 of the Company’s employees were connected with research and development projects.projects, compared to 52 employees as of December 31, 2019.
MANUFACTURING AND SERVICE
Projector Component Manufacturing
The Company assembles the projector of its theater systemsIMAX Theater Systems at its officefacility in Mississauga, Ontario, Canada (near Toronto). The Company develops and designs all of the key elements of the proprietary technology involved in this component. Fabrication of a majority of parts andsub-assemblies is subcontracted to a group of carefullypre-qualified third-party suppliers. Manufacture and supply contracts are signed for the delivery of the component on anorder-by-order basis. The Company believes its significant suppliers will continue to supply quality products in quantities sufficient to satisfy its needs. The Company inspects all parts andsub-assemblies, completes the final assembly and then subjects the projector to comprehensive testing individually and as a system prior to shipment. In 2017,Historically, these projectors, including both the Company’s xenon and laser-based projection systems, have had reliability rates based on scheduled shows of approximately 99.9%99%.
Sound System Component Manufacturing
The Company develops, designs and assembles the key elements of its theater sound system component. The standard IMAX theater sound system component comprises parts from a variety of sources, with approximately 50% of the materials of each sound system attributable to proprietary parts provided under original equipment manufacturers agreements with outside vendors. These proprietary parts include custom loudspeaker enclosures and horns, specialized amplifiers, and signal processing and control equipment. The Company inspects all parts andsub-assemblies, completes the final assembly and then subjects the sound system component to comprehensive testing individually and as a system prior to shipment.system.
Screen and Other Components
The Company purchases its screen component and glasses cleaning equipment from third parties. The standard screen system component is comprised of a projection screen manufactured to IMAX specifications and a frame to hang the projection screen. The proprietary glasses cleaning machine is a stand-alone unit that is connected to the theater’s water and electrical supply to automate the cleaning of 3D glasses.
15
Maintenance and Extended Warranty Services
The Company also provides ongoing maintenance and extended warranty services to IMAX theater systems.Theater Systems. These arrangements are usually for a separate fee, although the Company often includes free service in the initial year of an arrangement. The maintenance and extended warranty arrangements include service, maintenance and replacement parts for theater systems.IMAX Theater Systems.
To support the IMAX theater network, the Company has personnel stationed in major markets throughout the world who provide periodic and emergency maintenance and extended warranty services on existing theater systems.IMAX Theater Systems. The Company provides various levels of maintenance and warranty services, which are priced accordingly. Under full servicefull-service programs, Company personnel typically visit each theater every six months to provide preventative maintenance, cleaning and inspection services and emergency visits to resolve problems and issues with the theater system. Under some arrangements, customers can elect to participate in a service partnership program whereby the Company trains a customer’s technician to carry out certain aspects of maintenance. Under such shared maintenance arrangements, the Company participates in certain of the customer’s maintenance checks each year, provides a specified number of emergency visits and provides spare parts, as necessary. For both xenon and laser-based digital systems, the Company providespre-emptive maintenance, remote system monitoring and a network operations center that provides continuous access to product experts.
PATENTS AND TRADEMARKS
The Company’s inventions cover various aspects of its proprietary technology and many of these inventions are protected by Letters of Patent or applications filed throughout the world, most significantly in the United States, Canada, China, Belgium, Japan, France, Germany and the United Kingdom. The subject matter covered by these patents, applications and other licenses encompasses theater design and geometry, electronic circuitry and mechanisms employed in projectors and projection equipment (including 3D projection equipment), a method for synchronizing digital data, a method of generating stereoscopic (3D) imaging data from a monoscopicmonoscope (2D) source, a process for digitallyre-mastering 35mm films into large-format, a method for increasing the dynamic range and contrast of projectors, a method for visibly seaming or superimposing images from multiple projectors and other inventions relating to digital projectors.projectors and laser projection technology. The Company has secured the exclusive license rights from The Eastman Kodak Company (“Kodak”) to a portfolio of more than 50 patent families covering laser projection technology as well as certain exclusive rights to a broad range of Kodak patents in the field of digital cinema. The Company has been and will continue to be diligent in the protection of its proprietary interests.
As atof December 31, 2017,2020, the Company holds 106110 patents, has 1415 patents pending in the United States and has corresponding patents or filed applications in many countries throughout the world. While the Company considers its patents to be important to the overall conduct of its business, it does not consider any particular patent essential to its operations. Certain of the Company’s patents for improvements to the IMAX projection system components expire between 20182021 and 2034.2038.
The Company owns or otherwise has rights to trademarks and trade names used in conjunction with the sale of its products, systems and services. The following trademarks are considered significant in terms of the current and contemplated operations of the Company: IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It inIn IMAX®,The IMAXExperience®,An IMAXExperience®,An IMAX3DExperience3D Experience®, IMAX DMR®, DMR®DMR®, IMAX nXos®, IMAX think big®, think big® and IMAX Is BelievingFilms To The Fullest®. These trademarks are widely protected by registration or common law throughout the world. The Company also owns the service mark IMAX THEATRETM.
EMPLOYEESHUMAN CAPITAL
The Company had 606 employees as atis a globally diverse brand with the mission to connect the world through extraordinary experiences that inspire us to reimagine what’s possible, together. The Company has the power to inspire, ignite and involve its teams, customers and partners across the 1,650 IMAX Theater Systems in its network to transcend the ordinary. However, the Company understands that these experiences are only made possible through its employees’ diverse range of unique abilities and perspectives and its ability to attract, retain and engage a talented, inclusive and respected workforce.
As of December 31, 2017, compared2020, the Company had 622 full-time employees, of whom 142 employees were based outside of North America.
Total Rewards
The Company continues to 703have a total rewards mindset that encompasses all that is provided to its employees in the form of financial and nonfinancial compensation, benefits, well-being, and growth opportunities. The goal of these total rewards programs is to provide employees with market competitive offerings, opportunities and experiences that evolve over time.
16
As the Company continues to evolve as at December 31, 2016. Bothan organization, it continues to modernize its total rewards programs to deliverand drive a better employee counts exclude hourlyexperience and adequately reflect a diverse, multigenerational and talented workforce.
The structure of the Company’s total rewards programs balances base compensation, incentive compensation for both short-term and long-term performance and a focus on total well-being. In addition:
• | The Company’s comprehensive benefit program is a valuable piece of the Company’s total rewards package. All active, full-time employees are eligible for the benefit program, which includes medical, dental and vision coverage for employees and their families; provides income protection should employees become disabled and/or unable to work; and offers life and accidental death and dismemberment insurance. The Company provides parental leaves to all new parents for birth, adoption, or foster placement. The Company also maintains additional benefit programs to support the financial, mental, and physical well-being of its employees. |
• | The Company’s employee salaries and wages are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. Job function relative to salaries and wages are evaluated and benchmarked annually. By providing long-term equity-based incentive compensation, the Company aligns the interests of its employees with its shareholders. |
• | The Company partners with multiple external industry experts around compensation and benefits to support and independently evaluate its total rewards programs. The Company receives advice from such experts relating to global benefits offerings and employee compensation to ensure alignment with its peers within the industry. |
Diversity and Inclusion
The Company’s culture is defined by its core values of Inspire, Ignite, and Involve and the Company is committed to Diversity and Inclusion (“D&I”), which the Company views as the intersection of differences sparking exploration, creativity, innovation and collaboration. The Company’s focus with respect to D&I is to attract, retain, and engage a talented, inclusive and respected workforce. The Company has assembled a D&I council of employees across levels, tenure and demographic background to assist the Company in executing the four key pillars of its global D&I strategy:
• | Raise awareness and educate those around the Company on issues that are important to its people and its audiences. |
• | Empower the Company’s people and leadership to be champions of diversity, equity and inclusion by rewarding positive behaviors and encouraging frequent feedback and input. |
• | Communicate and connect using inclusive and concise messages. |
• | Ensure that equal opportunity and diversity of people is non-negotiable in how the Company attracts, selects, supports, develops and rewards its people, and in whom IMAX chooses to partner with. |
Employee Health and Safety
Recognizing the various employee heath and safety risks associated with the delivery of the world’s most immersive movie-going experience, the Company has implemented a global program for workplace safety that ensures it has the necessary controls in place to strive to keep its employees and visitors safe.
Employee heath and safety at the Company is a shared responsibility that requires continuous effort. Risks to the health and safety of the Company’s ownedemployees are present in day-to-day office work, building renovation, manufacturing, logistics, training, testing, research and operateddevelopment, and during the designing, installation and service of the Company’s theaters virtual reality centersaround the world. Every employee at each IMAX location, workplace, business unit and certain other newdepartment is responsible for participating in workplace safety planning activities and managers are responsible for employee health and safety program implementation for their business initiatives.function. This effort is supported by a cross-functional Heath and Safety team dedicated to employee health and safety and business continuity.
17
This relentless focus and commitment to the health and safety of the Company’s employees was never more evident than in the Company’s approach to COVID-19. Specifically, the Company:
• | Instituted a cross-functional Pandemic Response team to support decision making and implementation of COVID-19 response programs. |
• | Supported a quick pivot to a virtual workplace and scheduling flexibility to meet competing personal demands. |
• | Developed an illness reporting process to encourage those who were ill to stay home and focus on their health. |
• | Increased communication with the introduction of a dedicated resource page on its intranet for information related to the understanding of COVID-19, local resources, and access to mental well-being support. |
• | For work locations that remained open, the Company: |
o | Required training before entering its office locations; |
o | Increased cleaning protocol; |
o | Upgraded air filtration and ventilation systems; |
o | Provided access to personal protective equipment; |
o | Mandated daily health screenings; |
o | Mandated masks for those entering the facility; |
o | Required social distancing and implemented flow of traffic requirements in the building; and |
o | Modified workspaces to allow for social distancing and plexiglass protections where necessary. |
AVAILABLE INFORMATION
The Company makes available, free of charge, its Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q and Current Reports onForm 8-K, and any amendments to such reports, as soon as reasonably practicable after such filings have been made with the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, as well as obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330.Reports may be obtained free of charge through the SEC’s website at www.sec.gov and through the Company’s website at www.imax.com or by calling the Company’s Investor Relations Department at212-821-0100. No information included on the Company’sCompany's website shall be deemed included or otherwise incorporated into this 2017 Form10-K, except where expressly indicated.
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Item 1A. Risk Factors
Before you make an investment decision with respect to the Company’s common stock, you should carefully consider all of the information included in this Form 10-K and the Company’s subsequent periodic filings with the SEC. In particular, you should carefully consider the risk factors described below and the risks and uncertainties related to "Forward Looking Statements," any of the risks described below occurs,which could have a material adverse effect on the Company’s business, operating results andof operations, financial condition couldand the actual outcome of matters as to which forward looking statements are made in this annual report. The following risk factors, which are not ranked in any particular order, should be materially adversely affected.
read in conjunction with the balance of this annual report, including the Consolidated Financial Statements and related notes. The risks described below are not the only ones the Company faces. Additional risks not presently knownthat the Company deems immaterial or that are currently unknown to the Company or that it deems immaterial, may also impair its business or operations.
RISKS RELATED TO THE COMPANY’S BUSINESS AND OPERATIONS
The Company conductshas experienced a significant decrease in its revenues, earnings, and cash flows due to the COVID-19 global pandemic and its business, internationally,financial condition and results of operations may continue to be significantly harmed in future reporting periods.
In late January 2020, in response to the public health risks associated with COVID-19, the Chinese government directed exhibitors in China to temporarily close more than 70,000 movie theaters, including all of the approximately 700 IMAX theaters in mainland China. On March 11, 2020, due to the worsening public health crisis associated with the novel coronavirus, COVID-19 was characterized as a pandemic by the World Health Organization, and in the following weeks, local, state and national governments instituted stay-at-home orders and restrictions on large public gatherings which exposes itcaused movie theaters in countries around the world to uncertaintiestemporarily close, including substantially all of the IMAX theaters in those countries. As a result of the theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and risks that could negatively affect its operations,early 2021, including many scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms. More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures. As of December 31, 2020, 71% of the theaters in the IMAX commercial multiplex network were open, spanning 41 countries. This included 44% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 53% of the theaters in Rest of World markets. However, ticket sales and future growth prospects.have been significantly lower than normal levels in theaters outside of Asia as Hollywood movie studios have further delayed the theatrical release date for a number of films. As a result, certain theater chains have remained closed or have reduced their operating hours. In addition, theaters in major markets remain temporarily closed.
AThe repercussions of the COVID-19 global pandemic resulted in a significant portion ofdecrease in the Company’s revenues, earnings, and grossbox-office are generated by customers located outside the United States and Canada. Approximately 65%, 62% and 60% of the Company’s revenues were derived outside of the United States and Canadaoperating cash flows in 2017, 2016 and 2015, respectively. As at December 31, 2017, approximately 90% of IMAX theater systems arrangements in backlog are scheduled2020 due to be installed in international markets. The Company’s network currently spans 75 different countries, and the Company expects its international operations to continue to account for an increasingly significant portion of its revenuesa decline 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:
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 faces risks in connection with the continued expansion of its business in China.
At present, Greater China is the Company’s second largest market, by revenue. In recent years, the Company’s Greater China operations have accounted for an increasingly significant portion of its overall revenues, with nearly 33% of overall revenues generated from the Company’s China operations in 2017. As at December 31, 2017, the Company had 544 theaters operating in Greater China with an additional 309 theaters in backlog, which represent 61.9% of the Company’s current backlog and which are scheduled to be installed in Greater China by 2022. Of the systems currently scheduled to be installed in Greater China, 47.3% are under joint revenue sharing arrangements and digital remastering services, delays in the installation of certain theater systems and the suspension of maintenance services for theaters that were closed. While there continues to be a lack of new films released by movie studios and a significant number of theaters in the IMAX network are closed, the Company is experiencing a significant decline in earnings and operating cash flows as it is generating significantly lower than normal levels of GBO-based revenue from its joint revenue sharing arrangements and digital remastering services, it is unable to provide normal maintenance services to any of the theaters that remain closed, and while some installation activity is continuing, certain theater system installations have, and may continue to be delayed. Moreover, given the uncertainty around when movie-going will return to historical levels, there is no guarantee that the impacts of the COVID-19 global pandemic on the Company will end even after some or all theaters are reopened. In addition, the global economic impact of COVID-19 has resulted in record levels of unemployment in certain countries, which has led to, and may continue to result in, lower consumer spending. The timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s ability to generate significant GBO-based revenue until consumer behavior normalizes and consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough, reducing the working hours of other employees and reducing all non-essential capital expenditures to minimum levels. The Company has also implemented an active cash management process, which, among other things, requires senior management approval of all outgoing payments. In addition, in the first quarter of 2020, the Company drew down $280.0 million in remaining available borrowing capacity under its credit facility, which was then amended in June 2020 to, among other things,suspend the Senior Secured Net Leverage Ratio financial covenant in the underlying credit agreement through the first quarter of 2021 and substitute quarterly EBITDA from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020 to meet the original Senior Secured Net Leverage Ratio financial covenant.
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As of December 31, 2020, the Company was in compliance with all of its requirements under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
The Company has applied for wage subsidies, tax credits and other financial support under COVID-19 relief legislation that has been enacted in the countries in which it operates. There can, however, be no guarantees that the steps the Company has taken and continues to take to preserve cash and manage its expenditures will result in the cost savings the Company anticipates. There can also be no guarantees that any wage subsidies, tax credits and other financial support or any other governmental benefits and support for which the Company is eligible will materialize in the amounts expected. The Company cannot predict the manner in which such benefits will be allocated or administered, and the Company cannot guarantee that it will be able to access such benefits in a timely manner or at all. Certain of the benefits the Company seeks to access or may apply for in the future have not previously been administered on the present scale or at all. Any benefits the Company expects to receive, or may apply for in the future, may not be at the same levels as currently estimated, may impose additional conditions and restrictions on the Company’s operations or may otherwise provide less relief than currently contemplated. There can be no guarantees that the Company will receive any additional material financial support through these or other programs that may be created, expanded, or implemented by governments in the countries in which the Company operates.
In addition, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who are facing financial difficulties as a result of the theater closures. Certain of the Company’s exhibitor partners that had reopened theaters have temporarily suspended operations of their theater network in certain jurisdictions and other exhibitor partners have reduced their theaters’ operating hours, which may exacerbate existing financial difficulties. Other exhibitor partners in the future may make similar decisions to close all or part of their global theater networks or to reduce their operating hours if the COVID-19 pandemic continues and Hollywood movie studios continue to delay the release of new films, or for other reasons, which would further increase the Company’s ongoing exposurerisks associated with payments under existing agreements with the Company. The ability of such partners to box office performancemake payments cannot be guaranteed and is subject to changing economic circumstances. Such theater closures and other challenges in this market.
The China market faces a numberthe theatrical industry may force some of risks, including changes in laws and regulations, currency fluctuations, increased competition and changes in economic conditions, including the risk of an economic downturn or recession, as well as other conditions that may impact the Company’s exhibitor partners into bankruptcy proceedings. In such cases, local laws governing restructurings would apply, and studio partners, as well as consumer spending. Adverse developmentsthere can be no guarantees of the Company’s success in any of these areas could impactobtaining complete or partial payments owed to it by the applicable exhibitor partners. Further, the Company has had to delay movie theater installations from backlog and may be required to further delay or cancel such installations in the future. As a result, the Company’s future revenues and cash flows and could causemay be adversely affected.
Given the dynamic nature of the circumstances, while the Company to fail to achieve anticipated growth. In addition, over the past several years, the growth of screens in Greater China has outpaced IMAX box office growth.
Moreover, certain risks and uncertainties of doing business in China are solely within the controlbeen negatively impacted as of the Chinese government,date of filing of this report, it is difficult to predict the full extent of such adverse impact of the COVID-19 global pandemic on the Company’s financial condition, liquidity, business and Chinese law regulates bothresults of operations in future reporting periods. The extent and duration of such impact on the scopeCompany will depend on future developments, including, but not limited to, the timing of reopening of movie theaters worldwide and their return to historical levels of attendance, the timing of when new films are released, consumer behavior and general economic conditions, the solvency of the Company’s continued expansion in Chinaexhibitor partners, their ability to make timely payments and any potential construction or installation delays involving our exhibitor partners. Such events are highly uncertain and cannot be accurately forecast. Moreover, there can be no guarantees that the Company’s liquidity needs will not increase materially over the course of this pandemic. In addition, liquidity needs as well as other changes to the Company’s business and operations may impact the Company’s ability to maintain compliance with certain covenants under the amended Credit Agreement. The Company may also be subject to impairment losses based on long-term estimated projections. These estimates and the business conducted by it within China. For instance, the Chinese government regulates both thelikelihood of future changes in these estimates depend on a number of underlying variables and timing or termsa range of Hollywood films releasedpossible outcomes. Actual results may differ materially from management’s estimates, especially due to the China market. uncertainties associated with the COVID-19 pandemic. If business conditions deteriorate further, or should they remain depressed for a more prolonged period of time, management’s estimates of operating results and future cash flows for reporting units may be insufficient to support the goodwill assigned to them, thus requiring impairment charges. Estimates related to future expected credit losses and deferred tax assets, as well as the recoverability of joint revenue sharing equipment and the realization of variable consideration assets, could also be materially impacted by changes in estimates in the future.
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The Company cannot provide assurance thatCOVID-19 pandemic and public health measures implemented to contain it may also have the Chinese government will continueeffect of heightening many of the other risks described in this Form 10-K, including, but not limited to, permitrisks relating to harm to our key personnel, diverting management’s resources and time to addressing the releaseimpacts of IMAX films in China or thatCOVID-19, which may negatively affect the timing or numberCompany’s ability to implement its business plan and pursue certain opportunities, potential impairments, the effectiveness of IMAX releases will be favorableour internal control of financial reporting, cybersecurity and data privacy risks due to employees working from home, and risks of increased indebtedness due to the Company. There are also uncertainties regardingfull draw down of the interpretationCredit Facility, including the Company’s ability to seek waivers of covenants or to refinance such borrowings, among others. The longer the COVID-19 pandemic and applicationassociated protective measures persist, the more severe the extent of lawsthe adverse impact of the pandemic on the Company is likely to be.
General political, social and regulationseconomic conditions can affect the Company’s business by reducing both revenues generated from existing IMAX Theater Systems and the enforceabilitydemand for new IMAX Theater Systems.
The Company’s success depends in part on general political, social and economic conditions and the willingness of intellectual property and contract rights in China.consumers to purchase tickets to IMAX movies. If the Company were unable to navigate China’s regulatory environment, including with respect to its current customs inquiry, or if the Company were unable to enforce its intellectual property or contract rights in China,movie-going becomes less popular globally, the Company’s business could be adversely impacted.affected, especially if such a decline occurs in Greater China. In addition, the Company’s operations could be adversely affected if consumers' discretionary income falls as a result of an economic downturn. In recent years, the majority of the Company’s revenue has been directly derived from the box office revenues of its films. Accordingly, a decline in attendance at commercial IMAX theaters could materially and adversely affect several sources of key revenue streams for the Company.
The Company also depends on the sale and lease of IMAX Theater Systems to commercial movie exhibitors to generate revenue. Commercial movie exhibitors generate revenues from consumer attendance at their theaters, which depends on the willingness of consumers to visit movie theaters and spend discretionary income at movie theaters. In the event of declining box office and concession revenues, commercial exhibitors may be less willing to invest capital in new IMAX theaters. In addition, a significant portion of theaters in the Company’s backlog are expected to be installed in newly built multiplexes. An economic downturn could impact developers’ ability to secure financing and complete the buildout of these locations, thereby negatively impacting the Company’s ability to grow its theater network.
The success of the IMAX theater network is directly related to the availability and success of IMAX DMR films, for which there can be no guarantee.
An important factor affecting the growth and success of the IMAX theater network is the availability and strategic selection of films for IMAX theaters and thebox-office box office performance of such films. The Company itself produces only a small number of such films and, as a result, the Company relies principally on films produced by third partythird-party filmmakers and studios, including both Hollywood and local language features converted into the Company’s large format using the Company’s IMAX DMR technology. In 2017, 602020, 31 IMAX DMR films were released by studios to the worldwide IMAX theater network. There is no guarantee that filmmakers and studios will continue to release films to the IMAX theater network, or that the films selected for release to the IMAX theater network will be commercially successful. The Company is directly impacted by thebox-office commercial success and box office results forof the films released to the IMAX network through its joint revenue sharing arrangements, as well as through the percentage of thebox-office box office receipts the Company receives from the studios releasing IMAX DMR films, and the Company’s continued ability to secure films, find suitable partners for joint revenue share arrangements and to sell IMAX theater systems also depends on the number and commercial success of films released to its network.Theater Systems. The commercial success of films released to IMAX theaters depends on a number of factors outside of the Company’s control, including whether the film receives critical acclaim, the timing of its release, the success of the marketing efforts of the studio releasing the film, consumer preferences and trends in cinema attendance. Moreover, films can be subject to delays in production or changes in release schedule, which can negatively impact the number, timing and quality of IMAX DMR and IMAX original films released to the IMAX theater network.
In addition, as the Company’s international network has expanded, the Company has signed deals with studios in other countries to convert their films to the Company’s large format and release them to IMAX theaters. The Company may be unable to select films which will be successful in international markets or may be unsuccessful in selecting the right mix of Hollywood and local DMR films for a particular country or region.region, notably Greater China, the Company’s largest market. Also, conflicts in international release schedules may make it difficult to release every IMAX film in certain markets.
The Company depends principally on commercial movie exhibitors to purchase or lease IMAX theater systems,Theater Systems, to supplybox-office box office revenue under joint revenue sharing arrangements and under its sales and sales-type lease agreements and to supply venues in which to exhibit IMAX DMR films. The Company can make no assurances that exhibitors will continue to do any of these things.
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The Company is unable to predict the pace at which exhibitors will purchase or lease IMAX theater systemsTheater Systems or enter into joint revenue sharing arrangements with the Company, or whether any of the Company’s existing exhibitor customers will continue to do any of the foregoing. If exhibitors choose to reduce their levels of expansion, negotiate less favorable economic terms, or decide not to enter into transactions with the Company, the Company’s revenues would not increase at an anticipated rate and motion picture studios may be
less willing to convert their films into the Company’s format for exhibition in commercial IMAX theaters. As a result, the Company’s future revenues and cash flows could be adversely affected.
Recent consolidation among commercial exhibitorsThe Company relies on its key personnel, and studios reduces the breadthloss of one or more of those personnel could harm its ability to carry out its business strategy.
The Company’s operations and prospects depend in large part on the performance and continued service of its senior management team. The Company may not find qualified replacements for any of these individuals if their services are no longer available. The loss of the services of one or more members of the Company’s customer base, andsenior management team could result in a narrower market for the Company’s products and reduced negotiating leverage. A deterioration in the Company’s relationship with key partners could materially, adversely affect the Company’s business, financial condition or results of operation. In addition, an adverse economic impact on a significant customer’s business operations could have a corresponding material adverse effect on the Company.
The Company’s primary customers are commercial multiplex exhibitors. The commercial exhibition industry has undergone significant consolidation in recent years, with Dalian Wanda’s acquisitions of AMC and Hoyts Group in 2012 and 2015, respectively, and AMC’s acquisition of Carmike Cinemas and Odeon & UCI Cinemas Group, which includes Nordic Cinema Group, in 2016. The industry continues to consolidate, as evidenced by Cineworld Group’s planned acquisition of Regal Entertainment Group. Exhibitor concentration has resulted in individual exhibitor chains constituting a material portion of the Company’s network and revenue. For instance, Wanda and AMC continue to be the Company’s largest exhibitor customer, representing approximately, 16.4%, 13.5% and 16.0% of the Company’s total revenues in 2017, 2016 and 2015, respectively. Wanda’s current commitment to the Company stands at 359 IMAX theater systems, and Wanda and AMC together represented approximately 40.7% of the commercial network and 30.5% of the Company’s backlog as of December 31, 2017. The share of the Company’s revenue that is generated by Wanda and AMC is expected to continue to grow as the significant number of Wanda theater systems currently in backlog are opened. No assurance can be given that significant customers such as Wanda and/or AMC will continue to purchase theater systems and/or enter into joint revenue sharing arrangements with the Company and if so, whether contractual terms will be affected. If the Company does business with either Wanda and/or AMC or other large exhibitor chains less frequently or on less favorable terms than currently, the Company’s business, financial condition or results of operations may be adversely affected. In addition, an adverse economic impact on a significant customer’s business operations could have a corresponding material adverse effect on the Company.
The Company also receives revenues from studios releasing IMAX DMR films. Hollywood studios have also experienced recent consolidation, as evidenced by Walt Disney Studios’ planned acquisition of certain studio assets from Twenty First Century Fox. Studio consolidation could result in individual studios comprising a greater percentage of the Company’s film slate and overall DMR revenue, and could expose the Company to the same risks described above in connection with exhibitor consolidation.
General political, social and economic conditions can affect the Company’s business by reducing both revenue generated from existing IMAX theater systems and the demand for new IMAX theater systems.
The Company’s success depends in part on general political, social and economic conditions and the willingness of consumers to purchase tickets to IMAX movies. If movie-going becomes less popular globally, the Company’s business could be adversely affected. In addition, the Company’s operations could be adversely affected if consumers’ discretionary income falls as a result of an economic downturn. In recent years, the majority of the Company’s revenue has been directly derived from thebox-office revenues of its films. Accordingly, a decline in attendance at commercial IMAX theaters could materially and adversely affect several sources of key revenue streams for the Company.
The Company also depends on the sale and lease of IMAX theater systems to commercial movie exhibitors to generate revenue. Commercial movie exhibitors generate revenues from consumer attendance at their theaters, which depends on the willingness of consumers to visit movie theaters and spend discretionary income at movie theaters. In the event of decliningbox-office and concession revenues, commercial exhibitors may be less willing to invest capital in new IMAX theaters. In addition, a significant portion of theaters in the Company’s backlog are expected to be installed in newly built multiplexes. An economic downturn could impact developers’ ability to secure financing and complete the buildout of these locations, thereby negatively impacting the Company’s ability to groweffectively pursue its theater network.business strategy.
The Company may experience adverse effects due to exchange rate fluctuations.
A substantial portion of the Company’s revenues are denominated in U.S. dollars, while a substantial portion of its expenses are denominated in Canadian dollars. The Company also generates revenues in Chinese Yuan Renminbi, Euros and Japanese Yen. While the Company periodically enters into forward contracts to hedge its exposure to exchange rate fluctuations between the U.S. and the Canadian dollar, the Company may not be successful in reducing its exposure to these fluctuations. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. Even in jurisdictions in which the Company does not accept local currency or requires minimum payments in U.S. dollars, significant local currency issues may impact the profitability of the Company’s arrangements for the Company’s customers, which
ultimately affect the Company’s ability to negotiate cost-effective arrangements and, therefore, the Company’s results of operations. In addition, because IMAX films generatebox-office in 75 different countries, unfavorable exchange rates between applicable local currencies and the U.S. dollar could affect the Company’s reported grossbox-office and revenues, further impacting the Company’s results of operations.
The introduction of new, competing products and technologies could harm the Company’s business.
Theout-of-home entertainment industry is very competitive, and the Company faces a number of competitive challenges. According to the National Association of Theater Owners, as at December 31, 2017, there were approximately 42,381conventional-sized screens in North American multiplexes. The Company faces competition both in the form of technological advances inin-home entertainment as well as those within the theater-going experience. In recent years, for instance, exhibitors and entertainment technology companies have introduced their own branded, large-screen 3D auditoriums or other proprietary theater systems, and in many cases have marketed those auditoriums or theater systems as having the same quality or attributes as an IMAX theater. The Company may continue to face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources to develop and support them. If the Company is unable to continue to deliver a premium movie-going experience, or if other technologies surpass those of the Company, the Company may be unable to continue to produce theater systems which are premium to, or differentiated from, other theater systems.
As noted above, the Company facesin-home competition from a number of alternative motion picture distribution channels such as home video,pay-per-view, streaming services,video-on-demand, DVD, Internet and syndicated and broadcast television. The Company further competes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater, social media and restaurants.
If the Company is unable to continue to produce a differentiated theater experience, consumers may be unwilling to pay the price premiums associated with the cost of IMAX theater tickets andbox-office performance of IMAX films may decline. Decliningbox-office performance of IMAX films could materially and adversely harm the Company’s business and prospects.
Failure to respond adequately or in a timely fashion to changes and advancements in digital technology could negatively affect the Company’s business.
There have been a number of advancements in the digital cinema field in recent years. In order to keep pace with these changes and in order to continue to provide an experience which is premium to and differentiated from conventional cinema experiences, the Company has made, and expects to continue to make, significant investments in digital technology in the form of research and development and the acquisition of third party intellectual property and/or proprietary technology. Recently, the Company has made significant investments in laser technology as part of the development of its next-generation laser-based digital projection system, which it began rolling out to the largest theaters in the IMAX network at the end of 2014. The Company continued research and development throughout 2017 to support the further development of an updated laser-based digital projection system, which is targeted primarily for screens in commercial multiplexes. The process of developing new technologies is inherently uncertain and subject to certain factors that are outside of the Company’s control, including reliance on third party partners and suppliers, and the Company can provide no assurance its investments will result in commercially viable advancements to the Company’s existing products or in commercially successful new products, or that any such advancements or products will improve upon existing technology or will be developed within the timeframe expected.
The Company is undertaking new lines of business and these new business initiatives may not be successful.
The Company is undertaking new lines of business. These initiatives represent new areas of growth for the Company and could include the offering of new products and services that may not be accepted by the market. The Company has recently explored initiatives in the fields of location-based virtual reality, original content andin-home entertainment technology, allboth of which are intensivelyintensely competitive businesses and which are dependent on consumer demand, over which the Company has no control. The Company is also exploring new technologies to connect the IMAX network to facilitate bringing more unique content, including broadcasts of live events, to IMAX theater audiences. If any new business in which the Company invests or attempts to develop does not progress as planned, the Company may be adversely affected by investment expenses that have not led to the anticipated results, by write-downs of its equity investments, by the distraction of management from its core business or by damage to its brand or reputation.
In addition, these initiatives may involve the formation of joint ventures and business alliances. While the Company seeks to employ the optimal structure for each such business alliance, the alliance may require a high level of cooperation with and reliance on the Company’s partners and there is a possibility that the Company may have disagreements with itsa relevant partner with respect to financing, technological management, product development, management strategies or otherwise. Any such disagreement may cause
the joint venture or business alliance to be terminated.
The Company may not realize cost savings or other benefits from any of its restructuring initiatives and the failure to do so may have an adverse impact on its business, financial condition, or results of operations.
In connection with the ongoing analysis and evaluation of its business operations, the Company has implemented, and may from time to time implement, initiatives that it believes will position the Company for future success and long-term sustainable growth, including the elimination of certain business ventures, consolidation of properties, staff reductions and the realignment of resources. Although the Company expects its restructuring initiatives to result in cost savings aimed at increasing efficiency, profitability, operating leverage and free cash flow, there can be no assurances that these benefits will be realized to the extent projected. Some of these initiatives may also result in unintended consequences, such as additional employee attrition, business disruptions and distraction of management. If the Company does not achieve projected savings as a result of these initiatives or incurs higher than expected or unanticipated costs in implementing these initiatives, its business, financial condition, or results of operations could be adversely impacted.
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The Company faces cyber-security and similar risks, which could result in the disclosure, theft, or loss of confidential or other proprietary information, including intellectual property, damage to the Company’s brand and reputation, legal exposure and financial losses. The Company must also comply with a variety of data privacy regulations and failure to comply with such regulations may affect the Company’s financial performance.
The nature of the Company’s business involves access to and storage of confidential and proprietary content and other information, including its own intellectual property and the intellectual property of certain movie studios or partners it may work with, as well as certain information regarding the Company’s customers, employees, licensees, and suppliers. Although the Company maintains robust procedures, internal policies and technological security measures to safeguard such content and information, as well as a cyber-security insurance policy, the Company’s information technology systems could be penetrated by internal or external parties intent on extracting information, corrupting information, stealing intellectual property or trade secrets, or disrupting business processes. Information security risks have increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. The Company’s information technology infrastructure may be vulnerable to such attacks, including through the use of malware, software bugs, computer viruses, ransomware, social engineering, and denial of service. It is possible that such attacks could compromise the Company’s security measures or the security measures of parties with whom the Company does business, and thereby could result in obtaining the confidential or proprietary information of the Company or its customers, employees, licensees, and suppliers.Because the techniques that may be used to circumvent the Company’s safeguards change frequently and may be difficult to detect, the Company may be unable to anticipate any new techniques or implement sufficient preventive security measures. The Company seeks to monitor such attempts and incidents and to prevent their recurrence through modifications to the Company’s internal procedures and information technology infrastructure, but in some cases preventive action might not be successful. Moreover, the development and maintenance of these security measures may be costly and will require ongoing updates as technologies evolve and techniques to overcome the Company’s security measures become more sophisticated. Any such breach or unauthorized access could result in a disruption of the Company’s operations, the theft, unauthorized use or publication of the Company’s intellectual property, other proprietary information or the personal information of customers, employees, licensees or suppliers, a reduction of the revenues the Company is able to generate from its operations, damage to the Company’s brand and reputation, a loss of confidence in the security of the Company’s business and products, and significant legal and financial exposure, each of which could potentially have an adverse effect on the Company’s business.
In addition, a variety of laws and regulations at the international, national, and state level govern the Company’s collection, use, protection and processing of personal data. These laws, including the General Data Protection Regulation and the California Consumer Privacy Act, are constantly evolving and may result in increasing regulatory oversight and public scrutiny in the future. The Company’s actual or perceived failure to comply with such regulations could result in fines, investigations, enforcement actions, penalties, sanctions, claims for damages by affected individuals, and damage to the Company’s reputation, among other negative consequences, any of which could have a material adverse effect on its financial performance.
The credit agreement governing the Company’s senior secured credit facility contains significant restrictions that limit its operating and financial flexibility.
The credit agreement governing the Company’s senior secured credit facility contains certain restrictive covenants that, among other things, limit its ability to:
• | incur additional indebtedness; |
• | pay dividends and make distributions; |
• | repurchase stock; |
• | make certain investments; |
• | transfer or sell assets; |
• | create liens; |
• | enter into transactions with affiliates; |
• | issue or sell stock of subsidiaries; |
• | create dividend or other payment restrictions affecting restricted subsidiaries; and |
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• | merge, consolidate, amalgamate, or sell all or substantially all of its assets to another person. |
These restrictive covenants impose operating and financial restrictions on the Company that limit the Company’s ability to engage in acts that may be in the Company’s long-term best interests.
RISKS RELATED TO THE COMPANY’S INTERNATIONAL OPERATIONS
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 77%, 66% and 66% of the Company’s revenues were derived outside of the United States and Canada in 2020, 2019 and 2018, respectively. As of December 31, 2020, approximately 74.8% of IMAX Theater Systems in backlog are scheduled to be installed in international markets. The Company’s network spanned 84 different countries as of December 31, 2020, and the Company expects its international operations to continue to account for an increasingly significant portion of its future revenues. 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 IMAX 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 the Company’s theaters can present; |
• | fluctuations in the value of various foreign currencies 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; |
• | difficulties in obtaining competitively priced key commodities, raw materials and component parts from various international sources that are needed to manufacture quality products on a timely basis; |
• | imposition of foreign exchange controls in 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 IMAX 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 foreign government 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; |
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• | 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. |
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. 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 the Company’s business operations in such regions and may also harm the Company’s brand. Moreover, a deterioration of the diplomatic relations between the United States or Canada and a given country may impede the Company’s ability to operate theaters in such countries and have a negative impact on the Company’s financial condition and future growth prospects.
The Company faces risks in connection with its significant presence in China and the continued expansion of its business there.
Greater China is the Company’s largest market by revenue, with approximately 38% of overall revenues generated from its Greater China operations in 2020. As of December 31, 2020, the Company had 745 theaters operating in Greater China with an additional 251 theaters in backlog, which represent 47.6% of the Company’s current backlog and which are scheduled to be installed in Greater China by 2028. Of the IMAX Systems currently scheduled to be installed in Greater China, 65.3% are under joint revenue sharing arrangements, which further increases the Company’s ongoing exposure to box office performance in this market.
The China market faces a number of risks, including changes in laws and regulations, currency fluctuations, increased competition and changes in economic conditions, including the risk of an economic downturn or recession, trade embargoes, restrictions or other barriers, as well as other conditions that may impact the Company’s exhibitor and studio partners, and consumer spending. Adverse developments in any of these areas could impact the Company’s future revenues and cash flows and could cause the Company to fail to achieve anticipated growth.
Moreover, certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates both the scope of the Company’s continued expansion in China and the business conducted by it within China. For instance, the Chinese government regulates the number, timing, and terms of Hollywood films released to the China market. The Company cannot provide assurance that the Chinese government will continue to permit the release of IMAX films in China or that the timing or number of IMAX releases will be favorable to the Company. There are also uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. If the Company were unable to navigate China’s regulatory environment, or if the Company were unable to enforce its intellectual property or contract rights in China, the Company’s business could be adversely impacted.
The Company may experience adverse effects due to exchange rate fluctuations.
A substantial portion of the Company’s revenues are denominated in U.S. Dollars, while a substantial portion of its expenses are denominated in Canadian Dollars. The Company also generates revenues in Chinese Yuan Renminbi, Euros and Japanese Yen. While the Company periodically enters into forward contracts to hedge its exposure to exchange rate fluctuations between the U.S. and the Canadian Dollar, the Company may not be successful in reducing its exposure to these fluctuations. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. Even in jurisdictions in which the Company does not accept local currency or requires minimum payments in U.S. Dollars, significant local currency issues may impact the profitability of the Company’s arrangements for the Company’s customers, which ultimately affect the Company’s ability to negotiate cost-effective arrangements and, therefore, the Company’s results of operations. In addition, because IMAX films generate box office in 84 different countries, unfavorable exchange rates between applicable local currencies and the U.S. Dollar could affect the Company’s reported gross box office and revenues, further impacting the Company’s results of operations.
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RISK RELATED TO THE COMPANY’S INDUSTRY
Consolidation among commercial exhibitors and studios reduces the breadth of the Company’s customer base, and could result in a narrower market for the Company’s products and reduced negotiating leverage. A deterioration in the Company’s relationship with key partners could materially, adversely affect the Company’s business, financial condition or results of operation. In addition, an adverse economic impact on a significant customer’s business operations could have a corresponding material adverse effect on the Company.
The Company’s primary customers are commercial multiplex exhibitors. The commercial exhibition industry has undergone significant consolidation, with Wanda’s acquisitions of AMC and Hoyts Group in 2012 and 2015, respectively, and AMC’s acquisition of Carmike Cinemas and Odeon & UCI Cinemas Group, which includes Nordic Cinema Group, in 2016. In recent years, the industry has continued to consolidate, as evidenced by Cineworld Group’s acquisition of Regal Entertainment Group in 2018. Exhibitor concentration has resulted in certain exhibitor chains constituting a material portion of the Company’s network and revenue. For instance, Wanda and AMC continue to be the Company’s largest exhibitor customer, representing approximately, 16.4%, 16.5% and 17.1% of the Company’s total revenues in 2020, 2019 and 2018, respectively. Wanda’s current commitment to the Company stands at 361 IMAX Theater Systems, and Wanda and AMC together represented approximately 35.1% of the commercial network and 19.0% of the Company’s backlog as of December 31, 2020. The share of the Company’s revenue that is generated by Wanda and AMC is expected to continue to grow as the number of Wanda theater systems currently in backlog are opened. No assurance can be given that significant customers such as Wanda and/or AMC will continue to purchase IMAX Theater Systems and/or enter into joint revenue sharing arrangements with the Company and if so, whether contractual terms will be affected. If the Company does business with either Wanda and/or AMC or other large exhibitor chains less frequently or on less favorable terms than currently, the Company’s business, financial condition or results of operations may be adversely affected. In addition, an adverse economic impact on a significant customer’s business operations could have a corresponding material adverse effect on the Company.
The Company also receives revenues from studios releasing IMAX DMR films. Hollywood studios have also experienced consolidation, as evidenced by the Walt Disney Company’s acquisition of certain studio assets from Twenty First Century Fox in 2019. Studio consolidation could result in individual studios comprising a greater percentage of the Company’s film slate and overall DMR revenue, and could expose the Company to the same risks described above in connection with exhibitor consolidation.
RISKS RELATED TO THE COMPANY’S COMPETITVE ENVIRONMENT
Failure to respond adequately or in a timely fashion to changes and advancements in digital technology could negatively affect the Company’s business.
There have been a number of advancements in the digital cinema field in recent years. In order to keep pace with these changes and in order to continue to provide an experience that is premium to and differentiated from conventional cinema experiences, the Company has made, and expects to continue to make, significant investments in digital technology in the form of research and development and the acquisition of third party intellectual property and/or proprietary technology. In recent years, the Company has made significant investments in laser technology as part of the development of its next-generation laser-based digital projection system, which it began rolling out to the largest theaters in the IMAX network at the end of 2014. The Company continued research and development throughout 2018 to support the further development and roll-out of IMAX with Laser projection system, which is targeted primarily for screens in commercial multiplexes. The process of developing new technologies is inherently uncertain and subject to certain factors that are outside of the Company’s control, including reliance on third party partners and suppliers, and the Company can provide no assurance its investments will result in commercially viable advancements to the Company’s existing products or in commercially successful new products, or that any such advancements or products will improve upon existing technology or will be developed within the timeframe expected.
26
The introduction of new, competing products and technologies could harm the Company’s business.
The out-of-home entertainment industry is very competitive, and the Company faces a number of competitive challenges. According to the National Association of Theater Owners, as of December 31, 2020, there were approximately 43,800 conventional-sized screens in North American multiplexes. The Company faces competition both in the form of technological advances in in-home entertainment as well as those within the theater-going experience. In recent years, for instance, exhibitors and entertainment technology companies have introduced their own branded, large-screen 3D auditoriums or other proprietary theater systems, and in many cases have marketed those auditoriums or theater systems as having similar quality or attributes as an IMAX Theater System. The Company may continue to face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources to develop and support them. If the Company is unable to continue to deliver a premium movie-going experience, or if other technologies surpass those of the Company, the Company may be unable to continue to produce theater systems which are premium to, or differentiated from, other theater systems.
As noted above, the Company faces in-home competition from a number of alternative motion picture distribution channels such as home video, pay-per-view, streaming services, video-on-demand, Blu-ray Disc, Internet and syndicated and broadcast television. In addition, as a result of the COVID-19 pandemic and related movie theater closures, in 2020, a number films were released directly to streaming services, at the same time as being released in theaters or instead of being released in theaters, and there can be no assurance that this practice will end once movie theaters reopen. Should this practice continue, in-home competition with streaming services will further intensify. The Company further competes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater, social media, and restaurants.
If the Company is unable to continue to produce a differentiated theater experience, consumers may be unwilling to pay the price premiums associated with the cost of IMAX theater tickets and box office performance of IMAX films may decline. Declining box-office performance of IMAX films could materially and adversely harm the Company’s business and prospects.
The Company may not be able to adequately protect its intellectual property, and competitors could misappropriate its technology or brand, which could weaken its competitive position.
The Company depends on its proprietary knowledge regarding IMAX theater systems and digital and film technology. The Company relies principally upon a combination of copyright, trademark, patent and trade secret laws, restrictions on disclosures and contractual provisions to protect its proprietary and intellectual property rights. These laws and procedures may not be adequate to prevent unauthorized parties from attempting to copy or otherwise obtain the Company’s processes and technology or deter others from developing similar processes or technology, which could weaken the Company’s competitive position and require the Company to incur costs to secure enforcement of its intellectual property rights. The protection provided to the Company’s proprietary technology by the laws of foreign jurisdictions may not protect it as fully as the laws of Canada or the United States. The lack of protection afforded to intellectual property rights in certain international jurisdictions may be increasingly problematic given the extent to which future growth of the Company is anticipated to come from foreign jurisdictions. Finally, some of the underlying technologies of the Company’s products and system components are not covered by patents or patent applications.
The Company owns or licenses patents issued and patent applications pending, including those covering its digital projector, digital conversion technology and laser illumination technology. The Company’s patents are filed in the United States, often with corresponding patents or filed applications in other jurisdictions, such as Canada, China, Belgium, Japan, France, Germany, and the United Kingdom. The patent applications pending may not be issued or the patents may not provide the Company with any competitive advantage. The patent applications may also be challenged by third parties. Several of the Company’s issued patents for improvements to IMAX projectors, IMAX 3D Dome and soundprojection system components expire between 2021 and 2034.2038. Any claims or litigation initiated by the Company to protect its proprietary technology could be time consuming, costly and divert the attention of its technical and management resources.
The IMAX brand stands for the highest quality and most immersive motion picture entertainment. Protecting the IMAX brand is a critical element in maintaining the Company’s relationships with studios and its exhibitor clients. Though the Company relies on a combination of trademark and copyright law as well as its contractual provisions to protect the IMAX brand, those protections may not be adequate to prevent erosion of the brand over time, particularly in foreign jurisdictions. Erosion of the brand could threaten the demand for the Company’s products and services and impair its ability to grow future revenue streams.
27
RISKS RELATED TO THE COMPANY’S REVENUES, EARNINGS, AND FINANCIAL POSITION
The Company faces cyber-securityCompany’s operating results and similar risks, whichcash flow can vary substantially from period to period and could resultincrease the volatility of its share price.
The Company’s operating results and cash flow can fluctuate substantially from period to period. In particular, fluctuations in IMAX Theater System installations and GBO performance of IMAX DMR content can materially affect operating results. Factors that have affected the Company’s operating results and cash flow in the disclosure, theft or loss of confidential orpast, and are likely to affect its operating results and cash flow in the future, include, among other proprietary information, including intellectual property; damage to the Company’s brand and reputation; legal exposure and financial losses.things:
• | the timing of signing and installation of new IMAX Theater Systems (particularly for installations in newly-built multiplexes, which can result in delays that are beyond the Company’s control); |
• | the timing and commercial success of films distributed to the Company’s theater network; |
• | the demand for, and acceptance of, its products and services; |
• | the recognition of revenue of sales and sales-type leases; |
• | the classification of leases as sales-type versus operating leases; |
• | the volume of orders received and that can be filled in the quarter; |
• | the level of its sales backlog; |
• | the signing of film distribution agreements; |
• | the financial performance of IMAX theaters operated by the Company’s customers; |
• | financial difficulties faced by customers, particularly customers in the commercial exhibition industry; |
• | the magnitude and timing of spending in relation to the Company’s research and development efforts and related investments as well as new business initiatives; and |
• | the number and timing of joint revenue sharing arrangement installations, related capital expenditures and timing of related cash receipts. |
The natureMost of the Company’s business involves accessoperating expenses are fixed in the short term. The Company may be unable to rapidly adjust its spending to compensate for any unexpected shortfall in sales, joint revenue sharing arrangements revenue or IMAX DMR revenue, which would harm operating results for a particular period, although the results of any particular period are not necessarily indicative of the Company’s results for any other period.
The Company’s theater system revenue can vary significantly from its cash flows under IMAX Theater System sales or lease agreements.
The Company’s theater system revenue can vary significantly from the associated cash flows. The Company often provides financing to customers for IMAX Theater Systems on a long-term basis through long-term sale or lease arrangements. The terms of leases or notes receivable are typically 10 to 12 years. The sale and storagelease-type agreements for IMAX Theater Systems typically provide for three major sources of confidentialcash flow:
• | initial fees, which are paid in installments generally commencing upon the signing of the agreement until installation of the IMAX Theater Systems; |
• | ongoing fees, which are paid monthly after all IMAX Theater Systems have been installed and are generally equal to the greater of a fixed minimum amount per annum and a percentage of box office receipts; and |
• | ongoing annual maintenance and extended warranty fees, which are generally payable commencing in the second year of theater operations. |
28
Initial fees generally make up the vast majority of cash received under IMAX Theater System sales or lease agreements for a theater arrangement.
For sales and proprietary contentsales-type leases, the revenue recorded is generally equal to the sum of initial fees and other information, including intellectual property,the present value of any future initial payments, fixed minimum ongoing payments and sales arrangements also include an estimate of future variable consideration due under the agreement. Cash received from initial fees in advance of meeting the revenue recognition criteria for the IMAX Theater Systems is recorded as welldeferred revenue.
Leases that do not transfer substantially all of the benefits and risks of ownership to the customer are classified as information regardingoperating leases. For these leases, initial fees and fixed minimum ongoing payments are recognized as revenue on a straight-line basis over the lease term. Contingent payments in excess of fixed minimum ongoing payments are recognized as revenue when reported by theater operators, provided collectibility is reasonably assured.
As a result of the above, the revenue set forth in the Company’s Consolidated Financial Statements does not necessarily correlate with the Company’s cash flow or cash position. Revenues include the present value of future contracted cash payments and there is no guarantee that the Company will receive such payments under its lease and sale agreements if its customers default on their payment obligations.
The Company may not convert all of its backlog into revenue and cash flows.
At December 31, 2020, the Company’s backlog included 527 IMAX Theater Systems, consisting of 185 IMAX Theater Systems under sales or lease arrangements and 342 IMAX Theater Systems under joint revenue sharing arrangements. The Company lists signed contracts for IMAX Theater Systems for which revenue has not been recognized as backlog prior to the time of revenue recognition. The total value of the backlog represents all signed IMAX Theater System sale or lease agreements that are expected to be recognized as revenue in the future and includes initial fees along with the estimated present value of contractual ongoing fees due over the term, and a variable consideration estimate for the IMAX Theater Systems under sales arrangements, but it excludes amounts allocated to maintenance and extended warranty revenues. Notwithstanding the legal obligation to do so, some of the Company’s customers employees, licensees and suppliers. Although the Company maintains robust procedures to safeguard such content and information, as well as a cyber-security insurance policy,with which it has signed contracts may not accept delivery of IMAX Theater Systems that are included in the Company’s information technology systems could be penetrated by internal or external parties’ intent on extracting information, corrupting information, stealing intellectual property or trade secrets, or disrupting business processes. Information security risks have increasedbacklog. An economic downturn may exacerbate the risk of customers not accepting delivery of IMAX Theater Systems, especially in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. It is possibleplaces such as Greater China that computer hackers could compromise the Company’s security measures or the security measures of parties with whom the Company does business, and thereby obtain the confidential or proprietary information of the Company or its customers, employees, licensees and suppliers. Any such breach or unauthorized access could result inrepresent a disruptionlarge portion of the Company’s operations,backlog. Any reduction in backlog could adversely affect the theft, unauthorized useCompany’s future revenues and cash flows. In addition, customers with theater system obligations in backlog sometimes request that the Company agree to modify or publicationreduce such obligations, which the Company has agreed to do in the past under certain circumstances. Customer-requested delays in the installation of IMAX Theater Systems in backlog remain a recurring and unpredictable part of the Company’s intellectual property and other proprietary information, a reduction of the revenues the Company is able to generate from its operations, damage to the Company’s brand and reputation, a loss of confidence in the security of the Company’s business and products, and significant legal and financial exposure, each of which could potentially have an adverse effect on the Company’s business.
The Company’s revenues from existing customers are derived in part from financial reporting provided by its customers, which may be inaccurate or incomplete, resulting in lost or delayed revenues.
The Company’s revenue under its joint revenue sharing arrangements, a portion of the Company’s payments under lease or sales arrangements and its film distribution fees are based upon financial reporting provided by its customers. If such reporting is inaccurate, incomplete, or withheld, the Company’s ability to receive the appropriate payments it is owed in a timely fashion that are due to it may be impaired. The Company’s contractual ability to audit IMAX theaters may not rectify payments lost or delayed as a result of customers not fulfilling their contractual obligations with respect to financial reporting.
There is collection risk associated with payments to be received over the terms of the Company’s theater system agreements.
The Company is dependent in part on the viability of its exhibitors for collections under long-term leases, sales financing agreements and joint revenue sharing arrangements. Exhibitors or other operators may experience financial difficulties that could cause them to be unable to fulfill their contractual payment obligations to the Company. As a result, the Company’s future revenues and cash flows could be adversely affected.
The Company may not convert all of its backlog into revenue and cash flows.29
At December 31, 2017, the Company’s sales backlog included 499 theater systems, consisting of 162 systems under sales arrangements and 337 theater systems under joint revenue sharing arrangements. The Company lists signed contracts for theater systems for which revenue has not been recognized as sales backlog prior to the time of revenue recognition. The total value of the sales backlog represents all signed theater system sale or lease agreements that are expected to be recognized as revenue in the future and includes initial fees along with the present value of fixed minimum ongoing fees due over the term, but excludes contingent fees in excess of fixed minimum ongoing fees that might be received in the future and maintenance and extended warranty fees. Notwithstanding the legal obligation to do so, not all of the Company’s customers with which it has signed contracts may accept delivery of theater systems that are included in the Company’s backlog. This could adversely affect the Company’s future revenues and cash flows. In addition, customers with theater system obligations in backlog sometimes request that the Company agree to modify or reduce such obligations, which the Company has agreed to in the past under certain circumstances. Customer requested delays in the installation of theater systems in backlog remain a recurring and unpredictable part of the Company’s business.
The Company’s operating results and cash flow can vary substantially from period to period and could increase the volatility of its share price.
The Company’s operating results and cash flow can fluctuate substantially from period to period. In particular, fluctuations in theater system installations and grossbox-office performance of IMAX DMR content can materially affect operating results. Factors that have affected the Company’s operating results and cash flow in the past, and are likely to affect its operating results and cash flow in the future, include, among other things:
Most of the Company’s operating expenses are fixed in the short term. The Company may be unablesubject to rapidly adjust its spending to compensate for any unexpected shortfall in sales, joint revenue sharing arrangements revenue or IMAX DMR revenue which would harm operating results for a particular period, although the results of any particular period are not necessarily indicative of its results for any period.
The Company’s theater system revenue can vary significantly from its cash flows under theater system sales or lease agreements.
The Company’s theater systems revenue can vary significantly from the associated cash flows. The Company often provides financing to customers for theater systems on a long-term basis through long-term leases or notes receivables. The terms of leases or notes receivable are typically 10 years. The Company’s sale and lease-type agreements typically provide for three major sources of cash flow related to theater systems:
Initial fees generally make up the vast majority of cash received under theater system sales or lease agreements for a theater arrangement.
For sales and sales-type leases, the revenue recorded is generally equal to the sum of initial fees and the present value of minimum ongoing fees due under the agreement. Cash received from initial fees in advance of meeting the revenue recognition criteria for the theater systems is recorded as deferred revenue. Contingent fees are recognized as they are reported by the theaters after annual minimum fixed fees are exceeded.
Leases that do not transfer substantially all of the benefits and risks of ownership to the customer are classified as operating leases. For these leases, initial fees and minimum fixed ongoing fees are recognized as revenue on a straight-line basis over the lease term. Contingent fees are recognized as they are reported by the theaters after annual minimum fixed fees are exceeded.
As a result of the above, the revenue set forth in the Company’s financial statements does not necessarily correlate with the Company’s cash flow or cash position. Revenues include the present value of future contracted cash payments and there is no guarantee that the Company will receive such payments under its lease and sale agreements if its customers default on their payment obligations.
The Company’s stock price has historically been volatile and declines in market price, including as a result a market downturn, may negatively affect its ability to raise capital, issue debt, secure customer business and retain employees.
The Company is listed on the New York Stock Exchange (“NYSE”) and its publicly traded shares have in the past experienced, and may continue to experience, significant price and volume fluctuations. This market volatility could reduce the market price of its common stock, regardless of the Company’s operating performance. A decline in the capital markets generally, or an adjustment in the market price or trading volumes of the Company’s publicly traded securities, may negatively affect its ability to raise capital, issue debt, secure customer business or retain employees. These factors, as well as general economic and geopolitical conditions, may have a material adverse effect on the market price of the Company’s publicly traded securities.
The credit agreement governing the Company’s senior secured credit facility contains significant restrictions that limit its operating and financial flexibility.
The credit agreement governing the Company’s senior secured credit facility contains certain restrictive covenants that, among other things, limit its ability to:
These restrictive covenants impose operating and financial restrictions on the Company that limit the Company’s ability to engage in acts that may be in the Company’s long-term best interests.
The Company is subject tofurther impairment losses on its film assets.assets if such assets do not meet management’s estimates of total revenues.
The Company amortizes its film assets, including IMAX DMR costs capitalized using the individual film forecast method, whereby the costs of film assets are amortized and participation costs are accrued for each film in the ratio of revenues earned in the current period to management’s estimate of total revenues ultimately expected to be received for that title. Management regularly reviews, and revises when necessary, its estimates of ultimate revenues on atitle-by-title basis, which may result in a change in the rate of amortization of the film assets and write-downs or impairments of film assets. Results of operations in future years include the amortization of the Company’s film assets and may be significantly affected by periodic adjustments in amortization rates.
The Company ismay be subject to impairment losses on its inventories.inventories if they become obsolete.
The Company records write-downs for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipated installation dates for the current backlog of theater system contracts, technological developments, signings in negotiation and anticipated market acceptance of the Company’s current and pending theater systems.IMAX Theater Systems.
If the Company’s goodwill or long-lived assets become impaired, the Company may be required to record a significant charge to earnings.
Under United States Generally Accepted Accounting Principles (“U.S. GAAP”), the Company reviews its long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be qualitatively assessed at least annually and when events or changes in circumstances arise or can be quantitatively tested for impairment. Factors that may be considered a change in circumstances include (but are not limited to) a decline in stock price and market capitalization, declines in future cash flows, and slower growth rates in the Company’s industry. The Company may be required to record a significant charge to earnings in its financial statements during the period in which any impairment of its goodwill or long-lived assets is determined.
Changes in accounting and changes in management’s estimates may affect the Company’s reported earnings and operating income.
U.S. GAAP and accompanying accounting pronouncements implementation guidelines and interpretations for many aspects of the Company’s business, such as revenue recognition, film accounting, accounting for pensions and other postretirement benefits, accounting for income taxes, and treatment of goodwill or long-lived assets, are highly complex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in the Company’s products or business could significantly change its reported future earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations. See(See “Critical Accounting Policies”Policies and Estimates” in Item 7.
The Company may not fully realize the projected cost savings and benefits from its restructuring initiative.RISKS RELATED TO THE COMPANY’S COMMON STOCK
The Company recently implemented a cost reduction plan that included staff reductionsCompany’s stock price has historically been volatile and the consolidation of certain leased facilities. As part of its cost reduction plan, the Company eliminated approximately 100 full-time positions,declines in market price, including positions at IMAX China Holding, Inc., equal to roughly 14% of the Company’s full-time global workforce. Although the Company expects the restructuring plan to result in cost savings aimed at increasing profitability, operating leverage and free cash flow, there can be no assurances that these benefits will be realized to the full extent projected. If the Company does not achieve projected savings as a result of these initiatives, or incurs higher than expected or unanticipated costs in implementing these initiatives, its business, financial condition or results of operations could be adversely impacted.
Enactment of the Tax Act could have a negative effect on the Company or its shareholders.
On December 20, 2017, the U.S. Congress passed the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”), and on December 22, 2017, President Trump signed the Tax Act into law. The Tax Act makes significant changes to the U.S. federal income tax rules applicable to both individuals and entities, including corporations. This tax legislation reduced the U.S. statutory corporate tax rate and made other changes that could have an impact on our overall U.S. federal tax liability in a given period. The tax legislation also included a number of provisions that limit or eliminate various deductions, including interest expense, performance-based compensation for certain executives and the domestic production activities deduction, among others, that could affect the Company’s U.S. federal income tax position. The Company is continuing to evaluate the overall impact of this tax legislation on its operations and U.S. federal income tax position. See Note 9 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion of the Tax Act. There can be no assurance that changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which the Company operates, will not materially and adversely affect the effective tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact the Company’s customers and counterparties or the economy generallymarket downturn, may also impact its financial condition and results of operations. There is some uncertainty as to the impact of the Tax Act on the Company or an investment in the Company’s shares. Investors should consult with their tax advisors with respect to the status of U.S. tax reform and its potential effect on an investment in the Company’s securities.
The Company relies on its key personnel, and the loss of one or more of those personnel could harm its ability to carry out its business strategy.
The Company’s operations and prospects depend in large part on the performance and continued service of its senior management team. The Company may not find qualified replacements for any of these individuals if their services are no longer available. The loss of the services of one or more members of the Company’s senior management team could adverselynegatively affect its ability to effectively pursueraise capital, issue debt, secure customer business and retain employees.
The Company is listed on the New York Stock Exchange (“NYSE”) and its publicly traded shares have in the past experienced, and may continue to experience, significant price and volume fluctuations. This market volatility could reduce the market price of its common stock, regardless of the Company’s operating performance. A decline in the capital markets generally, or an adjustment in the market price or trading volumes of the Company’s publicly traded securities, may negatively affect its ability to raise capital, issue debt, secure customer business strategy.or retain employees. These factors, as well as general economic and geopolitical conditions, may have a material adverse effect on the market price of the Company’s publicly traded securities.
Because the Company is incorporated in Canada, it may be difficult for plaintiffs to enforce against the Company liabilities based solely upon U.S. federal securities laws.
The Company is incorporated under the federal laws of Canada, some of its directors and officers are residents of Canada and a substantial portion of its assets and the assets of such directors and officers are located outside the United States. As a result, it may be difficult for U.S. plaintiffs to effect service within the United States upon those directors or officers who are not residents of the United States, or to realizeobtain or enforce against them or the Company in thejudgments of United States upon judgments of courts of the United States predicated solely upon the civil liability under the U.S. federal securities laws. In addition, it may be difficult for plaintiffs to bring an original action outside of the United States against the Company to enforce liabilities based solely on U.S. federal securities laws.
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Item 1B. Unresolved Staff Comments
None.
Item 2.Properties
The Company’s principal executive offices are located in Mississauga, Ontario, Canada, New York, New York, and Playa Vista, California. The Company’s principal facilities are as follows:
Operation | Own/Lease | Expiration | ||||
Mississauga, Ontario(1) | Headquarters, Administrative, Assembly and Research and | |||||
Development | Own | N/A | ||||
Playa Vista, California | Sales, Marketing, Film Production and Post-Production | Own | N/A | |||
New York, New York | Executive | Lease | 2029 | |||
Tokyo, Japan | Sales, Marketing and Maintenance | Lease | 2021 | |||
Shanghai, China | Sales, Marketing, Maintenance and Administrative | Lease | 2022 | |||
Dublin, Ireland | Sales, Marketing, Administrative and Research and | |||||
Development | Lease | 2026 | ||||
Moscow, Russia | Sales | Lease | 2021 | |||
London, United Kingdom | Sales | Lease | 2021 |
(1) | This facility is subject to a charge in favor of Wells Fargo Bank in connection with a secured term and revolving credit facility (see |
The Company believes that its existing facilities and equipment are in good operating condition and are suitable for the conduct of its business.
Item 3.Legal Proceedings
See note 13Note 16 of Notes to the accompanying audited consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this 2017 Form10-K.8.
Item 4.Mine Safety Disclosures
Not applicable.
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Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s common shares are listed for tradingtraded on the NYSE under the trading symbol “IMAX” on the NYSE. The following table sets forth the range of high and low sales prices per share for the common shares on the NYSE..
U.S. Dollars | ||||||||
High | Low | |||||||
NYSE | ||||||||
Year ended December 31, 2017 | ||||||||
Fourth quarter | $ | 26.40 | $ | 20.50 | ||||
Third quarter | $ | 23.20 | $ | 17.70 | ||||
Second quarter | $ | 33.60 | $ | 22.00 | ||||
First quarter | $ | 34.25 | $ | 30.75 | ||||
Year ended December 31, 2016 | ||||||||
Fourth quarter | $ | 34.80 | $ | 27.95 | ||||
Third quarter | $ | 34.47 | $ | 28.55 | ||||
Second quarter | $ | 33.50 | $ | 27.63 | ||||
First quarter | $ | 33.92 | $ | 25.99 |
As atof January 31, 2018,2021, the Company had approximately 239223 registered holders of record of the Company’sits common shares.
Over the last two years, the Company has not paid, nor does the Company have any current plans to pay, cash dividends on its common shares. The payment of dividends by the Company is subject to certain restrictions under the terms of the Company’s indebtedness (see note 11Note 14 of Notes to the accompanying audited consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 and “Liquidity and Capital Resources” in Part II, Item 7 of this 2017 Form10-K)7). The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.
In 2020, the Company expanded its share-based compensation program to include the issuance of performance share units (“PSUs”). Performance share units vest only if certain profitability and market targets are achieved at the end of a three-year performance period. The amount of compensation expense recognized for such performance-based share awards is dependent upon an assessment of the likelihood of achieving these defined future profitability or market targets at the end of the performance period. These assessments could result in a change to the number of PSUs that will ultimately vest as compared to the units granted.
Equity Compensation Plans
The following table sets forth information regarding the Company’s Equity Compensation Plan as atof December 31, 2017:2020:
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
| Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
|
| Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
|
| Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
| ||||||||||||||
Plan Category | (a) | (b) | (c) |
| (a) |
|
| (b) |
|
| (c) |
| |||||||||||||
Equity compensation plans approved by security holders | 6,077,429 | $ | 29.86 | 4,704,507 |
|
| 6,819,644 |
|
| $ |
| 19.23 |
|
|
| 7,436,333 |
| ||||||||
Equity compensation plans not approved by security holders | nil | nil | nil |
| nil |
|
|
| nil |
|
| nil |
| ||||||||||||
|
|
| |||||||||||||||||||||||
Total | 6,077,429 | $ | 29.86 | 4,704,507 |
|
| 6,819,644 |
|
| $ |
| 19.23 |
|
|
| 7,436,333 |
| ||||||||
|
|
|
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Performance Graph
The following graph compares the total cumulative shareholder return for $100 invested on December 31, 20112013 (assuming that all dividends were reinvested) in common shares of the Company against the cumulative total return of the NYSE Composite Index, the S&P/TSX Composite Index and the IMAX Peer Group to the end of the most recently completed fiscal year. The IMAX Peer Group consists of Ambarella, Inc., Avid Technologies, Inc., Cinemark Holdings, Inc., Cineplex Inc., Dolby Laboratories, Inc., Glu Mobile Inc., Harmonic Inc., Lions Gate Entertainment Corp., The Marcus Corporation, TiVo Corporation, World Wrestling Entertainment, Inc., Corus Entertainmentand Zynga Inc.,Take-Two Interactive Software, Inc., Dolby Laboratories, Inc., Six Flags Entertainment Corporation, Lions Gate Entertainment Corp. and Cinemark Holdings, Inc.
Issuer Purchases of Equity Securities
In 2017, the Company repurchased 1,736,150 common shares at an average price of $26.57 per share. The repurchases in 2017 exhausted the remaining allowance of $46.1 million under the previously announced $200.0 million share repurchase program, which expired in June 2017. The average carrying value of the stock retired was deducted from common stock and the remaining excess over the average carrying value of stock was charged to accumulated deficit. Since the inception of the prior buyback program, the Company has repurchased 6,697,406 common shares at an average price of $29.86 per share.
On June 12, 2017, the Company announced that itsCompany’s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common stock. The share purchase program expiresstock that would have expired on June 30, 2020. In June 2020, the Board of Directors approved a 12-month extension of this program which will now expire on June 30, 2021. 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. There wereDuring the three months ended December 31, 2020, the Company did not repurchase any shares under this program. In 2020, the Company repurchased 2,484,123 (2019 ― 134,384) common shares at an average price of $14.72 per share (2019 ― $19.76 per share), excluding commissions. As of December 31, 2020, the Company has $89.4 million available under its approved repurchase program.
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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 of June 6, 2019 (35,605,560 shares). This program expired on the date of the 2020 Annual General Meeting of IMAX China on June 11, 2020. During the 2020 Annual General Meeting, shareholders approved the repurchase of shares of IMAX China not to exceed 10% of the total number of issued shares as of June 11, 2020 (34,848,398 shares). This program will be valid until the 2021 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 repurchasesrepurchase program may be suspended or discontinued by IMAX China at any time. During the three months ended December 31, 2020, IMAX China did not repurchase any shares under the new program in 2017.this program. In 2020, IMAX China repurchased 906,400 (2019 ― 8,051,500) common shares at an average price of HKD $13.13 per share (U.S. $1.69 per share) (2019 ― HKD $18.63 per share; U.S. $2.38 per share).
The total number of shares repurchasedpurchased during the year ended December 31, 2020, under both the Company and IMAX China’s repurchase plans, does not include any shares receivedpurchased in the administration of employee share-based compensation plans.
CERTAIN INCOME TAX CONSIDERATIONS
United States Federal Income Tax Considerations
The following discussion is a general summary of the material U.S. federal income tax consequences of the ownership and disposition of the common shares by a holder of common shares that is an individual resident of the United States, or a United States corporation, or an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source (a “U.S. Holder”). This discussion does not discussaddress all aspects of U.S. federal income taxation that may be relevant to investors subject to special treatment under U.S. federal income tax law (including, for example, owners of 10.0% or more of the voting shares or value of the Company).
Distributions on Common Shares
In general, distributions (without reduction for Canadian withholding taxes) paid by the Company with respect to the common shares will be taxed to a U.S. Holder as foreign-source dividend income to the extent that such distributions do not exceed the current and accumulated earnings and profits of the Company (as determined for U.S. federal income tax purposes). Subject to certain limitations, under current law dividends paid tonon-corporate U.S. Holders may be eligible for a reduced rate of taxation as long as the Company is considered to be a “qualified foreign corporation”. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of an income tax treaty with the United States or a foreign corporation, the stock of which is regularly tradable on an established securities market in the United States. The amount of a distribution that exceeds the current and accumulated earnings and profits of the Company will be treated first as anon-taxable return of capital to the extent of the U.S. Holder’s tax basis in the common shares and thereafter as taxable capital gain. Corporate holders generally will not be allowed a deduction for dividends received in respect of distributions on common shares. Subject to the limitations set forth in the U.S. Internal Revenue Code of 1986, as amended, as modified by the U.S.-Canada Income Tax Treaty, U.S. Holders may elect to claim a foreign tax credit against their U.S. federal income tax liability for Canadian income tax withheld from dividends. Alternatively, U.S. Holders may claim a deduction for such amounts of Canadian tax withheld.
Disposition of Common Shares
Upon the sale or other disposition of common shares, a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale or other disposition and such holder’s tax basis in the common shares. Gain or loss upon the sale or other disposition of the common shares will be long-term if, at the time of the sale or other disposition, the common shares have been held for more than one year. Long-term capital gains ofnon-corporate U.S. Holders may be eligible for a reduced rate of taxation. The deduction of capital losses is subject to limitations for U.S. federal income tax purposes. A U.S. Holder’s gain or loss will generally be treated as U.S.-source income or loss for foreign tax credit purposes.
Canadian Federal Income Tax Considerations
This summary is applicable to a holder or prospective purchaser of common shares who, for the purposes of theIncome Tax Act (Canada) and any applicable treaty and at all relevant times, is not (and is not deemed to be) resident in Canada, does not (and is not deemed to) use or hold the common shares in, or in the course of, carrying on a business in Canada, and is not an insurer that carries on an insurance business in Canada and elsewhere.
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This summary is based on the current provisions of theIncome Tax Act (Canada), the regulations thereunder, all specific proposals to amend such Act and regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and the Company’s understanding of the administrative policies and assessing practices published in writing by the Canada Revenue Agency prior to the date hereof. This summary does not otherwise take into account any change in law or administrative policy or assessing practice, whether by judicial, governmental, legislative or administrative decision or action, nor does it take into account other federal or provincial, territorial or foreign tax consequences, which may vary from the Canadian federal income tax considerations described herein.
This summary is of a general nature only and it is not intended to be, nor should it be construed to be, legal or tax advice to any holder of the common shares and no representation with respect to Canadian federal income tax consequences to any holder of common shares is made herein. Accordingly, prospective purchasers and holders of the common shares should consult their own tax advisers with respect to their individual circumstances.
Dividends on Common Shares
Canadian withholding tax at a rate of 25.0% (subject to reduction under the provisions of any applicable tax treaty) will be payable on dividends (or amounts paid or credited on account or in lieu of payment of, or in satisfaction of, dividends) paid or credited to a holder of common shares. Under theCanada-U.S. Canada - U.S. Income Tax Convention (1980), as amended (the “Canada - U.S. Income Tax Treaty”), the withholding tax rate is generally reduced to 15.0% for a holder who is entitled to the benefits of the Canada - U.S. Income Tax Treaty and who is the beneficial owner of the dividends (or to 5.0% if the holder is a company that owns at least 10.0% of the common shares).
Capital Gains and Losses
Subject to the provisions of any relevant tax treaty, capital gains realized by a holder on the disposition or deemed disposition of common shares held as capital property will not be subject to Canadian tax unless the common shares are taxable Canadian property (as defined in theIncome Tax Act (Canada)), in which case the capital gains will be subject to Canadian tax at rates which will approximate
those payable by a Canadian resident. Common shares generally will not be taxable Canadian property to a holder provided that, at the time of the disposition or deemed disposition, the common shares are listed on a designated stock exchange (which currently includes the NYSE) unless at any time within the 60 month period immediately preceding such time (a) any combination of (i) such holder, (ii) persons with whom such holder did not deal at arm’s length or (iii) a partnership in which such holder or any such persons holds a membership interest either directly or indirectly through one or more partnerships, owned 25.0% or more of the issued shares of any class or series of shares of the Company and (b) more than 50% of the fair market value of the common shares was derived directly or indirectly from one or any combination of (i) real or immovable property situated in Canada, (ii) Canadian resource properties, (iii) timber resource properties, and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of paragraphs (i) to (iii), whether or not the property exists. In certain circumstances set out in theIncome TaxAct (Canada), the common shares may be deemed to be taxable Canadian property. Under theCanada-U.S. Canada - U.S. Income Tax Treaty, a holder who is entitled to the benefits of the Canada - U.S. Income Tax Treaty and to whom the common shares are taxable, Canadian property will not be subject to Canadian tax on the disposition or deemed disposition of the common shares unless at the time of disposition or deemed disposition, the value of the common shares is derived principally from real property situated in Canada.
Item 6.Selected Financial Data
The selected financial data set forth below is derived from the consolidated financial information35
Item 7.Management’s Discussion and Analysis of the Company. The financial information has been prepared in accordance with U.S. GAAP. All financial information referred to herein is expressed in U.S. dollars unless otherwise noted.Financial Condition and Results of Operations
Years Ended December 31, | ||||||||||||||||||||
(In thousands of U.S. dollars, except per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||
Revenues | $ | 380,767 | $ | 377,334 | $ | 373,805 | $ | 290,541 | $ | 287,937 | ||||||||||
Costs and expenses applicable to revenues | 195,521 | 174,656 | 154,517 | 117,153 | 123,334 | |||||||||||||||
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Gross margin | $ | 185,246 | $ | 202,678 | $ | 219,288 | $ | 173,388 | $ | 164,603 | ||||||||||
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Net income | $ | 12,518 | $ | 39,320 | $ | 64,624 | $ | 42,169 | $ | 44,115 | ||||||||||
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Net income attributable to common shareholders | $ | 2,344 | $ | 28,788 | $ | 55,844 | $ | 39,736 | $ | 44,115 | ||||||||||
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Net income per share attributable to common shareholders |
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Net income per share – basic | ||||||||||||||||||||
Net income per share from continuing operations | $ | 0.04 | $ | 0.43 | $ | 0.79 | $ | 0.57 | $ | 0.66 | ||||||||||
Net income per share from discontinued operations | — | — | — | 0.01 | — | |||||||||||||||
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$ | 0.04 | $ | 0.43 | $ | 0.79 | $ | 0.58 | $ | 0.66 | |||||||||||
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Net income per share – diluted | ||||||||||||||||||||
Net income per share from continuing operations | $ | 0.04 | $ | 0.42 | $ | 0.78 | $ | 0.56 | $ | 0.64 | ||||||||||
Net income per share from discontinued operations | — | — | — | — | — | |||||||||||||||
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$ | 0.04 | $ | 0.42 | $ | 0.78 | $ | 0.56 | $ | 0.64 | |||||||||||
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BALANCE SHEET DATA
(in thousands of U.S. dollars) | As at December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Cash and cash equivalents | $ | 158,725 | $ | 204,759 | $ | 317,449 | $ | 106,503 | $ | 29,546 | ||||||||||
Total assets | $ | 866,612 | $ | 857,334 | $ | 930,629 | $ | 621,106 | $ | 481,145 | ||||||||||
Total bank indebtedness | $ | 25,357 | $ | 27,316 | $ | 29,276 | $ | 4,283 | $ | — | ||||||||||
Total shareholders’ equity | $ | 602,257 | $ | 621,574 | $ | 673,850 | $ | 382,775 | $ | 319,585 |
In October 2016, the FASB issued ASUNo. 2016-16, “Income Taxes (Topic 740)”. The purpose of ASU2016-16 is to eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments require the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company elected to early adopt ASU2016-16 during the first quarter of 2017. The impact from the adoption was reflected in the Company’s consolidated financial statements on a modified retrospective basis resulting in an increase to Accumulated deficit of $8.3 million, a decrease to Other assets of $14.8 million, an increase to Deferred taxes of $7.9 million and an increase to Accrued and other liabilities of $1.4 million.
OVERVIEW
IMAX Corporation, together with its consolidated subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies, specializing in motion picture technologiestechnological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and presentations. The Company refers to all theaters using the IMAX theater system as “IMAX theaters”.specialized equipment, IMAX offers a uniqueend-to-end cinematic solution combining proprietary software, theater architecture and equipment to create the highest-quality,highest quality, most immersive motion picture experienceand other entertainment event experiences for which the IMAX® brand has become known globally. Top filmmakers and movie studios utilize the cutting-edge visual and sound technology of 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 event films and other events around the world. There were 1,370 IMAX theater systems (1,272 commercial multiplexes, 12 commercial destinations, 86 institutional) operating in 75 countries as of December 31, 2017. This compares to 1,215 theater systems (1,107 commercial multiplexes, 16 commercial destinations, 92 institutional) operating in 75 countries as of December 31, 2016.
The Company’sCompany leverages its innovative technology and engineering in all aspects of its core business, which principally consists of:
IMAX theater systemsTheater Systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s50-year history and combine:
As of December 31, 2020, there were 1,650 IMAX Theater Systems operating in 84 countries and territories, including 1,562 commercial multiplexes, 12 commercial destinations, and 76 institutional locations. This compares to 1,624 IMAX Theater Systems operating in 81 countries and territories as of December 31, 2019 including 1,529 commercial multiplexes, 14 commercial destinations, and 81 institutional locations. (See the globally recognizedtable below under “IMAX Network and Backlog” for additional information on the composition of the IMAX brand.network.)
The IMAX Theater System provides the Company’s exhibitor customers with a combination of the following benefits:
• | the ability to exhibit content that has undergone the IMAX DMR® conversion process, 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; |
• | advanced 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, certain movies shown in IMAX theaters are filmed using proprietary IMAX film and IMAX certified digital cameras, which offer filmmakers customized guidance and a workflow process to 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 theon-screen action, creating a more intense, immersive and exciting experience than in a traditional theater.
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As a result of the immersivenessengineering and superior image and sound qualityscientific achievements that are a hallmark ofThe IMAXExperience®, 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.
As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology. In 2018, the Company introduced IMAX with Laser, a laser projection system designed for IMAX theaters in commercial multiplexes, which represents a further evolution of IMAX’s proprietary technology. The Company released 60 films in 2017, up from 51 films in 2016.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 expectsfurther believes that IMAX with Laser is helping facilitate the next major lease renewal and upgrade cycle for the global IMAX network.
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.
IMPACT OF COVID-19 PANDEMIC
In late January 2020, in response to the public health risks associated with COVID-19, the Chinese government directed exhibitors in China to temporarily close more than 70,000 movie theaters, including all of the approximately 700 IMAX theaters in mainland China. On March 11, 2020, due to the worsening public health crisis associated with the novel coronavirus, COVID-19 was characterized as a pandemic by the World Health Organization, and in the following weeks, local, state and national governments instituted stay-at-home orders and restrictions on large public gatherings which caused movie theaters in countries around the world to temporarily close, including substantially all of the IMAX theaters in those countries. As a result of the theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms. More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures. As of December 31, 2020, 71% of the theaters in the IMAX commercial multiplex network were open, spanning 41 countries. This included 44% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 53% of the theaters in Rest of World markets. In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance levels despite the continued delay of Hollywood theatrical releases, which typically account for 70% of box office ticket sales in those regions. Management believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and moviegoers feel safe. However, ticket sales have been significantly lower than normal levels in theaters outside of Asia as Hollywood movie studios have further delayed the theatrical release dates for a similar number of films. As a result, certain theater chains have remained closed or have reduced their operating hours. In addition, theaters in major markets remain temporarily closed.
The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the Company’s revenues, earnings and operating cash flows in 2020 as gross box office (“GBO”) results from the Company’s theater customers declined significantly, the installation of certain theater systems was delayed, and maintenance services were generally suspended for theaters that were closed. While there continues to be a lack of new films released by movie studios and a significant number of theaters in the IMAX DMR filmsnetwork are closed, the Company is experiencing a significant decline in 2018earnings and operating cash flows as comparedit is generating significantly lower than normal levels of GBO-based revenue from its joint revenue sharing arrangements and digital remastering services, it is unable to 2017.provide normal maintenance services to any of the theaters that remain closed, and while some installation activity is continuing, certain theater system installations have, and may continue to be delayed. In addition, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor customers who are facing financial difficulties as a result of the theater closures. In response, the Company has provided temporary relief to exhibitor customers by waiving or reducing maintenance fees during periods when theaters are closed or operating with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement. In 2020, the Company increased its provision for current expected credit losses by $18.6 million, in part reflecting a reduction in the credit quality of its theater related accounts receivable, financing receivables and variable consideration receivables, which management believes is primarily related to the COVID-19 pandemic and adequately addresses the risk of not collecting these receivables in full.
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Management is encouraged by recent box office results in markets like China, Japan and South Korea where the virus is under control and audiences have demonstrated a willingness to return to cinema. However, the Company may continue to be significantly impacted by the COVID-19 global pandemic even after a significant portion or all theaters are reopened. The global economic impact of COVID-19 has led to record levels of unemployment in certain countries, which has led to, and may continue to result in lower consumer spending. The timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s ability to generate significant GBO-based revenue until consumer behavior normalizes and consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough, reducing the working hours of other employees and reducing all non-essential capital expenditures to minimum levels.
The Company has also implemented an active cash management process, which, among other things, requires senior management approval of all outgoing payments. In addition, in the first quarter of 2020, the Company drew down $280.0 million in remaining available borrowing capacity under the Credit Facility provided by its Credit Agreement with Wells Fargo Bank, National Association (both as defined in “Liquidity and Capital Resources”), which was then amended in June 2020 to, among other things,suspend the Senior Secured Net Leverage Ratio financial covenant in the Credit Agreement through the first quarter of 2021 and substitute quarterly EBITDA from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020 to meet the original Senior Secured Net Leverage Ratio financial covenant.
As of December 31, 2020, the Company was in compliance with all of its requirements under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
The Company has applied for and received wage subsidies, tax credits and other financial support under COVID-19 relief legislation that has been enacted in the countries in which it operates. During 2020, the Company recognized $6.4 million in benefits from the Canada Emergency Wage Subsidy (“CEWS”) program and $0.7 million in benefits from the U.S. CARES Act, as reductions to Selling, General and Administrative Expenses ($6.0 million), Costs and Expenses Applicable to Revenues ($1.0 million) and Research and Development ($0.1 million) in the Consolidated Statements of Operations. The CEWS program has been extended to June 2021. The Company will continue to review and apply for additional subsidies and credits for the remaining terms of these programs, where applicable.
In the fourth quarter of 2020, the Company performed its annual goodwill impairment test considering the latest available information and determined that its goodwill was not impaired. As of December 31, 2020, the Company’s total Goodwill was $39.0 million, of which $19.1 million relates to the IMAX Systems reporting unit, $13.5 million relates to the Joint Revenue Sharing Arrangement reporting unit, and $6.4 million relates to the IMAX Maintenance reporting unit. The impairment test was performed on a reporting unit level by comparing each unit’s carrying value, including goodwill, to its fair value. The carrying value of each reporting unit is based on a systematic and rational allocation of certain assets and liabilities. The fair value of each reporting unit is assessed using a discounted cash flow model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses are performed. The discount rates used in the cash flow model are derived based on the Company’s estimated weighted average cost of capital. These estimates and the likelihood of future changes in these estimates depend on a number of underlying variables and a range of possible outcomes. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic.
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In the fourth quarter of 2020, the Company also updated its recoverability tests of the carrying values of the theater system equipment supporting its joint revenue sharing arrangements, which are recorded within Property, Plant and Equipment. In performing its reviews of recoverability, the Company estimated the undiscounted future cash flows expected to result from the use of the assets. The cash flow estimates used in these tests are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 global pandemic; therefore, management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. For the year ended December 31, 2020, the Company recorded impairment losses of $0.3 million related to the theater system equipment supporting its joint revenue sharing arrangements. (See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8.)
In the third quarter of 2020, the Company assessed the recoverability of its deferred tax assets and recorded a $23.7 million valuation allowance to reduce the value of deferred tax assets. The valuation allowance was recorded in the jurisdictions where management could not reliably forecast that future tax liabilities would arise within the next five years, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic. In the fourth quarter of 2020, the Company increased the valuation allowance against its deferred tax assets by $4.9 million due to additional losses recorded in the period. The valuation allowance is expected to reverse when the Company determines it is more likely than not that the deferred tax assets in these jurisdictions will be realized. Despite this valuation allowance, the Company remains entitled to benefit from the tax attributes which currently have a valuation allowance applied to them.
If business conditions deteriorate further, or should they remain depressed for a more prolonged period of time, management’s estimates of operating results and future cash flows for the IMAX Systems and Joint Revenue Sharing Arrangements reporting units may be insufficient to support the goodwill assigned to them, thus requiring impairment charges. The Company will continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate there may be a potential impairment. In addition, estimates related to future expected credit losses and the recoverability of deferred tax assets, as well as the recoverability of joint revenue sharing equipment assets and the realization of variable consideration assets, could also be further impacted by changes in management’s estimates. (see Notes 3, 5 and 12 of Notes to Consolidated Financial Statements in Part II, Item 8).
(See “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” and Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8.)
SOURCES OF REVENUE
The primary revenue sources forFor the purposes of MD&A the Company can be categorizedhas organized its reportable segments into the following four main groups: network business, theater business, new businesscategories: (i) IMAX Technology Network; (ii) IMAX Technology Sales and other.Maintenance; (iii) New Business Initiatives; and (iv) Film Distribution and Post-Production. Within these four categories are the Company’s following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements; (iii) IMAX Systems; (iv) IMAX Maintenance; (v) Other Theater Business; (vi) New Business Initiatives; (vii) Film Distribution; and (viii) Film Post-Production. In the first quarter of 2020, the Company updated certain financial statement line descriptions (with no change to the classification of amounts) within Revenues and Costs and Expenses Applicable to Revenues in its Consolidated Statements of Operations to better describe the nature of its revenue-generating activities and related costs.
IMAX Technology Network
The network business includes variable revenues that are primarily derived from film studios and exhibitors. Under the Company’s DMR arrangements, the Company provides DMR services to studios in exchange for a percentage ofIMAX Technology Network category earns revenue based on contingent box office receipts. Under joint revenue sharing arrangements,receipts and includes the Company provides IMAX theater systems to exhibitorsDMR segment and also receives a percentage of contingent box office receipts. In addition, certain of the Company’s sales and sales-type leases require customers to make contingent rent payments that are tied to box office performance, and this contingent rent is included in the network business.
The theater business includes fixed revenues that are primarily derived from theater exhibitors through either a sale or sales-type lease arrangement for IMAX theater systems. Sales and sales-type lease arrangements typically require fixed upfront and annual minimum payments. The Company’s theater business also includes fixed revenues that are required under its hybrid theater systems from the joint revenue sharing arrangements segment. In addition, theater exhibitors also pay for associated maintenance, extended warranty services and the provision of aftermarket parts of its system components, and these revenues are included in the theater business.
New business includes revenues from content licensing and distribution fees associated with the Company’s original content investments, virtual reality initiatives, IMAX Home Entertainment, and other new business initiatives that are in the development and/orstart-up phase).
The Company also derives a small portion of other revenues from the film studios for provision of film production services, operation of its owned and operated theaters and camera rentals.
The Company believes that separating the fixed price revenues from the variable sources of revenue, as well as isolating itsnon-core new business initiatives, provides greater transparency into the Company’s performance.
Network Business: DigitalRe-Mastering (IMAX DMR) and Joint Revenue Sharing ArrangementsArrangement (“JRSA”) segment, as described in more detail below.
DigitalRe-Mastering (IMAX DMR)IMAX DMR
The Company has developed IMAX DMR, a proprietary technology known as IMAX DMR, tothat digitallyre-master remasters Hollywood films into IMAX digital cinema packageformats. In a typical IMAX DMR film arrangement, the Company receives a percentage of the box office receipts from a movie studio in exchange for converting a commercial film into IMAX DMR format or15/70-format film for exhibitionand distributing it through the IMAX network. In recent years, the percentage of gross box office receipts earned in IMAX theaters atDMR arrangements has averaged approximately 12.5%, except for within Greater China, where the Company receives a cost that is incurred by the Company. lower percentage of net box office receipts for certain Hollywood films.
39
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 whichTheIMAXExperience is known. In addition, the original soundtrack of a typicalfilm to be exhibited in IMAX DMR film arrangement, the Company receives a percentage, whichtheaters is remastered for IMAX digital sound systems 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 toconnection with the IMAX DMR formatrelease of the film. Unlike the soundtracks played in conventional theaters, IMAX remastered soundtracks are uncompressed and distributing them through thefull fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater network. Within Greater China, the Company receives a lower percentage of box office receipts for certain Hollywood films.seat is in an optimal listening position.
IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release of the film. Collectively, the Company refers to these enhancements as “IMAX DNA”. Filmmakers and filmmakers andmovie studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting select scenesfilms 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.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. In 2020, Universal Pictures’ 1917 was released with select scenes specifically formatted for IMAX screens, Warner Bros. Pictures’ Tenet was filmed with IMAX cameras, and Warner Bros. Pictures’ Wonder Woman 1984, released globally in December 2020, was partially shot with IMAX cameras. In addition, the upcoming filmsMarvel’s Avengers: Infinity Warand the Untitled Avengers Sequel are expectedBona Film’s The Rescue, which was released in China in December 2020, has an expanded aspect ratio that is exclusive to be shot in their entireties using IMAX cameras.
The original soundtrack of a film to be released to the IMAX theater network isre-mastered for the IMAX digital sound systems in connection with the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAXre-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.
The Company believes that the growth in international box office remains an important driver of future growth for the Company. During the year ended December 31, 2017, 63.4% of the Company’s gross box office from IMAX DMR films was generated in international markets, as compared to 61.8% in the year ended December 31, 2016. 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.markets, particularly in China. During the year ended December 31, 2017, 222019, 18 local language IMAX DMR films were released to the IMAX network, including 1514 in China and one in each of Japan, South Korea, India and Russia. 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. During 2020, 17 local language IMAX DMR films were released into the IMAX network, including ten in China, three in Russia, three in Japan, and one in India were released to the IMAX theater network.South Korea. The Company expects to announce additional local language IMAX DMR films to be released to the IMAX theater network in the remainder of 2018 and beyond.
In addition, in conjunction with Marvel and Disney|ABC Television Group, the Companyco-produced and exclusively premiered theatrically the television series “Marvel’s Inhumans” in IMAX theaters.
To date, the Company has announced the following 31 DMR titles to be released in 2018 to the IMAX theater network:
In addition, the Company in conjunction with Panda Productions will be releasing an IMAX original production,Pandas, in April 2018.2021.
The Company remains in active negotiations with all of the major Hollywood studios for additional films to fill out its short and long-term film slate.slate for the IMAX network. However, as a result of the theater closures associated with the COVID-19 global pandemic, Hollywood movie studios have postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many scheduled to be shown in IMAX theaters, while several other films have been released directly or concurrently to streaming platforms. Accordingly, as of the filing of this report, there remains uncertainty around the release dates of certain major films.
Joint Revenue Sharing Arrangements – Contingent Rent
The CompanyJRSA segment provides IMAX theater systemsTheater Systems to certain of its exhibitor customers underexhibitors through joint revenue sharing arrangements. Under the traditional form of these arrangements, (“JRSA”). The Company has two basic types of joint revenue sharing arrangements: traditionalIMAX provides the IMAX projection and hybrid.
Undersound system under a traditional joint revenue sharing arrangement,long-term lease in which the Company provides an IMAX theater system to a customer in return for a portionassumes the majority of the customer’s IMAXequipment and installation costs. In exchange for its upfront investment, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront paymentfee or annual minimum payments. Rental payments as would be required under a sales or sales-type lease arrangement (which is discussed below under “Theater Business”). Payments, which are based on box office receipts,from the customer are required throughout the term of the arrangement and are due either monthly or quarterly. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee. The Company retains title to the theater systemIMAX Theater System equipment components throughout the lease term, and the equipment is returned to the Company at the conclusion of the arrangement.
Under a hybridcertain other joint revenue sharing arrangement, by contrast,arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX theater systemTheater System in an amount that is typically half of what the Company would receive from a straighttypical sale transaction. As with a traditional joint revenue sharing arrangement, the customer also pays the Company a portionpercentage of the customer’s IMAXcontingent box office receipts over the term of the arrangement, although thethis percentage of box office receipts owing to the Company is typically half that of a traditional joint revenue sharing arrangement. The fixed revenues under aFor hybrid joint revenue
sharing arrangement arearrangements that take the form of a lease, the contingent rent is reported inwithin the Company’s theater business operations,IMAX Technology Network, while the contingent box office receipts are included infixed upfront payment is recorded as revenue within IMAX Technology Sales and Maintenance, as discussed below. For hybrid joint revenue sharing arrangements that take the Company’s network business operations.form of a sale, see the discussion below under IMAX Technology Sales and Maintenance.
Under the majority ofmost joint revenue sharing arrangements (both traditional and hybrid), the initialnon-cancellable term of IMAX theater systems is 10 years or longer and is renewable by the customer for one to two additional terms of between three to five years. The Company has the right to remove the equipment fornon-payment or other defaults by the customer. The contracts arenon-cancellable by the customer unless the Company fails to perform its obligations.
40
The revenue earned from customers under the Company’s joint revenue sharing arrangements can vary from quarter-to-quarter and year-to-year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of these IMAX Theater Systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.
Joint revenue sharing arrangements also require IMAX to provide maintenance and extended warranty services to the customer over the term of the lease in exchange for a separate fixed annual fee. These fees are reported within IMAX Technology Sales and Maintenance, as discussed below.
The introduction of joint revenue sharing arrangements has been an important factor in the expansion of the Company’s commercial theater network. Joint revenue sharing arrangements allow commercial theater exhibitors to install IMAX theater systemsTheater Systems without the significant initial capital investment required in a sale or sales-type lease arrangement. Joint revenue sharing arrangements drive recurring cash flows and earnings for the Company, as customers under joint revenue sharing arrangements pay the Company a portion of their ongoing box office. The Company funds its joint revenue sharing arrangements through cash flows from operations. As atof December 31, 2017,2020, the Company had 747890 theaters in operation under joint revenue sharing arrangements, a 16.7%2.3% increase as compared to the 640870 theaters in operation under joint revenue sharing arrangements open as atof December 31, 2016.2019. The Company also had contracts in backlog for an additional 337342 theaters under joint revenue sharing arrangements as atof December 31, 2017.2020, including 87 upgrades to existing theater locations and 255 new theater locations.
IMAX Technology Sales and Maintenance
The IMAX Technology Sales and Maintenance category earns revenue earnedprincipally from customers under the Company’ssale or sale-type lease of IMAX Theater Systems, as well as from the maintenance of IMAX Theater Systems. To a lesser extent, the IMAX Technology Sales and Maintenance category earns revenue from certain ancillary theater business activities and revenues from hybrid joint revenue sharing arrangements can vary from quarter to quarter and year to year based on a numberarrangements. These activities are described in more detail below under each of factors including film performance, the mix of theater system configurations, the timing of installation of these theater systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.their respective segments.
IMAX Systems
The IMAX Systems – Contingent Rent
The Company’s sales and 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
The Company alsosegment provides IMAX theater systemsTheater Systems to customers on a salesexhibitors through sale arrangements or long-term lease basis, typically with an initial10-year term. These agreements typically requirearrangements that for accounting purposes are classified as sales-type leases. Under these arrangements, in exchange for providing the payment ofIMAX Theater System, the Company earns initial fees and ongoing feesconsideration (which can include a fixed annual minimum amount per annumpayments and contingent fees in excess of the minimum payments), as well as maintenance and extended warranty fees.fees (see “IMAX Maintenance” below). The initial fees vary depending on the system configuration and location of the theater. Initial fees are paid to the Company in installments between the time of system signing the arrangement and the time of system installation, which is when the total of these fees, in addition to the present value of future annual minimum payments, are recognized as revenue. Ongoing fees are paid over the term of the contract, commencing after the theater system has been installed, and is a fixed minimum amount per annum. Finance income is derivedrecognized over the term of a financed sale or sales-type lease arrangementarrangement. In addition, in sale arrangements, an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded, is recorded as revenue in the unearned incomeperiod when the sale is recognized and is adjusted in future periods based on that financed sale or sales-type leaseactual results and changes in estimates. Such variable consideration is earned. Certain maintenance and extended warranty services are providedonly recognized on sales transactions to the customer forextent the Company believes there is not a separate fixed annual fee.risk of significant revenue reversal.
Under the Company’s sales agreements,In sale arrangements, title to the theater systemIMAX Theater System equipment components passesgenerally transfers to the customer. InHowever, in certain instances, however, the Company retains title or a security interest in the equipment until the customer has made all payments required underby the agreement. Underagreement or until certain shipment events for the terms ofequipment have occurred. In a sales-type lease agreement,arrangement, title to the theater systemIMAX Theater System equipment components remains with the Company. The Company has the right to remove the equipment fornon-payment or other defaults by the customer.
The revenue earned from customers under the Company’s theater system sales or lease agreements varies from quarter to quarterquarter-to-quarter and year to yearyear-to-year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the theater systems,IMAX Theater Systems, the nature of the arrangement and other factors specific to individual contracts.
Joint Revenue Sharing Arrangements – Fixed Fees
As discussed inUnder certain joint revenue sharing arrangements, above, under aknown as hybrid joint revenue sharing arrangementarrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX theater systemTheater System in an amount that is typically half of what the Company would receive from a straighttypical sale transaction. TheseFor hybrid joint revenue sharing arrangements that take the form of a lease, the contingent rent is reported within the IMAX Technology Network, as discussed above, while the fixed upfront payments are included in the Company’s theater business operations.payment is reported within IMAX Technology Sales and Maintenance.
Theater System41
IMAX 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 RevenuesBusiness
Additionally, the Company generates revenues from the saleThe Other Theater Business segment principally includes after-market sales of after-marketIMAX projection system parts and 3D glasses.
Revenue from theaterNew Business Initiatives
The New Business Initiatives segment includes activities related to the exploration of new lines of business arrangements is recognized at a different time from when cash is collected. See “Critical Accounting Policies” in Item 1and new initiatives outside of the Company’s Form10-Kcore business, which seek to leverage its proprietary, innovative technologies, its leadership position in the entertainment technology space and its unique relationship with content creators. Such new business initiatives currently include IMAX Enhanced and Connected Theaters, as discussed below.
IMAX Enhanced
The Company has developed 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. IMAX Enhanced brings IMAX digitally re-mastered 4K high dynamic range (HDR) content and DTS audio technologies to premier streaming platforms and best-in-class consumer electronics devices worldwide, offering consumers high-fidelity sight and sound experiences for the year ended December 31, 2017 (the “2017 Form10-K”) for further discussionhome.
To be certified, leading consumer electronics manufacturers spanning 4K/8K televisions, projectors, A/V receivers, loudspeakers, subwoofers and soundbars must 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.
IMAX Enhanced global device partners include Sony Electronics, Hisense, TCL, Phillips, Xiaomi, Sound United among others. By March 2021, IMAX Enhanced will have over six million certified devices in-market. IMAX Enhanced content is now available on six streaming platforms worldwide, with partners that include Sony Pictures Entertainment, Paramount Pictures, Huayi Brothers, Bona Film Group, Tencent Video, iQIYI and FandangoNOW, with more on the Company’s revenue recognition policies.way.
New BusinessConnected Theaters
The Company is currently exploring new linestechnologies and forms of business outside of its core business, with a focus on investments in alternativelocation-based entertainment experiences, original content as well as premiuma way to deepen consumer engagement and brand loyalty, including new technologies to further connect the IMAX home entertainment technologiesnetwork and services.
Virtual Reality
to facilitate bringing more unique content, including live events, to IMAX theater audiences. The Company is piloting a comprehensive virtual reality (“VR”) strategybelieves such additional connectivity can provide more innovative content to develop a premium, location-based VR offering to deliver immersive, multi-dimensional experiences, including entertainment content and games, to branded VR centers (“the IMAX VR Centers”). Pilot IMAX VR Centers are located in a stand-alone venuenetwork and in several multiplexes and are retrofitted with proprietary VR pods thatturn permit interactive, moveable VR experiences. The Company’s VR initiative is premised on a unique combination of premium content, proprietary design andbest-in-class technology.
In January 2017, the Company launched its flagship pilot IMAX VR Centerto engage audiences in Los Angeles. Since that time, the Company has opened six pilot IMAX VR Centers (two in New York City, one in Toronto, one in Manchester, England, one in Shanghai, China and one in Bangkok, Thailand). The Company continues to evaluate its pilot VR strategy based on several factors including the overall customer experience, pricing models, throughput, types of content featured and differences in geographic areas.new ways.
The Company also has a virtual reality fund (the “VR Fund”) among the Company, its subsidiary IMAX China and other strategic investors. The VR Fund will help finance the creation of interactive VR content experiences over the next three years for use across all VR platforms, including in the pilot IMAX VR Centers. The VR Fund recently 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.
Original Content
In 2017, the Company partnered with Marvel Television Inc. (“Marvel”) and Disney|ABC Television Group toco-produce and premiere theatrically the television series “Marvel’s Inhumans” in IMAX theaters. The first two episodes of the series ran worldwide in IMAX theaters for two weeks in September 2017 and subsequently the series premiered on the ABC network in the U.S. and across other networks internationally. As part of the investment, the Company shares in the economics across the venture, including in both the theatrical and television platforms. This agreement marks the first time a live-action television series has debuted in this manner, and the first time the Company has an economic interest in a television property.
The Company continues to believe that the IMAX network serves as a valuable platform to launch and distribute original content, especially during shoulder periods. However,periods between peak and off-peak seasons, known as "shoulder periods".
Film Distribution and Post-Production
Through the Film Distribution segment, the Company expects that future investments in originallicenses film content will be less capital intensive to the Company than its investment in “Marvel’s Inhumans”.
The Company has also created two film funds to help finance the production of original content. The Company is forming the IMAX China Film Fund (the “China Film Fund”) with its subsidiary IMAX China Holding Inc. (“IMAX China”), its partner CMC and several other large investors to help fund Mandarin language commercial films. The China Film Fund, which is expected initially to be capitalized with over $80.0 million, will target productions that can leverage the Company’s brand, relationships, technology and release windows in China. The China Film Fund is expected toco-finance approximately 15 Mandarin-language tent-pole films over three years, and will target contributions of between $3.0 million and $7.0 million per film. The China Film Fund will operate under an IMAXChina-CMC controlled greenlight committee.
In addition, the Company’s IMAX Original Film Fund (the “Original Film Fund”) was established in 2014 toco-finance a portfolio of 10 original large format films. The initial investment in the 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 agreed to contribute $9.0 million to the Original Film Fund over five years starting in 2014 and sees the Original Film Fund as a self-perpetuating vehicle designed to generate a continuous flow of high-quality documentary content. As at December 31, 2017, the Original Film Fund has invested $13.4 million toward the development of original films.
IMAX Home Entertainment Technologies and Services
The Company has also announced home theater initiatives, including a joint venture with TCL Multimedia Technology Holding Limited (“TCL”) to design, develop, manufacture and sell a premium home theater system. The joint venture has signed agreements with end users for the sale of more than 170 premium home theater systems, and has signed agreements with distributors for the sale of more than 470 home theater systems. 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.
Beyond its premium home theater, the Company has also developed other components of a broader home entertainment platform designed to permit customers to view content on a premiumvideo-on-demand basis in their home theaters.
Other
The Company is also a distributor ofdistributes 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 as its distribution fee either a fixed amount or a fixed percentage of the theater box office receipts or a fixed amountand following the Company’s recoupment of its costs the Company typically is entitled to receive an additional percentage of gross revenues as a distribution fee.participation revenues. The Company released the IMAX original production, Asteroid Hunters, in October 2020.
The Company alsoFilm Post-Production segment provides film post-production and quality control services for large-format films (whether produced internallyby IMAX or externally)third parties), and digital post-production services.
The Company derives a small portion of its revenues from other sources. As at December 31, 2017, the Company had two owned and operated 42
IMAX theaters (December 31, 2016 — two owned and operated IMAX theaters). In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits and losses and provides management services to three other theaters. The Company also rents its proprietary 2D and 3D large-format film and digital cameras to third party production companies. The Company maintains cameras and other film equipment and also offers production advice and technical assistance to both documentary and Hollywood filmmakers.NETWORK AND BACKLOG
IMAX Theater Network and Backlog
IMAX Theater Network
The following table outlinesprovides detailed information about the breakdown of the IMAX theater network by type and geographic location as atof December 31:31, 2020 and 2019:
2017 Theater Network | 2016 Theater Network |
| December 31, 2020 |
|
| December 31, 2019 |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Multiplex | Commercial Destination | Institutional | Total | Commercial Multiplex | Commercial Destination | Institutional | Total |
| Commercial Multiplex |
|
| Commercial Destination |
|
| Institutional |
|
| Total |
|
| Commercial Multiplex |
|
| Commercial Destination |
|
| Institutional |
|
| Total |
| |||||||||||||||||||||||||||||||||
United States | 364 | 4 | 35 | 403 | 349 | 5 | 41 | 395 |
|
| 367 |
|
|
| 4 |
|
|
| 30 |
|
|
| 401 |
|
|
| 371 |
|
|
| 4 |
|
|
| 33 |
|
|
| 408 |
| ||||||||||||||||||||||||
Canada | 37 | 2 | 7 | 46 | 37 | 2 | 7 | 46 |
|
| 39 |
|
|
| 1 |
|
|
| 7 |
|
|
| 47 |
|
|
| 39 |
|
|
| 2 |
|
|
| 7 |
|
|
| 48 |
| ||||||||||||||||||||||||
Greater China(1) | 527 | — | 17 | 544 | 407 | — | 17 | 424 |
|
| 729 |
|
|
| — |
|
|
| 16 |
|
|
| 745 |
|
|
| 702 |
|
|
| — |
|
|
| 15 |
|
|
| 717 |
| ||||||||||||||||||||||||
Western Europe |
|
| 115 |
|
|
| 4 |
|
|
| 8 |
|
|
| 127 |
|
|
| 115 |
|
|
| 4 |
|
|
| 10 |
|
|
| 129 |
| ||||||||||||||||||||||||||||||||
Asia (excluding Greater China) | 100 | 1 | 3 | 104 | 93 | 2 | 3 | 98 |
|
| 123 |
|
|
| 2 |
|
|
| 2 |
|
|
| 127 |
|
|
| 119 |
|
|
| 2 |
|
|
| 2 |
|
|
| 123 |
| ||||||||||||||||||||||||
Western Europe | 88 | 4 | 10 | 102 | 76 | 6 | 10 | 92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Russia & the CIS | 58 | — | — | 58 | 56 | — | — | 56 |
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| 68 |
|
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| 68 |
| ||||||||||||||||||||||||
Latin America(2) | 42 | — | 12 | 54 | 38 | — | 12 | 50 |
|
| 51 |
|
|
| 1 |
|
|
| 11 |
|
|
| 63 |
|
|
| 50 |
|
|
| 1 |
|
|
| 12 |
|
|
| 63 |
| ||||||||||||||||||||||||
Rest of the World | 56 | 1 | 2 | 59 | 51 | 1 | 2 | 54 |
|
| 70 |
|
|
| — |
|
|
| 2 |
|
|
| 72 |
|
|
| 65 |
|
|
| 1 |
|
|
| 2 |
|
|
| 68 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 1,272 | 12 | 86 | 1,370 | 1,107 | 16 | 92 | 1,215 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total(3) |
|
| 1,562 |
|
|
| 12 |
|
|
| 76 |
|
|
| 1,650 |
|
|
| 1,529 |
|
|
| 14 |
|
|
| 81 |
|
|
| 1,624 |
|
(1) | Greater China includes China, Hong Kong, Taiwan and Macau. |
(2) | Latin America includes South America, Central America and Mexico. |
(3) | Period-to-period changes in the tables above are reported net of the effect of permanently closed theaters. |
The Company currently believes that over time its commercial multiplex theater network could grow to approximately 2,8553,318 IMAX theaters worldwide from 1,272 commercial multiplex IMAX theatersthe 1,562 operating as of December 31, 2017.2020. The Company believes that the majority of its future growth will come from international markets. As atof December 31, 2017, 67.2%2020, 72.8% of IMAX theater systemsTheater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), upan increase from 63.7%71.9% as atof December 31, 2016.2019. Revenues and gross box office derived from outside the United States and Canadainternational markets continue to exceed revenues and gross box office from the United States and Canada. This was especially true during 2020 as the pace and extent of the reopening of IMAX theaters in Greater China amidst the COVID-19 global pandemic exceeded that of theaters in Domestic (i.e., United States and Canada) and Rest of World markets. (See “Impact of COVID-19 Pandemic” above.) Risks associated with the Company’s international business are outlined in Risk“Risk Factors – “TheThe 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 Part I, of this 2017 Form10-K.Item 1A.
Greater China continues to beis the Company’s second largest market, measured by revenues, with approximately 33%38% and 31% of overall revenues generated from the Company’sits China operations in 2017. As atthe years ended December 31, 2017,2020 and 2019, respectively. As of December 31, 2020, the Company had 544745 theaters operating in Greater China with an additional 309251 theaters in backlog that are scheduled to be installed in Greater China by 2022.2028. The Company’s backlog in Greater China represents 61.9%47.6% of the Company’sits total current backlog.backlog, including upgrades. The Company’s largest single international partnership is in China with Wanda Film formerly Wanda Cinema Line Corporation (“Wanda”). Wanda’s total commitment to the Company is for 359 theater systems361 IMAX Theater Systems in Greater China (of which 343 theater systems347 IMAX Theater Systems are under the parties’ joint revenue sharing arrangement).
(See Risk“Risk Factors – “TheThe Company faces risks in connection with its significant presence in China and the continued expansion of its business there” and “Risk Factors – General political, social and economic conditions can affect the Company’s business by reducing both revenue generated from existing IMAX Theater Systems and the demand for new IMAX Theater Systems” in China” in Item 1A of Part I, Item 1A.)
(See “Management’s Discussion and Analysis of this 2017 Form10-K.
43
The following table outlines the breakdown oftables provide detailed information about the Commercial Multiplex theatertheaters in operation within the IMAX network by arrangement type and geographic location as atof December 31, 2020 and 2019:
2017 |
| December 31, 2020 |
| |||||||||||||||||||||||||||||||||
IMAX Commercial Multiplex Theater Network |
| Commercial Multiplex Theaters in IMAX Network |
| |||||||||||||||||||||||||||||||||
Traditional JRSA | Hybrid JRSA | Total JRSA | Sale / Sales- type lease | Total |
| Traditional JRSA |
|
| Hybrid JRSA |
|
| Sale / Sales- type Lease |
|
| Total |
| ||||||||||||||||||||
Domestic Total (United States & Canada) | 273 | 4 | 277 | 124 | 401 |
|
| 276 |
|
|
| 5 |
|
|
| 125 |
|
|
| 406 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Greater China | 260 | 80 | 340 | 187 | 527 |
|
| 376 |
|
|
| 106 |
|
|
| 247 |
|
|
| 729 |
| |||||||||||||||
Asia (excluding Greater China) | 35 | 23 | 58 | 42 | 100 |
|
| 33 |
|
|
| 2 |
|
|
| 88 |
|
|
| 123 |
| |||||||||||||||
Western Europe | 31 | 24 | 55 | 33 | 88 |
|
| 48 |
|
|
| 27 |
|
|
| 40 |
|
|
| 115 |
| |||||||||||||||
Russia & the CIS | — | — | — | 58 | 58 |
|
| — |
|
|
| — |
|
|
| 68 |
|
|
| 68 |
| |||||||||||||||
Latin America | — | — | — | 42 | 42 |
|
| 1 |
|
|
| — |
|
|
| 50 |
|
|
| 51 |
| |||||||||||||||
Rest of the World | 14 | 3 | 17 | 39 | 56 |
|
| 16 |
|
|
| — |
|
|
| 54 |
|
|
| 70 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
International Total | 340 | 130 | 470 | 401 | 871 |
|
| 474 |
|
|
| 135 |
|
|
| 547 |
|
|
| 1,156 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Worldwide Total | 613 | 134 | 747 | 525 | 1,272 | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||
IMAX Commercial Multiplex Theater Network | ||||||||||||||||||||||||||||||||||||
JRSA | Hybrid JRSA | Total JRSA | Sale / Sales- type lease | Total | ||||||||||||||||||||||||||||||||
Domestic Total (United States & Canada) | 262 | 4 | 266 | 120 | 386 | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
International: | ||||||||||||||||||||||||||||||||||||
Greater China | 195 | 66 | 261 | 146 | 407 | |||||||||||||||||||||||||||||||
Asia (excluding Greater China) | 34 | 20 | 54 | 39 | 93 | |||||||||||||||||||||||||||||||
Western Europe | 21 | 23 | 44 | 32 | 76 | |||||||||||||||||||||||||||||||
Russia & the CIS | — | — | — | 56 | 56 | |||||||||||||||||||||||||||||||
Latin America | — | — | — | 38 | 38 | |||||||||||||||||||||||||||||||
Rest of the World | 13 | 2 | 15 | 36 | 51 | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
International Total | 263 | 111 | 374 | 347 | 721 | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Worldwide Total | 525 | 115 | 640 | 467 | 1,107 | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Worldwide Total(1) |
|
| 750 |
|
|
| 140 |
|
|
| 672 |
|
|
| 1,562 |
|
|
| December 31, 2019 |
| |||||||||||||
|
| Commercial Multiplex Theaters in IMAX Network |
| |||||||||||||
|
| Traditional JRSA |
|
| Hybrid JRSA |
|
| Sale / Sales- type Lease |
|
| Total |
| ||||
Domestic Total (United States & Canada) |
|
| 277 |
|
|
| 5 |
|
|
| 128 |
|
|
| 410 |
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China |
|
| 357 |
|
|
| 106 |
|
|
| 239 |
|
|
| 702 |
|
Asia (excluding Greater China) |
|
| 34 |
|
|
| 1 |
|
|
| 84 |
|
|
| 119 |
|
Western Europe |
|
| 46 |
|
|
| 27 |
|
|
| 42 |
|
|
| 115 |
|
Russia & the CIS |
|
| — |
|
|
| — |
|
|
| 68 |
|
|
| 68 |
|
Latin America |
|
| 2 |
|
|
| — |
|
|
| 48 |
|
|
| 50 |
|
Rest of the World |
|
| 15 |
|
|
| — |
|
|
| 50 |
|
|
| 65 |
|
International Total |
|
| 454 |
|
|
| 134 |
|
|
| 531 |
|
|
| 1,119 |
|
Worldwide Total(1) |
|
| 731 |
|
|
| 139 |
|
|
| 659 |
|
|
| 1,529 |
|
(1) | Period-to-period changes in the tables above are reported net of the effect of permanently closed theaters. |
As atof December 31, 2017, 277 (2016 – 266)2020, 276 (2019 ― 277) of the 747 (2016 – 640)750 (2019 ― 731) theaters under traditional joint revenue sharing arrangements in operation, or 37.1% (2016 – 41.6%36.8% (2019 ― 37.9%) were located in the United States andor Canada, with the remaining 470 (2016 – 374)474 (2019 ― 454) or 62.9% (2016 – 58.4%63.2% (2019 ― 62.1%) of theaters under traditional joint revenue sharing arrangements being located in international markets.
44
Sales Backlog
The following table provides detailed information about the Company’s current sales backlog is as follows:of December 31, 2020 and 2019:
December 31, 2017 | December 31, 2016 | |||||||||||||||
Number of Systems | Fixed Contractual Dollar Value (in thousands) | Number of Systems | Fixed Contractual Dollar Value (in thousands) | |||||||||||||
Sales and sales-type lease arrangements | 162 | $ | 205,001 | 143 | $ | 175,331 | ||||||||||
Joint revenue sharing arrangements | ||||||||||||||||
Hybrid arrangements | 121 | 64,328 | (1) | 92 | 48,658 | (1) | ||||||||||
Traditional arrangements | 216 | 11,942 | (1) | 263 | 3,680 | (1) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
499 | (2) | $ | 281,271 | 498 | (3) | $ | 227,669 | |||||||||
|
|
|
|
|
|
|
|
|
| December 31, 2020 |
|
|
| December 31, 2019 |
|
| ||||||||||||||||||||||||||||||||
|
| Number of |
|
|
| Dollar Value |
|
|
| Number of |
|
|
| Dollar Value |
|
| ||||||||||||||||||||||||
|
| Systems |
|
|
| (in thousands) |
|
|
| Systems |
|
|
| (in thousands) |
|
| ||||||||||||||||||||||||
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
|
| New |
|
|
| Upgrade |
|
| ||||||||
Sales and sales-type lease arrangements |
|
| 175 |
|
|
|
| 10 |
|
|
|
| 200,296 |
|
|
| $ | 13,135 |
|
|
|
| 168 |
|
|
|
| 10 |
|
|
|
| 205,574 |
|
|
| $ | 12,874 |
|
|
Hybrid joint revenue sharing arrangements |
|
| 140 |
|
|
|
| 7 |
|
|
|
| 99,911 |
|
|
|
| 5,560 |
|
|
|
| 133 |
|
|
|
| 7 |
|
|
|
| 97,736 |
|
|
|
| 5,560 |
|
|
Traditional joint revenue sharing arrangements |
|
| 115 |
| (1) |
|
| 80 |
| (1) |
|
| 200 |
| (2) |
|
| 5,500 |
| (2) |
|
| 133 |
| (1) |
|
| 80 |
| (1) |
|
| 400 |
| (2) |
|
| 5,800 |
| (2) |
|
|
| 430 |
|
|
|
| 97 |
|
|
|
| 300,407 |
|
|
| $ | 24,195 |
|
|
|
| 434 |
|
|
|
| 97 |
|
|
|
| 303,710 |
|
|
| $ | 24,234 |
|
|
(1) | Includes 46 IMAX Theater Systems (2019 – 47) where the customer has the option to convert from a joint revenue sharing arrangement to a sales arrangement. |
(2) | Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box office results. |
The number of theater systemsIMAX 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,year-to-year, which adds to backlog and the installation and acceptance of theater systemsIMAX Theater Systems and the settlement of contracts, both of which reduce backlog. Sales backlogBacklog typically represents the fixed contracted revenue under signed theater systemIMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present valuesystem, as well as an estimate of contractual ongoing fees due over the term;variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues as well as fees (contingent rent) in excess of contractual ongoing fees that may be received in the future.revenues. The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases letters of intent orand long-term conditional theater commitments. The value of theatersTheaters under joint revenue sharing arrangements is excluded from thedo not usually have dollar value of sales backlog, although certain theater systemsIMAX 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 systemIMAX 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 systeman IMAX 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 a joint revenue sharing arrangement to a sale) after signing but before installation. Current backlog information reflects all known elections.
45
The following table outlinestables provide detailed information about the breakdown of the totalCompany’s backlog by arrangement type and geographic location as atof December 31:31, 2020 and 2019:
2017 |
| December 31, 2020 |
|
| |||||||||||||||||||||||||||||||||
IMAX Theater Backlog |
| IMAX Theater System Backlog |
|
| |||||||||||||||||||||||||||||||||
JRSA | Hybrid JRSA | Total JRSA | Sale / Lease | Total |
| Traditional JRSA |
|
| Hybrid JRSA |
|
| Sale / Lease |
|
| Total |
|
| ||||||||||||||||||||
Domestic Total (United States & Canada) | 37 | 3 | 40 | 9 | 49 |
|
| 122 |
|
|
| 3 |
|
|
| 8 |
|
|
| 133 |
|
| |||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
International: | |||||||||||||||||||||||||||||||||||||
Greater China | 134 | 102 | 236 | 73 | 309 | ||||||||||||||||||||||||||||||||
Asia (excluding Greater China) | 6 | 11 | 17 | 20 | 37 | ||||||||||||||||||||||||||||||||
Western Europe | 33 | 4 | 37 | 8 | 45 | ||||||||||||||||||||||||||||||||
Latin America | — | — | — | 17 | 17 | ||||||||||||||||||||||||||||||||
Rest of the World | 6 | 1 | 7 | 35 | 42 | ||||||||||||||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
International Total | 179 | 118 | 297 | 153 | 450 | ||||||||||||||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
Worldwide Total | 216 | 121 | 337 | 162 | 499 | ||||||||||||||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
2016 | |||||||||||||||||||||||||||||||||||||
IMAX Theater Backlog | |||||||||||||||||||||||||||||||||||||
JRSA | Hybrid JRSA | Total JRSA | Sale / Lease | Total | |||||||||||||||||||||||||||||||||
Domestic Total (United States & Canada) | 48 | 3 | 51 | 10 | 61 | ||||||||||||||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Greater China | 199 | 76 | 275 | 59 | 334 |
|
| 50 |
|
|
| 114 |
|
|
| 87 |
|
|
| 251 |
|
| |||||||||||||||
Asia (excluding Greater China) | 4 | 8 | 12 | 20 | 32 |
|
| 5 |
|
|
| 15 |
|
|
| 30 |
|
|
| 50 |
|
| |||||||||||||||
Western Europe | 7 | 5 | 12 | 6 | 18 |
|
| 12 |
|
|
| 13 |
|
|
| 5 |
|
|
| 30 |
|
| |||||||||||||||
Russia & the CIS | — | — | — | 18 | 18 |
|
| — |
|
|
| 1 |
|
|
| 15 |
|
|
| 16 |
|
| |||||||||||||||
Latin America | — | — | — | 15 | 15 |
|
| 3 |
|
|
| — |
|
|
| 7 |
|
|
| 10 |
|
| |||||||||||||||
Rest of the World | 5 | — | 5 | 15 | 20 |
|
| 3 |
|
|
| 1 |
|
|
| 33 |
|
|
| 37 |
|
| |||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
International Total | 215 | 89 | 304 | 133 | 437 |
|
| 73 |
|
|
| 144 |
|
|
| 177 |
|
|
| 394 |
|
| |||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||
Worldwide Total | 263 | 92 | 355 | 143 | 498 |
|
| 195 |
|
|
| 147 |
|
|
| 185 |
|
|
| 527 |
| (1) | |||||||||||||||
|
|
|
|
|
|
| December 31, 2019 |
|
| |||||||||||||
|
| IMAX Theater System Backlog |
|
| |||||||||||||
|
| Traditional JRSA |
|
| Hybrid JRSA |
|
| Sale / Lease |
|
| Total |
|
| ||||
Domestic Total (United States & Canada) |
|
| 128 |
|
|
| 3 |
|
|
| 9 |
|
|
| 140 |
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China |
|
| 58 |
|
|
| 124 |
|
|
| 71 |
|
|
| 253 |
|
|
Asia (excluding Greater China) |
|
| 9 |
|
|
| — |
|
|
| 35 |
|
|
| 44 |
|
|
Western Europe |
|
| 11 |
|
|
| 13 |
|
|
| 7 |
|
|
| 31 |
|
|
Russia & the CIS |
|
| — |
|
|
| — |
|
|
| 12 |
|
|
| 12 |
|
|
Latin America |
|
| 3 |
|
|
| — |
|
|
| 11 |
|
|
| 14 |
|
|
Rest of the World |
|
| 4 |
|
|
| — |
|
|
| 33 |
|
|
| 37 |
|
|
International Total |
|
| 85 |
|
|
| 137 |
|
|
| 169 |
|
|
| 391 |
|
|
Worldwide Total |
|
| 213 |
|
|
| 140 |
|
|
| 178 |
|
|
| 531 |
| (2) |
(1) | Includes 148 new IMAX with Laser projection system configurations and 95 upgrades of existing locations to IMAX with Laser projection system configurations. |
(2) | Includes 144 new IMAX with Laser projection system configurations and 92 upgrades of existing locations to IMAX with Laser projection system configurations. |
Approximately 90.2%74.8% of IMAX theater systemTheater System arrangements in backlog as atof December 31, 20172020 are scheduled to be installed in international markets (2016(2019 ― 73.6%).
(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – 87.8%Impact of COVID-19 Pandemic” and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A.).
46
Signings and Installations
The following reflects the Company’s theater systemtables provide detailed information about IMAX Theater System signings and installations:installations for the years ended December 31, 2020 and 2019:
|
| Years Ended December 31, |
|
| ||||||
|
| December 31, 2020 |
|
|
| December 31, 2019 |
|
| ||
Theater System Signings: |
|
|
|
|
|
|
|
|
|
|
New IMAX Theater Systems |
|
|
|
|
|
|
|
|
|
|
Sales and sales-type lease arrangements |
|
| 28 |
|
|
|
| 49 |
|
|
Hybrid joint revenue sharing lease arrangements |
|
| 18 |
|
|
|
| 48 |
|
|
Traditional joint revenue sharing arrangements |
|
| 2 |
|
|
|
| 7 |
|
|
Total new IMAX Theater Systems |
|
| 48 |
|
|
|
| 104 |
|
|
Upgrades of IMAX Theater Systems |
|
| 17 |
|
|
|
| 39 |
|
|
Total IMAX Theater System signings |
|
| 65 |
|
|
|
| 143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
| ||||||
|
| December 31, 2020 |
|
|
| December 31, 2019 |
|
| ||
Theater System Installations: |
|
|
|
|
|
|
|
|
|
|
New IMAX Theater Systems |
|
|
|
|
|
|
|
|
|
|
Sales and sales-type lease arrangements |
|
| 27 |
|
|
|
| 55 |
|
|
Hybrid joint revenue sharing lease arrangements |
|
| 5 |
|
|
|
| 20 |
|
|
Traditional joint revenue sharing arrangements |
|
| 23 |
|
|
|
| 54 |
|
|
Total new IMAX Theater Systems |
|
| 55 |
|
|
|
| 129 |
|
|
Upgrades of IMAX Theater Systems |
|
| 16 |
|
|
|
| 57 |
|
|
Total IMAX Theater System installations |
|
| 71 |
|
|
|
| 186 |
|
|
(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A.)
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Theater System Signings: | ||||||||
Full new sales and sales-type lease arrangements | 85 | 61 | ||||||
New traditional joint revenue sharing arrangements | 35 | 246 | ||||||
New hybrid joint revenue sharing arrangements | 50 | 7 | ||||||
|
|
|
| |||||
Total new theaters | 170 | 314 | ||||||
Upgrades of IMAX theater systems | 7 | 5 | ||||||
|
|
|
| |||||
Total theater signings | 177 | 319 | ||||||
|
|
|
| |||||
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Theater System Installations: | ||||||||
Full new sales and sales-type lease arrangements | 60 | 56 | (1) | |||||
New traditional joint revenue sharing arrangements | 86 | 76 | ||||||
New hybrid joint revenue sharing arrangements | 19 | 33 | ||||||
Short-term operating lease arrangement | — | 1 | ||||||
|
|
|
| |||||
Total new theaters | 165 | 166 | ||||||
Upgrades of IMAX theater systems | 5 | (2) | 16 | (2)(3) | ||||
|
|
|
| |||||
Total theater installations | 170 | 182 | ||||||
|
|
|
|
The Company anticipates that it will install approximately 145 new theater systems (excluding upgrades) in 2018. The Company cautions, however, that theater system installations may slip from period to period over the course of the Company’s business, usually for reasons beyond its control.
47
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its consolidated financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).
The preparation of these consolidated financial statements and related disclosures in accordance with U.S. GAAP requires management to make judgments, assumptions, and estimates and judgments under its accounting policies that affect the financial results. The precision of theseamounts reported in the Company’s Consolidated Financial Statements and accompanying notes. Management’s judgments, assumptions, and estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes.
Management bases its estimatesare based on historical experience, future expectations and other assumptionsfactors that are believed to be reasonable atas of the date of the consolidated financial statements. Company’s Consolidated Financial Statements. Actual results may ultimately differ from thesethe Company’s original estimates, due to uncertainty involved in measuring, at a specific point in time,as future events which are continuous in nature, and circumstances sometimes do not develop as expected, and the differences may be material. Management believes that the following are the Company’s most critical accounting policies and estimates, which are not ranked in any particular order, that may affect the Company’s reported results of operations and/or financial condition. The Company’s other significant accounting policies are discusseddescribed in note 2Note 3 of Notes to its audited consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report for the Fiscal Year ended December 31, 2017 (this “2017Form 10-K”). Management considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates.
The Company considers the following significant estimates, assumptions and judgments to have the most significant effect on its results:8.
Revenue Recognition
ApplicationThe application of the various accounting principles under U.S. GAAP related to the measurement and recognition of revenue requires the Companymanagement to make judgments and estimates. Contract arrangementsIn addition, revenue contracts with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. The
On January 1, 2018, the Company believesadopted ASC Topic 606, “Revenue from Contracts with Customers,” utilizing the modified retrospective transition method and recorded a cumulative catch-up adjustment to retained earnings as of the date of adoption. In conjunction with its adoption, the Company applied ASC Topic 606 only to contracts that revenue recognition is critical for its financial statements because consolidated net income is directly affectedwere not completed as of the date of adoption, referred to as open contracts. IMAX Theater System sales and maintenance contracts within the existing network of open theaters and sales backlog comprise a significant majority of the Company’s open contracts at any point in time. DMR arrangements where the film continues to be shown by the timingCompany’s exhibitor partners, film distribution arrangements with remaining terms, and aftermarket sales orders that have been received but for which control of revenue recognitionthe product has not yet transferred to the customer are all also considered open contracts.
Multiple Element Arrangements
Revenues from the sale of IMAX Theater Systems, the provision of maintenance services for IMAX Theater Systems, the sale of aftermarket projection system parts and 3D glasses, the conversion of film content into the IMAX DMR format, the distribution of documentary film content and the provision of post-production services are all within the scope of ASC Topic 606. The Company’s joint revenue sharing revenue arrangements, with certain customers may involve multiple elements consistingthe exception 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, supervisionthose where title of installation, and projectionist training; a license to use the IMAX brand; 3D glasses; maintenance and extended warranty services; and licensingTheater System transfers to the customer, known as hybrid sales, are not in scope of films. ASC Topic 606 as they are classified as leases. Similarly, any IMAX Theater System arrangements classified as sales-type leases are also excluded from ASC Topic 606.
IMAX Theater Systems
The Company evaluates all elementseach of the performance obligations in an IMAX Theater System arrangement to determine whatwhich are considered typical deliverablesdistinct, 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 LeasesASC Topic 606, “Revenue from Contracts with Customers,” ASC Topic 842, “Leases,” and ASC Topic 460, “Guarantees”.
The Company’s “System Obligation” consists of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”);following: (i) an IMAX Theater System, which includes the Guarantees Topic of the FASB ASC; the Entertainment – Films 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 consideration received or receivable in the arrangement is allocated based on the applicable guidance in the above noted standards.
Theater Systems
The Company has identified the projection system,projector, sound system, screen system and, if applicable, a 3D glasses cleaning machine,machine; (ii) services associated with the IMAX Theater System, including theater design support, the supervision of installation services, and projectionist trainingtraining; and the(iii) a license to use of the IMAX brand to bemarket the theater. The System Obligation, as a single deliverablegroup, is a distinct performance obligation and a single unit of accounting (“accounting. The Company is not responsible for the System Deliverable”). When an arrangement does not include all the elements of a System Deliverable, the elementsphysical installation of the equipment in the customer’s facility; however, it supervises the installation by the customer. The customer has the right to use the IMAX brand from the date the Company and the customer enter into an arrangement.
IMAX Theater System Deliverablearrangements also include a requirement for the Company to provide maintenance services over the life of the arrangement in exchange for an extended warranty and annual maintenance fee, which is subject to a consumer price index increase on renewal each year. Consideration related to the provision of maintenance services is included in the allocation of the transaction price to the separate performance obligations in the arrangement at contract inception, as discussed in more detail below. The Company’s maintenance services are considered bya stand ready obligation and, as a result, are recognized on a straight-line basis over the Companycontract term.
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The transaction price in an IMAX Theater System arrangement is allocated to beeach good or service that is identified as a single deliverable and a single unit of accounting.
The Company uses vendor-specific objective evidence ofseparate performance obligation based on estimated standalone selling price (VSOE)prices. This allocation is based on observable prices when the Company sells the deliverable separately and is the price actually charged by thegood or service separately. The Company for that deliverable. VSOE ishas established standalone prices for the Company’s System Deliverable,Obligation and maintenance and extended warranty services, andas well as for film license arrangements. The Company uses a best estimate of selling price (BESP)an adjusted market assessment approach for units of accountingseparate performance obligations that do not have VSOEstandalone selling prices or third-party evidence of estimated standalone selling price.prices. The Company determines BESP for a deliverable by consideringconsiders multiple factors including the Company’sits historical pricing practices, product class, market competition and geography.
Revenue allocatedThe transaction price for the System Obligation consists of upfront or initial payments made before and after the final installation of the IMAX Theater System and ongoing payments throughout the term of the arrangement. The Company estimates the transaction price, including an estimate of future variable consideration, received in exchange for the goods delivered or services rendered. The arrangement for the sale of an IMAX Theater System includes indexed minimum payment increases over the term of the arrangement, as well as the potential for additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded. In addition, hybrid sales arrangements include amounts owed by the customer based on a percentage of their box office receipts over the term of the arrangement. These contract provisions are considered to be variable consideration under ASC Topic 606. An estimate of the present value of such variable consideration is recognized as revenue upon the transfer of control of the System Obligation to the System Deliverablecustomer, subject to constraints to ensure that there is recognized in accordance withnot a risk of significant revenue reversal. This estimate is based on management’s box office projections for the Revenue Recognition Topicindividual theater, which are developed using historical data for the theater and, if necessary, comparable theaters and territories. Transfer of control of the FASB ASC, when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed, and (iv)System Obligation occurs at the earlier of (a) receipt of written customerclient acceptance certifying the completion of installation andrun-in testing of the equipmentinstallation of the IMAX Theater System, including projectionist training, and the completion of projectionist training or (b) public opening of the theater providedto the public.
IMAX Theater System arrangements are non-cancellable unless the Company fails to perform its obligations. In the absence of a material default by the Company, there is persuasive evidenceno right to any remedy for the customer under the Company’s arrangements. If a material default by the Company exists, the customer has the right to terminate the arrangement and seek a refund only if the customer provides notice to the Company of a material default and only if the Company does not cure the default within a specified period.
Constraints on the Recognition of Variable Consideration
The recognition of variable consideration involves a significant amount of judgment. Variable consideration is recognized subject to appropriate constraints to avoid a significant reversal of revenue in future periods. The Company reviews its variable consideration assets on at least a quarterly basis. ASC Topic 606 identifies several examples of situations when constraining variable consideration is appropriate:
• | The amount of consideration is highly susceptible to factors outside the entity’s influence; |
• | The uncertainty about the amount of consideration is not expected to be resolved for a long period of time; |
• | The Company’s experience (or other evidence) with similar types of contracts is limited, or that experience has limited predictive value; and |
• | The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. |
As discussed above, the Company’s significant streams of variable consideration relate to arrangements for the sale of IMAX Theater Systems which include indexed minimum payment increases over the term of the arrangement, as well as the potential for additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded. In addition, hybrid sales arrangements include variable consideration based on a percentage of the customer’s box office receipts over the term of the arrangement.
Variable consideration related to indexed minimum payment increases is outside of the Company’s control, but the movement in the rates is historically well documented and economic trends in inflation are easily accessible. For each contract subject to an indexed minimum payment increase, the Company estimates the most likely amount using published indices. The amount of the estimated minimum payment increase is then recorded at its present value as of the date of recognition using the customer’s implied borrowing rate.
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Variable consideration related to the level of the customer’s box office receipts is outside of the Company’s control as it is dependent upon the commercial success of film content in future periods. The Company tracks numerous performance statistics for box office performance in regions worldwide and applies its understanding of these theater markets to estimate the most likely amount of variable consideration to be earned over the term of the arrangement. The Company then applies a constraint to this estimate by reducing the projection by a percentage factor for theaters or markets with no or limited historical box office experience. In cases where direct historical experience can be observed, average experience, eliminating significant outliers, is used. The resulting amount of variable consideration is then recorded at its present value as of the date of recognition using a risk-weighted discount rate.
IMAX DMR and Film Distribution Services
In an IMAX DMR arrangement, the Company receives a percentage of the box office receipts from a third party who owns the copyright to a film in exchange for converting the film into IMAX DMR format and distributing it through the IMAX network. In these arrangements, although the Company does not hold rights to the intellectual property in the form of the film content, it is compensated for the application of its intellectual property in the form of its patented DMR processes to create new intellectual property in the form of an IMAX DMR version of film.
In a Film Distribution arrangement, the priceCompany licenses film content and distributes large-format films, primarily for its institutional theater partners. The Company’s Film Distribution revenues are strictly from the license of its intellectual property in the form of documentary film content to which the Company holds exclusive distribution rights.
Revenues associated with both IMAX DMR and Film Distribution arrangements qualify for the variable consideration exemption for sales- or usage-based royalties in ASC Topic 606 and are recognized in the period when the corresponding box office sales occur.
Current Expected Credit Losses
In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is fixed or determinablebased on expected losses rather than incurred losses. The standard requires financial assets measured on the amortized cost basis to be presented at the net amount expected to be collected. The Company’s accounts receivable, financing receivables and collectability is reasonably assured.variable consideration receivables are within the scope of ASU No. 2016-13. The Company adopted ASU No. 2016-13 and several associated ASUs on January 1, 2020 with no required cumulative-effect adjustment to accumulated deficit. (See Note 5 of Notes to Consolidated Financial Statements in Part II, Item 8.)
The initial revenue recognized consistsability of the initial payments receivedCompany to collect its accounts receivable, financing receivable and variable consideration receivables is heavily dependent on the present valueviability and solvency of any future initial payments and fixed minimum ongoing payments that have been attributed to this unit of accounting. Contingent payments in excess of the fixed minimum ongoing payments are recognized when reported byindividual theater operators provided collectabilitywhich is reasonably assured.significantly influenced by consumer behavior and general economic conditions. Theater operators and, in certain situations, movie studios, may experience financial difficulties that could cause them to be unable to fulfill their payment obligations to the Company.
The Company has also agreed,develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
Judgments regarding the collectibility of accounts receivable, financing receivables and variable consideration receivables, and the amount of any required allowance for credit losses, are based on occasion,management’s initial credit evaluation of the customer and the regular ongoing monitoring of the credit quality of each customer. This monitoring process includes an analysis of collections history and aging for each customer, as well as meetings on at least a monthly basis to sell equipment under leaseidentify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or atwhen the end of a lease term. Considerationcustomer has agreed to for these lease buyouts is includeda payment plan and payments have commenced in revenues from equipment and product sales, when persuasive evidence of an arrangement exists, the feesaccordance with that plan. Changes in credit quality classification are fixed or determinable, collectability is reasonably assured and titledependent upon management approval. Management’s judgments with respect to the theater system passes fromcollectibility of accounts receivable, financing receivables and variable consideration receivables, and the amount of any required allowance for credit losses, may ultimately prove, with the benefit of hindsight, to be incorrect.
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As a result of the COVID-19 pandemic, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who are facing financial difficulties as a result of the customer.
Film Production and IMAX DMR Services
In certain film arrangements,disruption in their normal business operations during the pandemic. Accordingly, for the year ended December 31, 2020, the Company produces a film financedincreased its provision for current expected credit losses by third parties, whereby the third party retains the copyright and the Company obtains exclusive distribution rights. Under these arrangements, the Company is entitled to receive a fixed fee or to
retain as a fee the excess of funding over cost of production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which is charged to costs and expenses applicable to revenues-services. The production fees are deferred, and recognized as$18.6 million, reflecting a reduction in the costcredit quality of its theater related receivables balances and the heightened collection risk associated with certain movie studios in foreign markets. Due to the unprecedented nature of the film, based on the ratio of the Company’s distribution revenues recognized in the current period to the ultimate distribution revenues expected from the film.
Revenues from digitallyre-mastering (IMAX DMR) films where third parties own or hold the copyrights and the rights to distribute the film are derived in the form of processing fees and recoupments calculated as a percentage ofbox-office receipts generated from there-mastered films. Processing fees are recognized as Service revenues when the performance of the relatedre-mastering service is completed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured. Recoupments, calculated as a percentage ofbox-office receipts, are recognized as Services revenues whenbox-office receipts are reported by the third party that owns or holds the related film rights, provided collectability is reasonably assured.
Losses on film production and IMAX DMR services are recognized as costs and expenses applicable to revenues-services in the period when it is determined that the Company’s estimate of total revenues to be realized by the Company will not exceed estimated total production costs to be expended on the film production and the cost of IMAX DMR services.
Allowances for Accounts Receivable and Financing Receivables
Allowances for doubtful accounts receivable are basedCOVID-19 pandemic, its effect on the Company’s assessment of the collectability of specific customer balances, which is based upon a review of the customer’s credit worthiness, past collection historycustomers and the underlying asset value of the equipment, where applicable. Interest on overdue accounts receivable is recognized as income as the amounts are collected.
The Company monitors the performance of the theaterstheir ability to which it has leased or sold theater systems which are subjectmeet their financial obligations to ongoing payments. When facts and circumstances indicate that there is a potential impairment in the accounts receivable, net investment in lease or a financing receivable, the Company will evaluate the potential outcomeis difficult to predict.
(See “Management’s Discussion and Analysis of either a renegotiation involving changesFinancial Condition and Results of Operations – Impact of COVID-19 Pandemic”. See Note 5 of Notes to Consolidated Financial Statements in the terms of the receivable or defaults on the existing lease or financed sale agreements. The Company will record a provision if it is considered probable that the Company will be unable to collect all amounts due under the contractual terms of the arrangement or a renegotiated lease amount will cause a reclassification of the sales-type lease to an operating lease.
These provisions are adjusted when there is a significant change in the amount or timing of the expected future cash flows or when actual cash flows differ from cash flow previously expected. While such credit losses have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Changes in the underlying financial condition of its customers could result in a material impact on the Company’s consolidated results of operation and financial position.Part II, Item 8.)
Inventories
The Company records write-downs for excess and obsolete inventory based upon current estimates ofmanagement’s judgments regarding future events and business conditions, including the anticipated installation dates for the current backlog of theater system contracts, contracts in negotiation, technological developments, signings in negotiation, growth prospects within the customers’ ultimate marketplace and anticipated market acceptance of the Company’s current and pending theater systems.
Asset Impairments
The Company performs a qualitative, and when necessary quantitative, impairment test on its goodwill on an annual basis, coincident with theyear-end, as well as in quarters where events or changes in circumstances suggest that the carrying amount may not be recoverable.Goodwill
Goodwill impairmentrepresents the excess of the purchase price paid over the fair value of net assets acquired in a business combination. Goodwill is assessednot amortized, but is tested annually for impairment at the reporting unit level in the fourth quarter of the year and between annual tests if indicators of potential impairment exist. These indicators could include a decline in the Company’s stock price and market capitalization, a significant change in the outlook for the reporting unit's business, lower than expected operating results, increased competition, legal factors, or the sale or disposition of a significant portion of a reporting unit. For reporting units with goodwill, an impairment loss is recognized for the amount by comparingwhich the unit’sreporting unit's carrying value, including goodwill, to theexceeds its fair value. The carrying value of the unit. The Company completedeach reporting unit is based on a full quantitative analysis as required by ASC 350 – “Intangibles – Goodwillsystematic and Other” (Step 1) in 2014. The carrying values of each unit are subject to allocationsrational allocation of certain assets and liabilities that the Company has applied in a systematic and rational manner.liabilities. The fair value of the Company’s unitseach reporting unit is assessed using a discounted cash flow model.model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses are performed. The discount rates used in the cash flow model is constructed usingare derived based on the Company’s budgetestimated weighted average cost of capital. These estimates and long-range plan asthe likelihood of future changes in these estimates depend on a base.number of underlying variables and a range of possible outcomes.
In the fourth quarter of 2020, the Company performed its annual goodwill impairment test considering the latest available information and determined that its goodwill was not impaired. As of December 31, 2020, the Company’s total Goodwill was $39.0 million, of which $19.1 million relates to the IMAX Systems reporting unit, $13.5 million relates to the Joint Revenue Sharing Arrangement reporting unit, and $6.4 million relates to the IMAX Maintenance reporting unit.
The estimates used in the Company’s goodwill impairment tests and the likelihood of future changes in these estimates depend on a number of underlying variables and a range of possible outcomes. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. If business conditions deteriorate further, or should they remain depressed for a more prolonged period of time, management’s estimates of operating results and future cash flows for the IMAX Systems and Joint Revenue Sharing Arrangements reporting units may be insufficient to support the goodwill assigned to them, thus requiring impairment charges. The Company performswill continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate there may be a qualitative assessmentpotential impairment.
Long-Lived Assets
Long-lived assets are grouped and reviewed for impairment at the lowest level for which identifiable cash flows are largely independent whenever events or changes in circumstances indicate that the carrying amount of the asset (or asset group) may not be recoverable. In such situations, long-lived assets are considered impaired when estimated future cash flows (undiscounted and without interest charges) resulting from the use of the asset (or asset group) and its reporting units and certain select quantitative calculations againsteventual disposition are less than the carrying value of the asset (or asset group). In such situations, the asset (or asset group) is written down to its fair value, which is the present value of the estimated future cash flows. Factors that are considered when evaluating long-lived assets for impairment include a current long range plan to determine whetherexpectation that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair valuelong-lived asset will be sold significantly before the end of its useful life, a reporting unitsignificant decrease in the market price of the long-lived asset, and a significant change in the extent or manner in which the long-lived asset is less thanbeing used.
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In the fourth quarter of 2020, the Company updated its recoverability tests of the carrying amount (Step 0).
Long-lived asset impairment testing is performed atvalues of the lowest level of an asset group attheater system equipment supporting its joint revenue sharing arrangements, which identifiable cash flows are largely independent.recorded within Property, Plant and Equipment. In performing its review forreviews of recoverability, the Company estimatesestimated the undiscounted future cash flows expected to result from the use of the asset or asset groupassets. The cash flow estimates used in these tests are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 global pandemic; therefore, management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. For the year ended December 31, 2020, the Company recorded impairment losses of $0.3 million related to the theater system equipment supporting its eventual disposition. If the sumjoint revenue sharing arrangements.
Film Assets
The recoverability of the expectedCompany’s film assets is dependent upon the commercial acceptance of the underlying films and the resulting level of box office results and, in certain situations, ancillary revenues. If management’s projections of future net cash flows is less thanresulting from the exploitation of a film indicate that the carrying amountvalue of the film asset oris not recoverable, the film asset group, anis written down to its fair value.
For the year ended December 31, 2020, the Company recorded $10.8 million in impairment loss is recognizedlosses principally to write-down the carrying value of certain documentary, alternative content film assets and DMR related film assets due to a decrease in projected box office totals and related revenues based on management’s regular quarterly recoverability assessments. As of December 31, 2020, following the consolidated statementrecording of operations. Measurementthese write-downs, the Company’s film assets totaled $5.8 million, which principally consists of DMR and documentary content. There can be no assurances that there will not be additional write-downs to the carrying values of these assets as the Company continues to assess the ongoing impact of the impairment loss is based onCOVID-19 pandemic.
Share-Based Compensation
The Company issues share-based compensation to eligible employees, directors, and consultants under the excess ofIMAX Corporate Second Amended and Restated Long-Term Incentive Plan (as may be amended, the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows.
The Company’s estimates of future cash flows involve anticipating future revenue streams, which contain many assumptions that are subject to variability, as well as estimates for future cash outlays, the amounts of which,“IMAX LTIP”) and the timing of which are both uncertain. Actual results that differ fromChina Long-Term Incentive Plan (the “China LTIP”) as summarized below. On June 3, 2020, the Company’s budgetshareholders approved the IMAX LTIP at the Company’s Annual and long-range plan could result in a significantly different result to an impairment test, which could impact earnings.
Special Meeting. The Company’s investment in debt securities classified as anavailable-for-sale investment has unrealized holding gains and losses which is excluded from earnings and reported in other comprehensive income until realized. Realization occurs upon the sale of a portion of or the entire investment. The investment is impaired if the value is not expected to recover based on the length of time and extent to which the market value has been less than cost. Furthermore, when the Company intends to sell a specifically identified beneficial interest, a write-down for other-than-temporary impairment shall be recognized in earnings.
Pension Plan Assumptions
The Company’s pension plan obligations and related costs are calculated using actuarial concepts, within the framework of the Compensation – Retirement Benefits Topic of the FASB ASC. A critical assumption to this accountingIMAX LTIP is the discount rate. The Company evaluatesCompany’s governing document and awards to employees, directors, and consultants under this critical assumption annually or when otherwise required to by accounting standards. Other assumptions include factors such as expected retirement date, mortality rate, rateplan may consist of compensation increase, and estimates of inflation.
The discount rate enables the Company to state expected future cash payments for benefits as a present value on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. A lower discount rate increases the present value of benefit obligations and increases pension expense. The Company’s discount rate was determined by considering the average of pension yield curves constructed from a large population of high-quality corporate bonds. The resulting discount rate reflects the matching of plan liability cash flows to the yield curves.
The discount rate used is a key assumption in the determination of the pension benefit obligation and expense. A 1.0% change in the discount rate used would result in a $2.2 million reduction or a $2.6 million increase in the pension benefit obligation with a corresponding benefit or charge recognized in other comprehensive income in the year.
Deferred Tax Asset Valuation
As at December 31, 2017, the Company had net deferred income tax assets of $30.7 million. The Company’s management assesses realization of its deferred tax assets based on all available evidence in order to conclude whether it is more likely than not that the deferred tax assets will be realized. Available evidence considered by the Company includes, but is not limited to, the Company’s historical operating results, projected future operating results, reversing temporary differences, contracted sales backlog at December 31, 2017, changing business circumstances, and the ability to realize certain deferred tax assets through loss and tax credit carry-back and carry-forward strategies.
When there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, the Company would adjust the applicable valuation allowance in the period when such change occurs.
Tax Exposures
The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company adjusts tax expense to reflect the Company’s ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results. The Company provides for such exposures in accordance with Income Taxes Topic of the FASB ASC.
Stock-Based Compensation
The Company’s stock-based compensation generally includes stock options, and restricted share units (“RSUs”)., performance share units (“PSUs”) and other awards. A separate stock option plan, the China LTIP, was adopted by a subsidiary of the Company in October 2012.
The Company estimatesmeasures share-based compensation expense using the grant date fair value of the award, which is recognized as an expense in the Consolidated Statements of Operations on a straight-line basis over the requisite service period. Share-based compensation expense is not adjusted for estimated forfeitures, but is instead adjusted when and if actual forfeitures occur.
Stock Options
The Company utilizes a lattice-binomial option-pricing model (“Binomial Model”) to determine the fair value of stock option awards on the date of grant using fair value measurement techniques. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant.
The Company utilizes a lattice-binomial option-pricing model (the “Binomial Model”) to determine the fair value of stock option awards.date. The fair value determined by the Binomial Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards,award, and actual and projected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises are expected to occur on average.average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model best provides an accuratea fair measure of the fair value of the Company’s employee stock options. Although
The Company stratifies its employees into homogeneous groups in order to calculate the grant date fair value of stock options using the Binomial Model. As a result, ranges of assumptions are used for the expected life of the option. The Company uses historical data to estimate option exercise behavior within the Binomial Model and various groups of employees that have similar historical exercise behavior are grouped together for valuation purposes. The expected volatility rate is estimated based on a blended volatility method which takes into consideration the Company’s historical share price volatility, the Company’s implied volatility which is determined in reference to observed current market prices for the Company’s traded options and the Company’s peer group volatility.
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(See Note 17(c) of Notes to Consolidated Financial Statements in Part II, Item 8 for the assumptions used to determine the fair value of employeethe Company’s stock options is determined in accordance with the Equity topic of the FASB ASC using an option-pricing model, that value may not be indicative of theoptions.)
Restricted Share Units
The fair value observed in a willing buyer/willing seller market transaction.
Impact of Recently Issued Accounting Pronouncements
Please see note 3RSU awards is equal to the audited consolidated financial statements in Item 8 of this Company’s 2017Form 10-K for information regarding the Company’s recent changes in accounting policies and recently issued accounting pronouncements impacting the Company.
ASSET IMPAIRMENTS AND OTHER CHARGES (RECOVERIES)
The following table identifies the Company’s charges (recoveries) relating to the impairment of assets:
Years Ended December 31, | ||||||||||||
(in thousands of U.S. dollars) | 2017 | 2016 | 2015 | |||||||||
Asset impairments | ||||||||||||
Property, plant and equipment | $ | 3,966 | $ | 223 | $ | 405 | ||||||
Impairment of investments and loans | 1,225 | 194 | 425 | |||||||||
Film assets | 17,363 | 3,020 | — | |||||||||
Other assets | 2,533 | — | — | |||||||||
Other charges (recoveries): | ||||||||||||
Accounts receivable | 1,967 | 1,029 | 677 | |||||||||
Financing receivables | 680 | (75 | ) | 75 | ||||||||
Inventories | 500 | 458 | 572 | |||||||||
Other assets | 47 | — | — | |||||||||
Property, plant and equipment | 1,224 | 885 | 1,485 | |||||||||
Other intangible assets | 63 | 206 | 86 | |||||||||
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Total asset impairments and other charges | $ | 29,568 | $ | 5,940 | $ | 3,725 | ||||||
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Asset Impairments
As a resultclosing price of the Company’s restructuring activitiescommon stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service periods in June 2017, certain long-lived assets were deemed to be impaired as the Company’s exit from certain activities limited the future revenue associated with these assets. Consolidated Statements of Operations.
Performance Share Units
The Company recognized property, plantgrants two types of PSU awards, one which vests based on a combination of employee service and equipment chargesthe achievement of $3.7 million, film impairment chargescertain EBITDA-based targets and one which vests based on a combination of $0.3 millionemployee service and other asset chargesthe achievement of $1.5 million. Additional detailscertain stock-price targets. These awards vest over a three-year performance period. The grant date fair value of PSUs with EBITDA-based targets is equal to the closing price on the date of grant or the average closing price of the Company’s restructuring activitiescommon stock for five days prior to the date of grant. The grant date fair value of PSUs with stock-price targets is determined on the grant date using a Monte Carlo simulation, which is a valuation model that takes into account the likelihood of achieving the stock-price targets embedded in the award (“Monte Carlo Model”). The compensation expense attributable to each type of PSU is recognized on a straight-line basis over the requisite service period. At the conclusion of the three-year performance period, the number of PSUs that ultimately vest can range from 0% to a maximum vesting opportunity of 175% of the initial award, depending upon actual performance versus the established EBITDA and stock-price targets.
The fair value determined by the Monte Carlo Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are discussed in note 22not limited to, its audited consolidated financial statements in Item 8market conditions as of this 2017 Form10-K.the grant date, the Company’s expected stock price volatility over the term of the awards, and other relevant data. The compensation expense is fixed on the date of grant based on the dollar value granted.
The Company records asset impairment chargesamount and timing of compensation expense recognized for property, plant and equipment after anPSUs with EBITDA-based targets is dependent upon management's assessment of the carrying valuelikelihood and timing of certain asset groups in light of their future expected cash flows. During 2017, the Company recorded asset impairment charges of $0.3 million
(2016 — $0.2 million; 2015 — $0.4 million) as the Company recognized that the carrying values for the assets exceeded the expected undiscounted future cash flows.
In 2017, the Company identified andwrote-off $1.2 million related to a certain loan that is no longer considered collectible. No such charge was recognized in the years ended December 31, 2016 and 2015, respectively.
The Company recognized a $0.2 million other-than-temporary impairment of its investments in 2016 as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost (2015 — $0.4 million). No such charge was recorded in the year ended December 31, 2017.
The Company recognized an impairment on its episodic content assets, within film assets, of $11.7 millionachieving these targets. If, as a result of lowermanagement’s assessment, it is projected that a greater number of PSUs will vest than previously anticipated, revenue generated for the “Marvel’s Inhumans” television series’ first season. No such charge wasa life-to-date adjustment to increase compensation expense is recorded in the years ended December 31, 2016 and 2015, respectively.
The Company reviewed the carrying value of certain documentary film assetsperiod such determination is made. Conversely, if, as a result of management’s assessment, it is projected that a lower number of PSUs will vest than expected revenue being generated duringpreviously anticipated, a life-to-date adjustment to decrease compensation expense is recorded in the period such determination is made.
Deferred Income Tax Assets
Income taxes are accounted for under the liability method whereby deferred income tax assets and revised expectationsliabilities are recognized for the expected future revenues basedtax consequences of temporary differences between the accounting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in the latest information available. An impairmentCompany’s Consolidated Statements of $5.3 million was recorded based onOperations in the carrying valueperiod in which the change is enacted. Investment tax credits are recognized as a reduction of these documentary films as compared to the related estimated future box office and revenues that would ultimately be generated by these films (2016 — $3.0 million; 2015 — $nil).
In 2017, the VR Fund helped finance the production of one interactive VR experience. Due to the weaker than expected performance at the VR Centers, the Company recognized a $1.0 million impairment of the VR content asset. The VR fund is consolidated by the Company and has a third partynon-controlling interest. The Company’s share of this impairment afternon-controlling interest is $0.4 million.
Other Charges (Recoveries)income tax expense.
The Company recorded a net provisionassesses the realization of $2.0 million in 2017 (2016 — $1.0 million; 2015 —$0.7 million) in accounts receivabledeferred income tax assets and, based on all available evidence, concludes whether it is more likely than not that the Company’snet deferred income tax assets will be realized. A valuation allowance is provided for the amount of deferred income tax assets not considered to be realizable. In assessing the need for a valuation allowance, management considers, among other things, projections of future taxable income and ongoing assessment of the collectability of specific customer balances. The higher charge in 2017 is primarily resulting from the deterioration in the financial condition of certain theater exhibitorsprudent and studios.
In 2017,feasible tax planning strategies. If management determines that sufficient negative evidence exists (for example, if the Company recordedexperiences cumulative three-year losses in a net provision of $0.7 million in financing receivables (2016 — net recovery of $0.1 million; 2015 — net provision of $0.1 million). Provisions of the Company’s financing receivables is recorded when the collectability associated with certain financing receivables is uncertain. These provisions are adjusted when there isjurisdiction), then management will consider recording a significant change in the amountvaluation allowance against a portion or timing of the expected future cash flows or when actual cash flows differ from cash flows previously expected.
The Company recorded an $0.5 million provision (2016 — $0.5 million; 2015 — $0.6 million) in costs and expenses applicable to revenues due to a reduction in the net realizable value of its inventories. These charges primarily resulted from a reduction in the net realizable value of its theater system equipment inventories and certain service part inventories due to normal operational activity.
In 2017, the Company recorded a charge of $1.2 million (2016 — $0.3 million; 2015 — $0.4 million) reflecting property, plant and equipment that were no longer in use. In 2016, the Company also recorded a charge of $0.6 million (2015 — $0.6 million) in cost of sales applicable to Equipment and product sales upon the upgrade of xenon-based digital systems under operating lease arrangements to laser-based digital systems under sales or sales-type lease arrangements. No such charge was recorded in the year ended December 31, 2017. In addition, in 2015, the Company recorded a charge of $0.5 million in cost of sales applicable to Rentals upon the upgrade of certain xenon-based digital systems to laser-based digital systems operating under joint revenue sharing arrangements. No such charge was recorded for the year ended December 31, 2017 and 2016, respectively.
In 2017, the Company recorded a charge of $0.1 million (2016 — $0.2 million; 2015 — $0.1 million) reflecting other intangible assets that were no longer in use.
As of December 31, 2017, the Company can determine a reasonable estimate of the effects of U.S. tax reform and is recording that estimate as a provisional amount. The provisionalre-measurementall of the deferred tax assets in that jurisdiction. If, after recording a valuation allowance, management’s projections of future taxable income and liabilities resultedother positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove more difficult to support the realization of these deferred tax assets. As a result, an additional valuation allowance could be required, which would have an adverse impact on the Company’s effective income tax rate and results. Conversely, if, after recording a valuation allowance, management determines that sufficient positive evidence exists in the jurisdiction in which a valuation allowance is recorded (for example, if the Company is no longer in a $9.3three-year cumulative loss position in the jurisdiction, and management expects to have future taxable income in that jurisdiction based upon management’s forecasts and the expected timing of deferred tax asset reversals), the Company may reverse a portion or all of the valuation allowance in that jurisdiction. In such situations, the adjustment made to the deferred tax asset would have a favorable impact on the Company’s effective income tax rate and results in the period such determination was made.
53
In the third quarter of 2020, the Company assessed the recoverability of its deferred tax assets and recorded a $23.7 million discretevaluation allowance to reduce the value of deferred tax provision whichassets. The valuation allowance was recorded in the jurisdictions where management could not reliably forecast that future tax liabilities would arise within the next five years, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic. In the fourth quarter of 2020, the Company increased the effectivevaluation allowance against its deferred tax rateassets by 31.1% for$4.9 million due to additional losses recorded in the year. See “Results of Operations” in Item 7 and note 9period. The valuation allowance is expected to the audited consolidated financial statements in Item 8 of this Company’s 2017Form 10-K for further discussion.
NON-GAAP FINANCIAL MEASURES
In this report,reverse when the Company presents certain data which aredetermines it is more likely than not recognized under U.S. GAAP and are considered“non-GAAP financial measures” under U.S. Securities and Exchange Commission rules. Specifically,that the deferred tax assets in these jurisdictions will be realized. Despite this valuation allowance, the Company presents the followingnon-GAAP financial measures as supplemental measures of its performance:
The Company presents adjusted net income and adjusted net income per diluted share, which excludes stock-based compensation andnon- recurring exit costs, restructuring charges and associated impairments, the related tax impact of these adjustments and a tax charge resultingbenefit from the enactment of the U.S.tax attributes which currently have a valuation allowance applied to them.
Uncertain Tax Act, 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 anon-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) andnon-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 tonon-controlling interests, its stock-based compensation,non-recurring exit costs, restructuring charges and associated impairments (net of any related tax impact) and a tax charge resulting from the enactment of the U.S. Tax Act 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, thesenon-GAAP measures may not be comparable to similarly titled amounts reported by other companies. The Company’snon-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. GAAPPositions
The Company is requiredsubject to maintainongoing tax exposures, examinations and assessments in various jurisdictions. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a minimum levelprobability weighting of “EBITDA”,the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as such term is definedof the balance sheet date. Although management believes that the Company has adequately accounted for its uncertain tax positions, tax audits can result in subsequent assessments where the ultimate resolution may result in the Company’s credit agreement (and which is referredCompany owing additional taxes above what was originally recognized in its financial statements.
Tax reserves for uncertain tax positions are adjusted by the Company to herein as “Adjusted EBITDA per Credit Facility”,reflect management’s best estimate of the outcome of examinations and assessments and in light of changing facts and circumstances, such as the credit agreement includescompletion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with the uncertain tax positions until they are resolved. Some of these adjustments require significant judgment in estimating the timing and amount of the additional adjustments beyond interest, taxes, depreciationtax expense.
RECENTLY ISSUED ACCOUNTING STANDARDS
Please see Note 4 of Notes to Consolidated Financial Statements in Part II, Item 8 for a discussion of recently issued accounting standards and amortization). EBITDA and Adjusted EBITDA per Credit Facility (each as defined below) are used by management to evaluate, assess and benchmarktheir impact on the Company’s operational results, and the Company believes that EBITDA and Adjusted EBITDA per Credit Facility are 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 and adjusted EBITDA attributable to non-controlling interests.financial statements.
The Company is also introducing the metric Adjusted EBITDA per Credit Facility excluding “Marvel’s Inhumans”, which is defined and discussed under “Credit Facility” in this Item 7. However, the Company cautions that EBITDA, Adjusted EBITDA per Credit Facility and Adjusted EBITDA per Credit Facility excluding “Marvel’s Inhumans” are non-GAAP measures and should not be construed as substitutes for net income, operating income or other operating performance measures that are determined in accordance with U.S. GAAP. In addition, EBITDA, Adjusted EBITDA per Credit Facility and Adjusted EBITDA per Credit Facility excluding “Marvel’s Inhumans” might not be comparable to similarly titled measures used by other companies.
54
RESULTS OF OPERATIONS
Important factors that theThe Company’s business and future prospects are evaluated by Richard L. Gelfond, its Chief Executive Officer (“CEO”) Richard L. Gelfond uses in assessing the Company’s business, using a variety of factors and prospects include:
Management, including gross margins earned by the Company’s segments, as discussed below; (v) consolidated earnings from operations, as adjusted for unusual items; (vi) the overall execution, reliability and consumer acceptance of The IMAX Experience; (vii) the success of new business initiatives; and (viii) short- and long-term cash flow projections.
The CEO who is the Company’s Chief Operating Decision Maker (“CODM”) (as, as such term is defined in the Segment Reporting Topicunder U.S. GAAP. The CODM, along with other members of the FASB ASC), assessesmanagement, assess segment performance based on segment revenues and gross margins and film performance.margins. Selling, general and administrative expenses, research and development costs, the amortization of intangibles, receivablesintangible assets, provisions (recoveries),for (recoveries of) current expected credit losses, certain write-downs, net of recoveries, interest income, interest expense and income tax (provision) recovery(expense) benefit are not allocated to the Company’s segments. As identified in note 18 to the accompanying audited financial statements in Item 1, the Company identified new business as an additional reportable segment in the first quarter of 2017. The Company now 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:
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 identifiedare organized into the following four categories: (i) IMAX Technology Network; (ii) IMAX Technology Sales and Maintenance; (iii) New Business Initiatives; and (iv) Film Distribution and Post-Production. Within these categories are the Company’s following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements; (iii) IMAX Systems, (iv) IMAX Maintenance; (v) Other Theater Business; (vi) New Business Initiatives; (vii) Film Distribution; and (viii) Film Post-Production, each of which are described above has been classified into oneunder “Sources of these broader groups for purposes of MD&A discussion. The Company believes that this approachRevenue.” This categorization is consistent with how the CODM reviews the financial performance of the businessCompany 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 groupsthe four categories listed above is significantly more relevant and useful to readers, as the Company’s consolidated statementsConsolidated Statements of operationsOperations captions combine results from several segments. Certain
The discussion of the prior year’s figures have been reclassifiedCompany’s results of operations below compares results for the years ended December 31, 2020 and 2019. A discussion of the Company’s results of operations comparing results for the years ended December 31, 2019 and 2018 is included under the section entitled “Results of Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and is incorporated by reference into this Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
55
Results of Operations for the Years Ended December 31, 2020 and 2019
For the year ended December 31, 2020, the Company reported a net loss attributable to conformcommon shareholders of $(143.8) million, or $(2.43) per diluted share, as compared to net income attributable to common shareholders of $46.9 million, or $0.76 per diluted share, for the current year’s presentation.year ended December 31, 2019. For the year ended December 31, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(112.1) million, or $(1.89) per diluted share*, as compared to adjusted net income attributable to common shareholders* of $64.8 million, or $1.05 per diluted share*, for the year ended December 31, 2019.
The following table sets forthpresents the breakdown ofCompany’s revenue and gross margin (margin loss) by category:category and reportable segment for the years ended December 31, 2020 and 2019:
|
| Revenue |
|
| Gross Margin (Margin Loss) |
| ||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
IMAX Technology Network |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX DMR |
| $ | 28,265 |
|
| $ | 120,765 |
|
| $ | 13,731 |
|
| $ | 78,592 |
|
Joint revenue sharing arrangements, contingent rent |
|
| 17,841 |
|
|
| 76,673 |
|
|
| (9,500 | ) |
|
| 48,446 |
|
|
|
| 46,106 |
|
|
| 197,438 |
|
|
| 4,231 |
|
|
| 127,038 |
|
IMAX Technology Sales and Maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX Systems (1) |
|
| 54,055 |
|
|
| 107,321 |
|
|
| 24,816 |
|
|
| 58,168 |
|
Joint revenue sharing arrangements, fixed fees |
|
| 2,056 |
|
|
| 11,014 |
|
|
| 529 |
|
|
| 2,613 |
|
IMAX Maintenance |
|
| 21,999 |
|
|
| 53,151 |
|
|
| 3,068 |
|
|
| 23,010 |
|
Other Theater Business (2) |
|
| 1,666 |
|
|
| 8,390 |
|
|
| (438 | ) |
|
| 2,624 |
|
|
|
| 79,776 |
|
|
| 179,876 |
|
|
| 27,975 |
|
|
| 86,415 |
|
New Business Initiatives |
|
| 2,226 |
|
|
| 2,754 |
|
|
| 1,878 |
|
|
| 2,106 |
|
Film Distribution and Post-Production |
|
| 8,719 |
|
|
| 12,210 |
|
|
| (10,198 | ) |
|
| (1,262 | ) |
Sub-total |
|
| 136,827 |
|
|
| 392,278 |
|
|
| 23,886 |
|
|
| 214,297 |
|
Other |
|
| 176 |
|
|
| 3,386 |
|
|
| (2,346 | ) |
|
| (125 | ) |
Total |
| $ | 137,003 |
|
| $ | 395,664 |
|
| $ | 21,540 |
|
| $ | 214,172 |
|
(In thousands of U.S. dollars) | Revenue | Gross Margin | ||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
Network Business | ||||||||||||||||||||||||
IMAX DMR | $ | 108,853 | $ | 106,403 | $ | 107,089 | $ | 71,789 | $ | 69,196 | $ | 77,645 | ||||||||||||
Joint revenue sharing arrangements - contingent rent | 70,444 | 73,500 | 81,396 | 47,337 | 54,705 | 63,500 | ||||||||||||||||||
IMAX systems - contingent rent | 3,890 | 4,644 | 3,900 | 3,890 | 4,644 | 3,900 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
183,187 | 184,547 | 192,385 | 123,016 | 128,545 | 145,045 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Theater Business | ||||||||||||||||||||||||
IMAX systems | ||||||||||||||||||||||||
Sales and sales-type leases(1) | 79,853 | 89,525 | 86,934 | 47,639 | 44,788 | 44,787 | ||||||||||||||||||
Ongoing fees and finance income(2) | 10,494 | 11,359 | 11,292 | 10,095 | 10,660 | 10,478 | ||||||||||||||||||
Joint revenue sharing arrangements – fixed fees | 10,118 | 17,913 | 17,724 | 2,349 | 5,132 | 4,873 | ||||||||||||||||||
Theater system maintenance | 45,383 | 40,430 | 36,944 | 18,275 | 13,660 | 12,701 | ||||||||||||||||||
Other theater | 9,145 | 10,888 | 10,482 | 1,965 | 1,930 | 2,105 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
154,993 | 170,115 | 163,376 | 80,323 | 76,170 | 74,944 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
New Business | 24,522 | 626 | — | (16,176 | ) | (2,199 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other | ||||||||||||||||||||||||
Film distribution and post-production | 13,172 | 14,127 | 10,945 | (1,006 | ) | (180 | ) | 1,122 | ||||||||||||||||
Other | 4,893 | 7,919 | 7,099 | (911 | ) | 342 | (1,823 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
18,065 | 22,046 | 18,044 | (1,917 | ) | 162 | (701 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 380,767 | $ | 377,334 | $ | 373,805 | $ | 185,246 | $ | 202,678 | $ | 219,288 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes initial upfront payments and the present value of fixed minimum payments from |
(2) | Principally includes after-market sales of IMAX projection system parts and |
* | See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount. |
56
Revenues and Gross Margin
ResultsDue to the COVID-19 global pandemic, substantially all of Operations Discussionthe theaters in the IMAX network were closed for a significant portion of 2020. In the Three Years Endedthird quarter of 2020,stay-at-home orders were lifted in many countries and movie theaters throughout the IMAX network gradually reopened with reduced capacities, physical distancing requirements, and other safety measures. As of December 31, 20172020, 71% of the theaters in the commercial multiplex network spanning 41 countries were open, including 44% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 53% of the theaters in Rest of World markets. In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance levels despite the continued delay of Hollywood theatrical releases, which typically account for 70% of box office ticket sales in those regions. Management believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and moviegoers feel safe. However, ticket sales have been significantly lower than normal levels in theaters outside of Asia as Hollywood movie studios have further delayed the theatrical release dates for a number of films. As a result, certain theater chains have remained closed or have reduced their operating hours. In addition, theaters in major markets remain temporarily closed.
The Company reported net incomeAs a result of $12.5 million, or $0.19 per basicthe factors discussed in the previous paragraph, the Company’s consolidated results of operations and diluted share,segment results for the year ended December 31, 2017, as compared to net income2020 materially declined versus the prior year with total revenues and gross margin decreasing by $258.7 million (65%) and $192.7 million (90%), respectively.
(See “Impact of $39.3 million, or $0.58 per basic and diluted share,COVID-19 Pandemic” above for the year ended December 31, 2016 and net income of $64.6 million, or $0.92 per basic share and $0.90 per diluted share, for the year ended December 31, 2015.
Net income for the year ended December 31, 2017 includes a $22.7 million charge, or $0.35 per diluted share (2016 — $30.5 million, or $0.45 per diluted share; 2015 — $21.9 million or $0.31 per diluted share), for stock-based compensation and a $16.2 million charge, or $0.25 per diluted share for exit costs, restructuring charges and associated impairments (2016 — $nil; 2015 — $nil). In 2017, the Company also recognized a $9.3 million, or $0.14 per diluted share,non-recurring tax charge as the Companyre-measured its deferred tax assets and liabilities asmore detailed discussion of the date of enactmentimpacts of the recently passed Tax Act.pandemic on the Company’s business.)
Adjusted net income, which consists of net income excluding the impact of stock-based compensation, exit costs, restructuring charges and associated impairments, the related tax impact of these adjustments, and tax charge from the provisionalre-measurement of U.S. deferred tax assets and liabilities given changes enactedIMAX Technology Network
IMAX Technology Network results are influenced by the Tax Act, was $51.5 million, or $0.79 per diluted share, forlevel of commercial success and box office performance of the year ended December 31, 2017 as compared to adjusted net income of $61.1 million, or $0.90 per diluted share, for the year ended December 31, 2016 and $82.4 million, or $1.15 per diluted share, for the year ended December 31, 2015.
The Company reported net income attributable to common shareholders of $2.3 million, or $0.04 per basic share and diluted share for the year ended December 31, 2017 (2016 — $28.8 million, or $0.43 per basic share and $0.42 per diluted share; 2015 — $55.8 million, or $0.79 per basic share and $0.78 per 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 related tax impact of these adjustments, and tax charge from the provisionalre-measurement of U.S. deferred tax assets and liabilities given changes enacted by the Tax Act, was $40.5 million, or $0.62 per diluted share, for the year ended December 31, 2017 as compared to adjusted net income attributable to common shareholders of $50.0 million, or $0.73 per diluted share, for the year ended December 31, 2016 and $73.0 million, or $1.02 per diluted share, for the year ended December 31, 2015.
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:
Years Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Net Income | Diluted EPS | Net Income | Diluted EPS | Net Income | Diluted EPS | |||||||||||||||||||
Reported net income | $ | 12,518 | $ | 0.19 | $ | 39,320 | $ | 0.58 | $ | 64,624 | $ | 0.90 | ||||||||||||
Adjustments: | ||||||||||||||||||||||||
Stock-based compensation | 22,653 | 0.35 | 30,523 | 0.45 | 21,880 | 0.31 | ||||||||||||||||||
Exit costs, restructuring charges and associated impairments | 16,174 | 0.25 | — | — | — | — | ||||||||||||||||||
Tax impact on items listed above | (9,218 | ) | (0.14 | ) | (8,783 | ) | (0.13 | ) | (4,056 | ) | (0.06 | ) | ||||||||||||
Impact of enactment of U.S. Tax Act | 9,323 | 0.14 | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Adjusted net income | 51,450 | 0.79 | 61,060 | 0.90 | 82,448 | 1.15 | ||||||||||||||||||
Net income attributable tonon-controlling interests(1) | (10,174 | ) | (0.16 | ) | (10,532 | ) | (0.16 | ) | (8,780 | ) | (0.12 | ) | ||||||||||||
Stock-based compensation (net of tax of $0.2 million, $0.2 million and $0.2 million, respectively)(1) | (620 | ) | (0.01 | ) | (533 | ) | (0.01 | ) | (703 | ) | (0.01 | ) | ||||||||||||
Exit costs, restructuring charges and associated impairments (net of tax of $0.1 million)(1) | (181 | ) | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Adjusted net income attributable to common shareholders | $ | 40,475 | $ | 0.62 | $ | 49,995 | $ | 0.73 | $ | 72,965 | $ | 1.02 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Weighted average diluted shares outstanding | 65,540 | 68,263 | 71,058 | |||||||||||||||||||||
|
|
|
|
|
|
Revenues and Gross Margin
The Company’s revenues for the year ended December 31, 2017 increased to $380.8 million from $377.3 million in 2016. The gross margin across all segments in 2017 was $185.2 million, or 48.7% of total revenue, compared to $202.7 million, or 53.7% of total revenue in 2016. Impairment charges included in gross margin for the year ended December 31, 2017 were $19.7 million, of which $13.0 million related to new business initiatives, or 5.2% of total revenue, compared to $3.7 million, of which $nil related to new business initiatives, or 1.0% of total revenue in the year ended December 31, 2016. Impacting the gross margin in 2017, was a gross loss experienced in the Company’s new business segment mainly duefilms released to the impairment charges discussed above.
The Company’s revenues for the year ended December 31, 2016 increased to $377.3 million from $373.8 million in 2015, largely due to an increase in revenues from the Company’s theater business. The gross margin across all segments in 2016 was $202.7 million, or 53.7% of total revenue, compared to $219.3 million, or 58.7% of total revenue in 2015. Impacting the gross margin in 2016 was the lower revenues experienced in the Company’s network, business largely due to weakerbox-office performance, particularly in the China region. Grossbox-office is a significant driver of the Company’s business as the impact of film performance affects multiple reporting segments,well as discussed below.
Network Business
Grossbox-office generated by IMAX DMR films increased 1.1% to $976.5 million in 2017 from $965.6 million in 2016. The 2016 grossbox-office generated was 2.1% lower than the $985.3 million in 2015. In 2017, grossbox-office was generated primarily from the exhibition of 67 films (60 new and 7 carryovers), as compared to 58 films (51 new and 7 carryover) exhibited in 2016 and 57 films (44 new and 13 carryover) exhibited in 2015. In recent years, the Company has experienced weaker grossbox-office particularly in the China region resulting from both film performance and unfavorable exchange rates.
The Company’s network business performance is impacted byother factors including the timing of a film release to the IMAX theater network,films released, the commercial successlength of the film,theatrical distribution window, the Company’s take rates under itsthe Company’s DMR and joint revenue sharing arrangements and the distribution window forlevel of marketing spend associated with the exhibition of films released in the IMAX theater network.year. Other factors impacting performanceIMAX Technology Network results include fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations.Dollar.
Network business revenue decreased by 0.7% to $183.2 million inFor the year ended December 31, 2017 from $184.52020, IMAX Technology Network revenues and gross margin decreased by $151.3 million in(77%) and $(122.8) million (97%), respectively, when compared to the prior year principally due to the impact of the COVID-19 pandemic, as discussed above. See below for separate discussions of IMAX DMR and JRSA contingent rent results for the year.
(See “Impact of COVID-19 Pandemic” above for a more detailed discussion of the impacts of the pandemic on the Company’s business.)
IMAX DMR
For the year ended December 31, 2016, primarily as a result of decreased revenue from joint revenue sharing arrangements. Furthermore, network business revenue was 4.1% lower in 2016 from the $192.4 million experienced in 2015. The2020, IMAX DMR revenues and gross margin experienceddecreased by the Company’s network business in 2017 was $123.0$92.5 million or 67.2% of network business revenue,(77%) and $64.9 million (83%), respectively, when compared to $128.5 million, or 69.7% in 2016 and $145.0 million, or 75.4% in 2015.
The 4.2% decrease in revenues from joint revenue sharing arrangements was largelythe prior year. These decreases are due to lower joint venture take rates, offset slightlya $849.3 million (77%) reduction in GBO generated by continued network growth. Joint venture take rates are impacted byIMAX DMR films, from $1,108.5 million to $259.2 million, due to the mix of theater systems installed and the particular geographic market for those systems. Contingent rent revenues from joint revenue sharing arrangements decreased to $70.4 million inCOVID-19 pandemic. For the year ended December 31, 20172020, GBO was generated primarily by the exhibition of 35 films (31 new and 4 carryovers) and the re-release of classic titles, as compared to 72 films (60 new and 12 carryovers) exhibited in 2019.
In addition to the level of revenues, IMAX DMR gross margin is also influenced by the costs associated with the films exhibited in the year, and can vary from $73.5 million inyear to year, particularly with respect to marketing expenses. For the year ended December 31, 2016. In 2015 revenues from2020, marketing expenses were $3.4 million, as compared to $22.5 million in the prior year.
Joint Revenue Sharing Arrangements – Contingent Rent
For the year ended December 31, 2020, JRSA contingent rent revenue and gross margin decreased by $58.8 million (77%) and $57.9 million (120%), respectively, when compared to the prior year. These decreases are due to a $429.3 million (77%) reduction in GBO generated by theaters under joint revenue sharing arrangements were $81.4 million. The decrease in revenues in 2016 versus 2015during the current year, from joint revenue sharing arrangements was$560.3 million to $131.0 million, due to weaker film performance in 2016, partly a resultthe COVID-19 pandemic. As of unfavorable exchange rates between applicable local currencies and the U.S. dollar. The Company ended 2017 with 747December 31, 2020, 890 theaters were operating under joint revenue sharing arrangements, as compared to 640870 theaters at the endas of 2016,December 31, 2019, an increase of 16.7% and 5292%. However, as discussed above, a portion of the theaters atin the endIMAX network remain closed as of 2015. Gross box office generatedDecember 31, 2020 due to the COVID-19 pandemic.
57
In addition to the level of revenues, JRSA margin is also influenced by the joint revenue sharinglevel of costs associated with such arrangements, was 2.8% higher at $525.3 millionsuch as depreciation expense related to the underlying Theater Systems and costs incurred to upgrade Theater Systems from digital xenon to IMAX with Laser, as well as advertising, marketing and commission costs primarily for the launch of new theaters. The level of depreciation expense in a year relative to the prior year is a function of the growth of the theater network and the mix of theater system configurations in the network. For the year ended December 31, 2017 from $511.02020, JRSA gross margin included depreciation expense of $24.9 million, as compared to $23.2 million in the prior year reflecting a 2% increase in the number of theaters operating under joint revenue sharing arrangements during the year and the impact of new theaters operating throughout 2019. For the year ended December 31, 2016 and $514.1 million in the year ended December 31, 2015.
The2020, JRSA gross margin from joint revenue sharing arrangements decreased to $47.3 million in the year ended December 31, 2017 from $54.7 million in the year ended December 31, 2016 and $63.5 million in 2015. Included in the calculation of gross margin for the year ended December 31, 2017 wereincludes certain advertising, marketing and commission costs primarily associated with new theater launches of $3.7$1.4 million, as compared to $2.7 million in 2016 and $3.0 million for such expenses in 2015. The lower gross margin experienced in 2017 versus prior years is mostly due to the lower take rates experienced (as discussed above), as well higher depreciation expense resulting from the continuous growth in the number of operational theaters under joint revenue sharing arrangements.
IMAX DMR revenues increased 2.3% to $108.9$3.3 million in the year ended December 31, 2017 from $106.4 million in the year ended December 31, 2016, partially offsetting the decrease in revenues from joint revenue sharing arrangements. prior year.
IMAX DMR revenues increased largely as a result of stronger returns under the Company’s DMR arrangements, driven by the geographical mix of films
exhibited in 2017 as compared to prior years. IMAX DMR revenues decreased 0.6% in 2016 from $107.1 million in the year ended December 31, 2015.
The gross margin from the IMAX DMR segment was $71.8 million, $69.2 millionTechnology Sales and $77.6 million in the years ended December 31, 2017, 2016 and 2015, respectively. 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.
Contingent rent revenue consists of variable payments received in excess of the fixed minimum ongoing payments which are primarily driven by gross box office performance reported by theater operators. Contingent rent revenue from IMAX systems decreased to $3.9 million in the year ended December 31, 2017 from $4.6 million in the year ended December 31, 2016. Contingent rent revenue from IMAX systems increased to $4.6 million in the year ended December 31, 2016 from $3.9 million in the year ended December 31, 2015.
Theater BusinessMaintenance
The primary drivers of this lineIMAX Technology Sales and Maintenance results are the number of business are theater system installationsIMAX Theater Systems installed in a year, and the Company’slevel of gross margin percentage earned on each installation, as well as the associated maintenance contractcontracts that accompany each theater installation. For the year ended December 31, 2017, theater business revenue decreased $15.1 million, or 8.9% to $155.0 million as compared to the year ended December 31, 2016 and increased 4.1% in 2016 as compared to the year ended December 31, 2015. The decrease in theater business revenue in 2017 as compared to 2016 was primarily due to:
The negative variance was partially offset by a $3.9 million increase due to four additional systems installed under sales or sales-type lease arrangements.
Despite the revenue decrease, theater business gross margin increased 5.5% to $80.3 million in 2017 as compared to $76.2 million in 2016, primarily due to the geographic market and variation of sales, sales-type lease and joint revenue sharing arrangements installed. The theater business gross margin was 51.8% compared to 44.8% in 2016 and 45.9% in 2015.
The installation of theater systemsIMAX Theater Systems in newly-builtnewly 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.
For the year ended December 31, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased by $100.1 million (56%) and $58.4 million (68%), respectively, when compared to the prior year as the pace of theater system installations slowed significantly and maintenance revenue was not recognized for theaters that remained closed during the year due to the COVID-19 pandemic, as discussed above. See below for separate discussions of IMAX Systems and IMAX Maintenance results for the year.
The breakdown infollowing table provides detailed information about the mix of IMAX Theater System installations for the years ended December 31, 2020 and 2019:
|
| 2020 |
|
| 2019 |
|
| ||||||||||
(In thousands of U.S. Dollars, except number of systems) |
| Number of Systems |
|
| Revenue |
|
| Number of Systems |
|
| Revenue |
|
| ||||
New IMAX Theater Systems — installed and recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-types lease arrangements(1) |
|
| 27 |
|
| $ | 32,420 |
|
|
| 55 |
|
| $ | 70,367 |
| (2) |
Joint revenue sharing arrangements — hybrid |
|
| 5 |
|
|
| 2,000 |
|
|
| 20 |
|
|
| 10,610 |
|
|
Total new IMAX Theater Systems |
|
| 32 |
|
|
| 34,420 |
|
|
| 75 |
|
|
| 80,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX theater system upgrades — installed and recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-types lease arrangements |
|
| 6 |
|
|
| 10,087 |
|
|
| 17 |
|
|
| 19,630 |
|
|
Total IMAX Theater Systems installed and recognized |
|
| 38 |
|
| $ | 44,507 |
| (3) |
| 92 |
|
| $ | 100,607 |
| (3) |
(1) | The arrangement for the sale of an IMAX Theater System includes fixed upfront and ongoing consideration, including indexed annual minimum payment increases over the term of the arrangement, as well as an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded. |
(2) | Includes a digital theater system relocated from a previous location. This installation is incremental to the IMAX network but full revenue for the digital system was not received. |
(3) | In addition to revenue from new and upgraded IMAX Theater Systems, revenues earned by the IMAX Systems segment also includes finance income and the impact of renewals and amendments to existing theater system arrangements. |
58
The average revenue per IMAX Theater System under sales and sales-type lease and joint revenue sharing arrangements (see discussion below) installations by theater system configuration for 2017, 2016 and 2015 is outlined in the table below:
Years Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Number of Systems | Dollar Value | Number of Systems | Dollar Value | Number of Systems | Dollar Value | |||||||||||||||||||
New IMAX digital theater systems — installed and recognized | ||||||||||||||||||||||||
Sales and sales-types lease arrangements | 60 | $ | 73,560 | 56 | $ | 69,620 | 56 | $ | 68,799 | |||||||||||||||
Short-term operating lease arrangement | — | — | �� | 1 | — | — | — | |||||||||||||||||
Joint revenue sharing arrangements — hybrid | 19 | 10,115 | 33 | 18,777 | 31 | 15,645 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total new theater systems | 79 | 83,675 | 90 | 88,397 | 87 | 84,444 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
IMAX digital theater system upgrades — installed and recognized | ||||||||||||||||||||||||
Sales and sales-types lease arrangements | 4 | 5,502 | 14 | 17,975 | 11 | 14,950 | ||||||||||||||||||
Short-term operating lease arrangements | — | — | — | — | 2 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total upgraded theater systems | 4 | 5,502 | 14 | 17,975 | 13 | 14,950 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total theater systems installed and recognized | 83 | $ | 89,177 | 104 | $ | 106,372 | 100 | $ | 99,394 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The average revenue per full, new theater system under a sales and sales-type lease arrangement varies depending upon the number of theater systemIMAX Theater System commitments with a single respective exhibitor, an exhibitor’s location orand various other various factors. AverageThe average revenue per full new theater system(i.e., not hybrid) IMAX Theater System under a sales and sales-type lease arrangementarrangements was $1.2 million for the year ended December 31, 2017,2020, as compared to $1.3 million in the year ended December 31, 2016 and $1.2 millionprior year.
(See “Impact of COVID-19 Pandemic” above for a more detailed discussion of the impacts of the pandemic on the Company’s business.)
IMAX Systems
For the year ended December 31, 2015.
Revenues from sales2020, IMAX Systems revenue and sales-type leases includes settlement revenue of $1.3gross margin decreased by $53.3 million in 2016 as(50%) and $33.4 million (57%), respectively, when compared to $0.1 million in 2015. Costs associated with settlements consist primarily of commission costs. Gross margin from sales and sales-type leases include settlement margin of $1.2 million in 2016, as compared to $0.1 million in 2015. No such settlement revenue or costs were recorded in the year ended December 31, 2017.2019. These decreases are principally the result of 28 fewer IMAX Theater System installations and 11 fewer IMAX Theater System upgrades in the current year as the pace of theater system installations slowed significantly due to the COVID-19 pandemic.
Theater system maintenance revenue increased 12.3% to $45.4 million inIMAX Maintenance
For the year ended December 31, 2017 from $40.4 million in the year ended December 31, 20162020, IMAX Maintenance revenue and $36.9 in 2015, a 9.4% increase in 2016 from 2015. Theater system maintenance gross margin decreased by $31.2 million (59%) and $19.9 million (87%), respectively, as maintenance revenue was $18.3 million innot recognized during the year ended December 31, 2017 versus $13.7 million inperiods of time when theaters were closed due to the year ended December 31, 2016 and $12.7 million in 2015. The Company recorded a write-down of $0.3 million, $0.2 million and less than $0.1 million for certain service parts inventories in the years ended 2017, 2016 and 2015, respectively. Maintenance revenue continues to grow as the number of theaters in the IMAX theater network grows. COVID-19 pandemic.
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 feesFilm Distribution and finance income was $10.5 million inPost-Production
For the year ended December 31, 20172020, Film Distribution and Post-Production revenue and gross margin decreased by $3.5 million (29%) and $8.9 million, respectively, when compared to $11.4the prior year. The results for the year are significantly influenced by $10.0 million in impairment losses recorded in the year principally to write-down the carrying value of certain documentary and alternative content film assets due to a decrease in projected box office totals and related revenues based on management’s regular quarterly recoverability assessments. As of December 31, 2020, following the recording of these write-downs, the Company’s film assets totaled $5.8 million, which principally consists of DMR and documentary content. There can be no assurances that there will not be additional write-downs to the carrying values of these assets as the Company continues to assess the ongoing impact of the COVID-19 pandemic (see Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8).
Selling, General and Administrative Expenses
For the year ended December 31, 20162020, Selling, General and $11.3Administrative Expenses decreased by $15.0 million in 2015. Gross margin for ongoing rent and finance income decreased(12%), when compared to $10.1 million in the year ended December 31, 2017 from $10.7 million in2019. For the year ended December 31, 20162020, Selling, General, and $10.5Administrative Expenses, excluding the impact of share-based compensation of $20.7 million, were $87.8 million, as compared to $102.7 million in 2015. the prior year, excluding share-based compensation of $20.8 million, representing a decrease of $14.9 million (14.5%). A portion of share-based compensation expense is recognized within Cost and Expenses Applicable to Revenue and Research and Development. (See Note 17 of Notes to Consolidated Financial Statements in Part II, Item 8.)
The comparison to the prior year is significantly influenced by COVID-19 government relief that the Company became entitled to receive during the year under the Canada Emergency Wage Subsidy program and the U.S. CARES Act, of which $6.0 million was recognized in 2020 as a reduction to Selling, General and Administrative Expenses. Also impacting the comparison to the prior year are management’s cost control efforts and lower business activity amidst the COVID-19 global pandemic resulting in lower staff costs, travel, facilities and marketing related expenses, among others. These factors are partially offset by a $19.6 million (38%) decrease in labor and other costs capitalized to inventory, film assets, and joint venture theater equipment or allocated to costs applicable to revenues, due to the lower level of production during the COVID-19 global pandemic.
In response to uncertainties associated with ongoing fees are minimal as it usually consiststhe COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve the cash by eliminating non-essential costs, placing certain employees on a temporary furlough, reducing the working hours of depreciation onother employees and deferring all non-essential capital expenditures to minimum levels.
59
Research and Development
A significant portion of the Company’s theaters under operating lease agreements and/or marketing.research and development efforts over the past several years have been focused on IMAX with Laser, the Company’s 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.
Other theater revenue decreased to $9.1 million inFor the year ended December 31, 2017 as compared to $10.92020, Research and Development expenses increased by $0.4 million in the year ended December 31, 2016 and $10.5 million in 2015. Other theater revenue primarily includes revenue generated from the Company’s after-market sales of projection system parts and 3D glasses. Despite the revenue decline, the gross margin recognized from other theater revenue was on par with prior years ($2.0 million in the year ended December 31, 2017 as compared to $1.9 million in 2016 and $2.1 million in 2015).
New Business
Revenue earned from the Company’s new business initiatives was $24.5 million in the year ended December 31, 2017, as compared to $0.6 million in the year ended December 31, 2016 and $nil in 2015. New business revenue was primarily generated from the release of theco-produced television series “Marvel’s Inhumans” in September 2017 and contractual payments relating to the development of an IMAX VR camera.
The gross margin recognized from the new business segment was a loss of $16.2 million in the year ended December 31, 2017 as compared to a loss of $2.2 million in the year ended December 31, 2016 and $nil in 2015, primarily due to the “Marvel’s Inhumans”performance as well as the launch of the Company’s first pilot IMAX VR Center in Los Angeles, the opening of five VR Centers in 2017 and the performance of the Company’s other new business initiatives, as(8%), when compared to the prior year, comparative period.
The performance of the new business segment for the year ended December 31, 2017, was mostly driven by the Company’s investment in, and the theatrical premiere of, the television series “Marvel’s Inhumans”. Episodic revenue, cost of revenue and negative gross margin recognized for the year ended December 31, 2017, were $20.4 million, $33.4 million and $13.0 million, respectively.
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. The Company recognized a net loss before tax from its new business initiatives for the year ended December 31, 2017 of $31.5 million, which includes amortization of $15.4 million, exit costs, restructuring charges and associated impairments of $3.4 million, impairment charges of $13.0 million and an equity loss of $0.7 million, as compared to net loss of $10.9 million, which includes amortization of $0.6 million and an equity loss of $2.3 million, in the prior year comparative period. Net loss before tax from its new business initiatives for the year ended December 31, 2015 was $8.5 million, which includes amortization of less than $0.1 million and an equity loss of $2.4 million.
Adjusted EBITDA per Credit Facility from the Company’s new business initiatives was $0.3 million in the year ended December 31, 2017 as compared to negative Adjusted EBITDA per Credit Facility of $8.0 million and $6.1 million in the year ended December 31, 2016 and 2015, respectively.
Other
Film distribution and post-production revenues was $13.2 million in the year ended December 31, 2017, as compared to $14.1 million in the year ended December 31, 2016. In 2017 revenues from post-production was almost double that of 2016 due to work performed onDunkirk, which was mostly offset by a decrease in film distribution revenue. The film distribution and post-production segments experienced a gross loss of $1.0 million in the year ended December 31, 2017 as compared to a loss of $0.2 million in the year ended December 31, 2016. The Company reviewed the carrying value of certain documentary film assets as a result of lower than expected revenue being generated during the year and revised expectations for future revenues based on the latest information available. In 2017, an impairment of $5.3 million was recorded based on the carrying value of these documentary films as compared to the related estimated future box office and revenues that would ultimately be generated by these films.
Film distribution and post-production revenues increased 29.1% to $14.1 million in 2016 from $10.9 million in 2015, primarily due to an increase in film distribution revenue from IMAX original films. The year ended December 31, 2016, includes the release of two IMAX original productions,A Beautiful Planetand Voyage of Time, whereas no original films were released in 2015. Gross margin was a loss of $0.2 million in 2016 as compared to $1.1 million in 2015, primarily due to a charge against film assets of $3.0 million in 2016, to reflect the carrying value of certain documentary film assets that exceeded the expected revenues generated from estimated futurebox-office. No similar charge was recorded in 2015. This was partially offset by revenue earned from the release of the two IMAX original productions in 2016 as discussed above.
Other revenue decreased to $4.9 million in the year ended December 31, 2017, as compared to $7.9 million in the year ended December 31, 2016 and $7.1 million in 2015. Other revenue primarily includes revenue generated from the Company’s theater operations and camera rental business. The decrease in revenue is primarily the result of two IMAX owned and operational theaters in the year ended December 31, 2017, as compared to three such theaters in the prior years comparative period.
The gross margin recognized from other revenue was a loss of $0.9 million in the year ended December 31, 2017, as compared to loss of $0.3 million in the year ended December 31, 2016 and loss of $1.8 million in 2015 due to the performance of the owned and operated theaters and the lower revenues from camera rentals.
Selling, General and Administrative Expenses
In conjunctioncosts associated with the Company’s restructuring and cost-savings initiatives, selling, general and administrative expenses decreased to $110.4 million in 2017, as compared to $124.7 million in 2016. Selling, general and administrative expenses excluding the impact of stock-based compensation were $90.0 million in 2017, as compared to $94.2 million in 2016.
Selling, general and administrative expenses increased to $124.7 million in 2016, as compared to $115.3 million in 2015. Selling, general and administrative expenses excluding the impact of stock-based compensation were $94.2 million in 2016, as compared to $93.4 million in 2015.
The following reflects the significant items impacting selling, general and administrative expenses for the years ended December 31, 2017, 2016 and 2015:
2017 | 2016 | 2015 | 2017 versus 2016 | 2016 versus 2015 | ||||||||||||||||||||||||
Stock-based compensation | $ | 20,393 | $ | 30,523 | $ | 21,880 | $ | (10,130 | ) | (33.2 | )% | $ | 8,643 | 39.5 | % | |||||||||||||
Staff costs | 58,284 | 60,659 | 57,046 | (2,375 | ) | (3.9 | )% | 3,613 | 6.3 | % | ||||||||||||||||||
Foreign exchange (gain) loss | (954 | ) | 859 | 2,373 | (1,813 | ) | (211.1 | )% | (1,514 | ) | (63.8 | )% | ||||||||||||||||
Other general corporate expenditures | 32,677 | 32,704 | 34,046 | (27 | ) | (0.1 | )% | (1,342 | ) | (3.9 | )% | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 110,400 | $ | 124,745 | $ | 115,345 | $ | (14,345 | ) | $ | 9,400 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Staff costs presented above are related to the Company’s core business and include salaries and benefits.
The Company’s net foreign exchange gains/losses are related to the translation of foreign currency denominated monetary assets and liabilities.
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 increased to $20.9 million in 2017 compared to $16.3 million in 2016 and $12.7 million in 2015 and are primarily attributable to the continued development of the Company’s updated laser-based digital projection system and other new business initiatives which commenced in 2016, including the development of a VR camera and virtual reality centers.
The Company intends for additional research and development to continue through 2018, as the Company supports further development of an updated laser-based projection system, which is targeted primarily for screens in commercial multiplexes.Connected Theaters initiative.
The Company also 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, developing and manufacturingcertifying more IMAX cameras, enhancing the Company’s 2D and 3D image quality, expanding the applicability of the Company’s digital technology developing IMAX theater systems’ capabilities in both theater and home entertainment and live entertainment, improvements to the DMR processprocess.
In addition, the Company has been, and intends to continue, using time and resources during the abilitybusiness slowdown caused by the COVID-19 global pandemic to deliver DMR releases digitallywork on leveraging and developing technologies and systems to help bring additional interactivity to its theater network, withoutbetter manage certain of the requirement for hard drives.
Receivable Provisions, NetCompany’s internal workflows and better organize and codify certain of Recoveries
Receivable provisions, net of recoveries for accounts receivablethe Company’s data. During previous adverse events and financing receivables amounted to a net provision of $2.6 million in 2017, as compared to $1.0 million in 2016 and $0.8 million in 2015. The higher charge in 2017 as compared to prior years’ is primarily resulting from the deteriorationdownturns in the financial condition of certain theater exhibitors and studios.
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,cinema business, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluationsfostered many of the innovations that helped enable its global growth in recent years, including the development of its customersproprietary DMR process and makes ongoing provisions forthe creation of its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractual commitments.joint-revenue sharing business model.
Asset Impairments and Other ChargesCredit Loss Expense
In 2017, the Company identified and wrote off $1.2 million related to a certain loan that is no longer considered collectible. No such charge was recognized in the prior years comparative period.
The Company recorded a charge related to property, plant and equipment of $0.2 million and $0.4 million in 2016 and 2015, respectively, reflecting assets that no longer meet the capitalization requirements. No such charge was recorded inFor the year ended December 31, 2016.
In 2016,2020, the Company recognizedrecorded a $0.2provision for current expected credit losses of $18.6 million other-than-temporary impairmentreflecting a reduction in the credit quality of its investments astheater and studio related receivable balances, which management believes is primarily related to the value isCOVID-19 pandemic and adequately addresses the risk of not collecting these receivables in full. Management’s judgments regarding expected to recovercredit losses are based on the lengthfacts available to management and involve estimates about the future. Due to the unprecedented nature of timethe COVID-19 pandemic, its effect on the Company’s customers and extenttheir ability to whichmeet their financial obligations to the market value has been less than cost, as comparedCompany is difficult to $0.4 million in 2015. No such charge was recorded inpredict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect. For the year ended December 31, 2017.2019, credit loss expense was $2.4 million. (See Notes 2 and 5 of Notes to Consolidated Financial Statements in Part II, Item 8.)
Interest IncomeAsset Impairments
For the year ended December 31, 2020, the Company recorded asset impairments of $1.2 million (2019 — $nil) principally related to write-down of content-related assets which became impaired in the year. (See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8.).
Legal Judgment and ExpenseArbitration Awards
Interest income was $1.0For the year ended December 31, 2020, the Company recorded a charge of $4.1 million associated with the Final Judgment issued on December 3, 2020 in 2017,respect of the Giencourt matter, as discussed in Note 16(c) of Notes to Consolidated Financial Statements in Part II, Item 8. No such charges were incurred in 2019.
Loss in Fair Value of Investments
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. For the year ended December 31, 2020, the fair value of the Company’s investment in Maoyan resulted in an unrealized loss of $2.1 million, as compared to $1.5an unrealized loss of $0.5 million in 2016 and $1.0the prior year, which are both recognized in the Consolidated Statements of Operations. In February 2021, IMAX China (Hong Kong) sold all of its 7,949,000 shares of Maoyan for gross proceeds of $17.8 million, in 2015.which represents a $2.6 million gain relative to the Company’s acquisition cost. No shares of Maoyan are currently held by IMAX China (Hong Kong).
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Interest Expense
Interest expense was $1.9$7.0 million in 2017,2020, as compared to $1.8$2.8 million in 2016the prior year. The increase in interest expense versus the prior year is due to a higher level of Credit Facility borrowings, which were outstanding for most of the year. In the first quarter of 2020, in response to uncertainties associated with the outbreak of the COVID-19 global pandemic and $1.7its impact on the Company’s business, the Company drew down $280.0 million in 2015. Consistent with its historical financial reporting,available borrowing capacity under the Credit Facility, resulting in total outstanding borrowings of $300.0 million. Furthermore, the Company entered into a First Amendment to the Credit Agreement in June 2020, primarily to suspend the Senior Secured Net Leverage Ratio covenant through the first quarter of 2021. During the amendment period, the applicable margin increased by 150 basis points. The fully drawn Credit Facility coupled with the increase to the applicable margin during the amendment period has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of theresulted in higher interest expense in its consolidated statementscurrent year versus prior year period. (See Note 14 of operations rather than income tax expense. In 2017, 2016 and 2015, the Company recovered less than $0.1 million, respectively,Notes to Consolidated Financial Statements in potential interest and penalties associated with its provision for uncertain tax positions. Also includedPart II, Item 8.)
Included in interest expense is the amortization of deferred finance costs in the amount of $0.6$0.9 million and $0.5 million in 2020 and $1.02019, respectively. The Company incurred fees of approximately $1.1 million in 2017, 2016 and 2015, respectively.connection with the Credit Facility amendment, which are being amortized on a straight-line basis through December 31, 2021. 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.
Income Taxes
For the year ended December 31, 2020, the Company recorded income tax expense of $26.5 million (2019 — $16.8 million), which includes a $28.6 million valuation allowance recorded in 2020. The valuation allowance was recorded in the jurisdictions where management could not reliably forecast that future tax liabilities would arise within the next five years, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic.At the point in time when the Company determines it is more likely than not that the deferred tax assets in these jurisdictions will be realized, the $28.6 million valuation allowance recorded in 2020 is expected to reverse. Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied to them.
Exit costs, restructuring chargesThe Company’s effective tax rate for year ended December 31, 2020 of (20.5)% differs from the Canadian statutory tax rate of 26.2%, primarily due to the recording of the valuation allowance discussed above, withholding taxes associated with the reversal of the indefinite reinvestment assertion for certain foreign subsidiaries, as discussed below, permanent book to tax differences, jurisdictional tax rate differences, and management’s estimates of contingent liabilities related to the resolution of various tax examinations.
In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, the Company recognized a deferred tax liability of $19.1 million for the year for the estimated applicable foreign withholding taxes associated impairmentswith these historical earnings, which will become payable upon the repatriation of any such earnings.
Exit costs, restructuring chargesAs of December 31, 2020, the Company’s Consolidated Balance Sheets include net deferred income tax assets of $18.0 million, net of a valuation allowance of $28.8 million (December 31, 2019 — $23.9 million, net of a valuation allowance of $0.2 million).
As of December 31, 2020, the Company’s Consolidated Balance Sheets include a deferred income tax liability of $19.1 million (December 31, 2019 — $nil).
Equity Method Investments
For the year ended December 31, 2020, the Company reported a loss of $1.9 million due to the write-off of deferred tax assets related to an equity method investment, as compared to $nil in 2019 related to its proportionate share of equity investee results.
Non-Controlling Interests
The Company’s Consolidated Financial Statements include the non-controlling interest in the net income (loss) of IMAX China as well as the impact of non-controlling interests in the activity of its Original Film Fund subsidiary. For the year ended December 31, 2020, the net loss attributable to non-controlling interests of the Company’s subsidiaries was $13.7 million (2019 ─ net income attributable to non-controlling interests of $11.7 million).
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LIQUIDITY AND CAPITAL RESOURCES
Credit Facility
The Company has a credit agreement, the Fifth Amended and Restated Credit Agreement, with Wells Fargo Bank, National Association (“Wells Fargo”), as agent, and a syndicate of lenders party thereto (the “Credit Agreement”). The Company’s obligations under the Credit Agreement are guaranteed by certain of its subsidiaries (the “Guarantors”) and are secured by first-priority security interests in substantially all the assets of the Company and the Guarantors. The facility provided by the Credit Agreement (the “Credit Facility”) matures on June 28, 2023.
The Credit Agreement has a revolving borrowing capacity of $300.0 million, and contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to $440.0 million or greater, subject to certain conditions, depending on the mix of revolving and term loans comprising the incremental facility.
In the first quarter of 2020, in response to uncertainties associated impairmentswith the outbreak of the COVID-19 global pandemic and its impact on the Company’s business, the Company drew down $280.0 million in available borrowing capacity under the Credit Facility, resulting in total outstanding borrowings of $300.0 million.
The Credit Agreement contains a covenant that requires the Company 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, 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 customary representations, warranties and event of default provisions.
On June 10, 2020, the Company entered into the First Amendment to the Credit Agreement (the “Amendment”), which, among other things, (i) suspends the Senior Secured Net Leverage Ratio covenant through the first quarter of 2021, (ii) re-establishes the Senior Secured Net Leverage Ratio covenant thereafter, provided that for subsequent quarters that such covenant is tested, as applicable, the Company will be permitted to use its quarterly EBITDA (as defined in the Credit Agreement) from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020, (iii) adds a $75.0 million minimum liquidity covenant measured at the end of each calendar month and (iv) restricts the Company’s ability to make certain restricted payments, dispositions and investments, create or assume liens and incur debt that would otherwise have been permitted by the Credit Agreement. The modifications to the negative covenants, the minimum liquidity covenant and modifications to certain other provisions in the Credit Agreement pursuant to the Amendment were $16.2effective from the date of the Amendment until the earlier of the delivery of the compliance certificate for the fourth quarter of 2021 and the date on which the Company, in its sole discretion, elects to calculate its compliance with the Senior Secured Net Leverage Ratio by using either its actual EBITDA or annualized EBITDA (the “Designated Period”).
As of December 31, 2020, the Company was in compliance with all of its requirements under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
Borrowings under the Credit Facility 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); provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the applicable margin for LIBOR borrowings will be 2.50% per annum and the applicable margin for U.S. base rate borrowings will be 1.75% per annum. The effective interest rate for the year ended December 31, 2020 was 2.38% (2019 — 3.43%).
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In addition, the Credit Facility has standby fees ranging from 0.25% to 0.38% per annum, based on the Company’s Total Leverage Ratio with respect to the unused portion of the Credit Facility; provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the standby fee will be 0.50% per annum.
The Company incurred fees of approximately $1.1 million in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.
As of December 31, 2020 and 2019, the Company did not have any letters of credit and advance payment guarantees outstanding under the Credit Facility.
(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A.)
Working Capital Facility
On July 24, 2020, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), one of the Company’s majority-owned subsidiaries in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.6 million) to fund ongoing working capital requirements (the “Working Capital Facility”). The facility expires in July 2021. As of December 31, 2020, there was 49.9 million Renminbi ($7.6 million) in borrowings outstanding, 140.1 million Renminbi ($21.5 million) available for future borrowings and 10.0 million Renminbi ($1.5 million) available for letters of guarantees under the Working Capital Facility. There were no amounts drawn under the Working Capital facility at December 31, 2019. The amounts available for borrowing under the Working Capital Facility are not subject to a standby fee. The effective interest rate for the year ended December 31, 2020 was 4.31% (2019 — nil).
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 gain on its foreign currency forward contracts was $2.0 million at December 31, 2020, as the fair value of the forward contracts exceeded the notional value (December 31, 2019 — $0.5 million). As of December 31, 2020, the Company has $31.9 million in notional value of such arrangements outstanding (December 31, 2019 — $36.1 million).
NBC Facility
On October 28, 2019, the Company entered into a $5.0 million facility with the National Bank of Canada (the “NBC Facility”) fully insured by Export Development Canada for use solely in conjunction with the issuance of performance guarantees and letters of credit. The Company did not have any letters of credit and advance payment guarantees outstanding as of December 31, 2020 and 2019 under the NBC Facility.
Assessment of Liquidity and Capital Requirements
As of December 31, 2020, the Company’s principal sources of liquidity included: (i) its balances of cash and cash equivalents ($317.4 million, which reflects the full draw of the Credit Facility in the first quarter of 2020); (ii) the anticipated collection of trade accounts receivable, which includes amounts owed under joint revenue sharing arrangements and DMR agreements with movie studios; (iii) the anticipated collection of financing receivables due in the next 12 months; and (iv) installment payments expected in the next 12 months on its existing sales and sales-type lease arrangements in backlog.
The Company’s $317.4 million balance of cash and cash equivalents as of December 31, 2020 includes $89.9 million in cash held outside of Canada (December 31, 2019—$90.1 million), of which $77.2 million was held in the People’s Republic of China (the “PRC”) (December 31, 2019—$67.6 million). In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, during the year ended December 31, 2020, the Company recognized a deferred tax liability of $19.1 million for the applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings.
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The Company’s operating cash flows and cash balances will be adversely affected if management’s projections of future signings of IMAX 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 Part I, Item 1A), there is no guarantee that the Company will be able to fund its operations through cash flows from operations. Under the terms of the Company’s typical sale and sales-type lease agreements, 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.
The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the Company’s revenues, earnings and operating cash flows in 2020as GBO results from theater exhibitors declined significantly, the installation of certain Theater Systems was delayed, and maintenance services were generally suspended for theaters that were closed. During time periods when there is a lack of new films released by movie studios and a significant number of theaters in the IMAX network are closed, the Company is experiencing a significant decline in earnings and operating cash flows as it is generating significantly lower than normal levels of GBO-based revenue from its joint revenue sharing arrangements and digital remastering services, it is unable to provide normal maintenance services to any of the theaters that remain closed, and while some installation activity is continuing, certain theater system installations have, and may continue to be delayed. In addition, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who are facing financial difficulties as a result of the theater closures. In response, the Company has provided temporary relief to exhibitor partners by waiving or reducing maintenance fees during periods when theaters are closed or operating with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement.
Based on the Company’s current cash balances and operating cash flows, management expects to have sufficient capital and liquidity to fund its anticipated operating needs and capital requirements during the twelve month period following the date of this report. However, as discussed above, the risk of breaching the Senior Secured Net Leverage Ratio within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility borrowings would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part I, Item 1A.)
Cash Flows for the Years Ended December 31, 2020 and 2019
During the year ended December 31, 2020, cash and cash equivalents increased by $207.9 million principally due to financing cash inflows of $240.6 million, which include the full draw of the Credit Facility in the first quarter of 2020, as discussed above. These financing cash inflows are partially offset by $23.0 million of cash used to fund the Company’s operating activities as the COVID-19 global pandemic resulted in a significant decline in revenue and earnings. In addition, during the year ended December 31, 2020, the Company invested $9.3 million in equipment to be used in its joint revenue sharing arrangements with exhibitors, intangible assets and property, plant and equipment. Based on management’s current operating plan for 2021, the Company expects to continue to use cash to deploy additional IMAX Theater Systems under joint revenue sharing arrangements.
Operating Activities
The Company’s net cash used in or provided by operating activities is affected by a number of factors, including: (i) the level of cash collections from customers in respect of existing IMAX Theater System sale and lease agreements, (ii) the amount of upfront payments collected from newly signed IMAX Theater System sale and lease agreements, (iii) the box-office performance of films distributed by the Company and/or released to IMAX theaters, (iv) the level of inventory purchases and (v) the level of the Company’s operating expenses, including expenses for research and development and new business initiatives.
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Net cash used in operating activities totaled to $23.0 million for the year ended December 31, 2020, as compared to net cash provided by operating activities of $90.4 million for the year ended December 31, 2019. For the year ended December 31, 2020, the net cash outflow from operating activities is principally due to the significant decrease in the Company’s revenue and earnings as a result of the COVID-19 global pandemic.
Investing Activities
Net cash used in investing activities totaled $9.3 million in the year ended December 31, 20172020 (2019 — $66.0 million) which is comprised of costs incurredincludes $6.7 million (2019 — $40.5 million) invested in equipment to exit an existing operating lease, employee severance costs, costs of consolidating facilities and contract termination costs. No such charges were incurred in prior years.
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 Cuts and Jobs Act (the “Tax Act”), changes due to foreign exchange, changesbe used in the Company’s valuation allowance based onjoint revenue sharing arrangements with exhibitors. In addition, the Company’s recoverability assessmentsCompany acquired $1.9 million (2019 — $2.9 million) of deferred taxintangible assets, and favorable or unfavorable resolution of various tax examinations.
The Company recorded income tax expense of $16.8 million for the year-ended December 31, 2017. The effective tax rate for the year of 55.9% was significantly higher than the statutory rate dueprincipally related to the impactpurchase of the Tax Act, which was enacted on December 22, 2017 by the U.S. government. The Tax Act makes broadinternal use software, and complex changes to the U.S. tax code including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%,purchased $0.7 million in property, plant and imposing other limitations and changes that limit or eliminate various deductions, including interest expense, performance based compensation for certain executives, and other deductions requiring there-measurement of deferred tax assets and liabilities. U.S. GAAP requires that the impact of changes to tax legislation be recognizedequipment (2019 — $7.4 million). Furthermore, in the period in which the law was enacted.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act when a company does not have all the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. While the Company is able to make reasonable estimates of the impact of the reduction in corporate rate and other changes in the legislation on deferred tax assets and liabilities the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions the Company may take.
The effect of there-measurement on deferred taxes is reflected entirely in the period that includes the enactment date and is allocated directly to income tax expense. As of December 31, 2017, the Company can determine a reasonable estimate of the effects of tax reform and is recording that estimate as a provisional amount. The provisionalre-measurement of the deferred tax assets and liabilities resulted in a $9.3 million discrete tax provision which increased the effective tax rate by 31.1% for the year. The provisionalre-measurement amount may change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities.
The Tax Act also includes a number of other changes including: (a) the imposition of aone-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), (b) a 100% dividends received deduction on dividends from foreign affiliates, (c) a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be global intangible low taxed income or “GILTI”, (d) creation of the base erosion anti-abuse tax, or “BEAT”, (e) provision for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign derived intangible income or “FDII”) and, (f) 100% expensing of qualifying fixed assets acquired after September 27, 2017.
Given that the Company is a Canadian based multinational with subsidiary operations in the US and other foreign jurisdictions a number of these changes are not anticipated to impact the Company. The Company does not expect to be subject to the BEAT, Transition Tax or GILTI given its current legal and tax structures. The Company will be eligible to expense qualifying fixed assets acquired after September 27, 2017, and will be impacted by the additional limitations imposed on the deductibility of executive compensation, and does not expect to be adversely impacted by the limitations placed on the deductibility of interest expense. The impact of the Tax Act may differ from this estimate, during theone-year measurement period due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act.
As a result, no income taxes have been provided for any undistributed foreign earnings, or any additional outside basis differences inherent in these foreign entities, as the Company is a Canadian corporation and these amounts continue to be indefinitely reinvested in foreign operations which are owned directly or indirectly.
As at December 31, 2017, the Company had a gross deferred income tax asset of $30.9 million, against which the Company is carrying a $0.2 million valuation allowance. For the year ended December 31, 2017, the Company recorded an income tax provision2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of $16.8 million, which included a provisionIMAX China purchased equity securities in Maoyan for $15.2 million. No investments of $1.4 million related to its provision for uncertain tax positions. In addition, includedequity securities occurred in the provision for income taxes was a $0.6 million provision for tax shortfalls related to stock-based compensation costs recognized in the period, and the $9.3 million charge relating to there-measurement of2020.
Capital expenditures, including the Company’s US deferred taxinvestment in joint revenue sharing equipment, purchase of property, plant and equipment, other intangible assets and liabilities given the enactment of the Tax Act.investments in film assets were $16.9 million in 2020 as compared to $74.3 million in 2019.
The Company recorded an income tax provision of $16.2Financing Activities
Net cash provided by financing activities totaled $240.6 million for 2016, of which $1.6 million is related to a decrease in its provision for uncertain tax positions and offset by net income tax recovery of $0.1 million.
During the year ended December 31, 2017, after considering all available evidence, both positive (including recent profits, projected future profitability, backlog, carry forward periods for,2020, as compared to net cash used of $57.1 million in 2019. In 2020, the net cash provided by financing activities was principally due to $280.0 million in Credit Facility borrowings drawn in the first quarter of 2020, as discussed above, and utilization of net operating loss carryovers and tax credits, discretionary deductions and other factors) and negative (including cumulative losses in past years and other factors), the Company concluded that the valuation allowance against$7.6 million drawn on IMAX Shanghai’s Working Capital Facility, partially offset by $36.6 million paid to repurchase common shares under the Company’s deferred tax assetsshare repurchase program, $3.6 million paid to purchase treasury stock for the settlement of restricted share units and related taxes, $1.5 million for the repurchase of common shares under the IMAX China share repurchase program, $4.2 million of dividends paid to the non-controlling interest shareholders of IMAX China and $1.1 million in Credit Facility amendment fees.
In 2019, the net cash used in financing activities was adequate. The remaining $0.2principally due to the net repayment of $20.0 million balance in Credit Facility borrowings, $19.2 million for the valuation allowance as at December 31, 2017 is primarily attributablerepurchase of common shares under the IMAX China share repurchase program, $14.4 million paid to certain U.S. state net operating loss carryovers that may expire without being utilized.
Thepurchase treasury stock for the settlement of restricted share units and related taxes, $4.4 million of dividends paid to the non-controlling interest shareholders of IMAX China, and $2.7 million paid to repurchase common shares under the Company’s Chinese subsidiary has made certain enquiries of the Chinese State Administration of Taxation regarding the potential deductibility of certain stock based compensationshare repurchase program, partially offset by $2.4 million common shares issued for stock options issuedexercised and $1.1 million received for the issuance of subsidiary shares to non-controlling interests.
CONTRACTUAL OBLIGATIONS
Payments to be made 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 investmentCompany under contractual obligations as 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 is unable to reliably estimate the magnitude of the related tax benefits at this time.
Equity-Accounted Investments
The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. At December 31, 2017, the equity method of accounting is being utilized for investments with a total carrying value of $nil (December 31, 2016 — $nil). The Company’s accumulated losses in excess of its equity investment were $2.0 million2020 are as at December 31, 2017follows:
|
| Payments Due by Period |
| |||||||||||||||||
(In thousands of U.S. Dollars) |
| Total Obligation |
|
| Less Than One Year |
|
| 1 to 3 years |
|
| 3 to 5 years |
|
| Thereafter |
| |||||
Purchase obligations(1) |
| $ | 35,348 |
|
| $ | 35,247 |
|
| $ | 83 |
|
| $ | — |
|
| $ | 18 |
|
Pension obligations(2) |
|
| 20,298 |
|
|
| — |
|
|
| 20,298 |
|
|
| — |
|
|
| — |
|
Operating lease obligations(3) |
|
| 21,493 |
|
|
| 3,715 |
|
|
| 5,190 |
|
|
| 4,258 |
|
|
| 8,330 |
|
Credit Facility(4) |
|
| 300,000 |
|
|
| — |
|
|
| 300,000 |
|
|
| — |
|
|
| — |
|
Working Capital Facility |
|
| 7,643 |
|
|
| 7,643 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Postretirement benefits obligations |
|
| 3,299 |
|
|
| 126 |
|
|
| 265 |
|
|
| 273 |
|
|
| 2,635 |
|
|
| $ | 388,081 |
|
| $ | 46,731 |
|
| $ | 325,836 |
|
| $ | 4,531 |
|
| $ | 10,983 |
|
(1) | Represents 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 Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), covering its CEO, Mr. Richard L. Gelfond. The SERP has a fixed benefit payable of $20.3 million. The table above assumes that Mr. Gelfond will receive a lump sum payment of $20.3 million six months after retirement at the end of the term of his current employment agreement, which expires on December 31, 2022, in accordance with the terms of the SERP, although Mr. Gelfond has not informed the Company that he intends to retire at that time. |
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(3) | Represents the total minimum annual rental payments due under the Company’s operating leases, almost entirely consisting of rent at the Company’s leased office space in New York. |
(4) | The Company is not required to make any minimum payments on the Credit Facility. |
Pension and $0.5 million as at December 31, 2016, and are classified in Accrued and other liabilities. For the year ended December 31, 2017, gross revenues, cost of revenue and net loss for these investments were $2.5 million, $3.9 million and $2.5 million, respectively (2016 — $0.6 million, $6.8 million and $6.2 million, respectively; 2015 — $nil, $9.3 million and $9.1 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $0.7 million for 2017 as compared to $2.3 million in 2016 and $2.4 million in 2015.
Non-Controlling Interests
The Company’s consolidated financial statements include thenon-controlling interest in the net income of IMAX China resulting from the IMAX China Investment and the IMAX China IPO as well as the impact ofnon-controlling interests in its subsidiaries created for the Film Fund and VR Content Fund activity. For the year ended December 31, 2017, the net income attributable tonon-controlling interests of the Company’s subsidiaries was $10.2 million (2016 — $10.5 million; 2015 — $8.8 million).
Pension PlanPostretirement Obligations
The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”),SERP, covering the Company’s CEO, Mr. Gelfond. As at December 31, 2017, the Company had an unfunded and accrued projected benefit obligation of approximately $19.0 million (December 31, 2016 — $19.6 million) in respect of the SERP.
The components of net periodic benefit cost were as follows:
Years ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Interest cost | $ | 427 | $ | 261 | $ | 253 | ||||||
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Pension expense | $ | 427 | $ | 261 | $ | 253 | ||||||
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The plan experienced an actuarial gain of $1.0 million during 2017, $0.2 million in 2016, and $0.2 million in 2015 resulting primarily from the continuing change in the Pension Benefit Guaranty Corporation (“PBGC”) published annuity interest rates year-over-year used to determine the lump sum payment under the plan.
Under the terms of the SERP, if Mr. Gelfond’s employment is terminated other than for cause (as defined in his employment agreement), he is entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit payments to Mr. Gelfond are subject to a deferral for six months after the termination of his employment, at which time Mr. Gelfond will be entitled to receive interest on the deferred amount credited at the applicable federal rate for short-term obligations. Pursuant to an amendment to his employment agreement dated November 8, 2016,1, 2019, the term of Mr. Gelfond’s employment was extended through December 31, 2019,2022, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of this amendment to his employment agreement, the arrangement, no compensation earned beginning in 2011 istotal benefit payable to be included in calculating this entitlementMr. Gelfond under the SERP.SERP was fixed at $20.3 million. As of December 31, 2020, the Company’s Consolidated Balance Sheet includes the present value of the related SERP benefit obligation of approximately $20.1 million recorded within Accrued and Other Liabilities (December 31, 2019 — $18.8 million).
The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As atof December 31, 2017,2020, the Company hadCompany’s Consolidated Balance Sheet includes an unfunded benefit obligation of $1.7$1.9 million within Accrued and Other Liabilities related to this plan (December 31, 20162019 — $1.7 million). For the year ended December 31, 2017 the Company contributed and expensed an aggregate of $0.1 million (2016 — $0.1 million; 2015 — $0.1$1.6 million).
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s formerCo-CEO and current Chairman of its Board of Directors, upon retirement. As atof December 31, 2017,2020, the Company hadCompany’s Consolidated Balance Sheet includes an unfunded benefit obligation recorded of $0.7 million within Accrued and Other Liabilities related to this plan (December 31, 20162019 — $0.6 million). For the year ended December 31, 2017 the Company contributed and expensed an aggregate of less than $0.1 million (2016 — $0.1 million; 2015 — $0.2$0.7 million).
The Company also maintainsmaintained a non-qualified deferred compensation retirementbenefit plan (the “Retirement Plan”) covering Greg Foster,the former CEO of IMAX Entertainment and Senior Executive Vice President of the Company. The Company has agreed to make a total contribution of $3.2 million over Mr. Foster’s employment term. The Retirement Plan is subject to a vesting schedule based on continued employment with the Company, such that 25% will vest July 2019; 50% will vest July 2022; 75% will vest July 2025; and Mr. Foster will be 100% vested in July 2027. As at December 31, 2017, the Company had an unfunded benefit obligation recorded of $1.0 million (December 31, 2016 - $0.5 million). During 2017, the Company contributed and expensed an aggregate of $0.7 million (2016 — $0.5 million).
Stock-Based Compensation
The Company estimates the fair value of stock option awards on the date of grant using fair value measurement techniques. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant.
Stock-based compensation expense recognized under FASB ASC 718, “Compensation – Stock Compensation” (“ASC 718”) for 2017, 2016 and 2015 was $23.0 million, $30.5 million and $21.9 million, respectively. The following reflects the Company’s stock-based compensation expense recorded to the respective financial statement line items in 2017:
2017 | ||||
Cost and expenses applicable to revenues | $ | 1,704 | ||
Selling, general and administrative expenses | 20,393 | |||
Research and development | 556 | |||
Exit costs, restructuring charges and associated impairments | 357 | |||
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$ | 23,010 | |||
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In 2016 and 2015, all stock-based compensation expense was recorded in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility
The Company maintains a senior secured credit facility (the “Credit Facility”) with a maximum borrowing capacity of $200.0 million and a scheduled maturity of March 3, 2020. The Credit Facility is collateralized by a first priority security interest in substantially all of the present and future assets of the Company and the Guarantors. Certain of the Company’s subsidiaries serve as guarantors (the “Guarantors”) of the Company’s obligations under the Credit Facility.
The terms of the Credit Facility are set forth in the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), dated March 3, 2015, among the Company, the Guarantors, the lenders named therein, Wells Fargo Bank, National Association (“Wells Fargo”), as agent and issuing lender (Wells Fargo, together with the lenders named therein, the “Lenders”) and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner and in various collateral and security documents entered into by the Company and the Guarantors.
Total amounts drawn and available under the Credit Facility at December 31, 2017 were $nil and $200.0 million, respectively (December 31, 2016 – $nil and $200.0 million, respectively).
Under the Credit Facility, the effective interest rate for the year ended December 31, 2017 was nil, as no amounts were outstanding during the period (2016 – nil).
The Credit Agreement provides that the Company is required at all times to satisfy a Minimum Liquidity Test (as defined in the Credit Agreement) of at least $50.0 million. The Company is also required to maintain minimum Adjusted EBITDA per Credit Facility (as defined in the Credit Agreement as EBITDA and referred to herein as Adjusted EBITDA per Credit Facility) of $100.0 million, and a Maximum Total Leverage Ratio (as defined in the Credit Agreement) of 1.75:1.0. The Company was in compliance with all of these requirements at December 31, 2017. The Maximum Total Leverage Ratio was 0.19:1 as at December 31, 2017, where Total Debt (as defined in the Credit Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar instruments and was $25.7 million. Adjusted EBITDA per Credit Facility is calculated as follows:
Adjusted EBITDA per Credit Facility: | ||||
(In thousands of U.S. Dollars) | ||||
Net income | $12,518 | |||
Add (subtract): | ||||
Provision for income taxes | 16,790 | |||
Interest expense, net of interest income | 915 | |||
Depreciation and amortization, including film asset amortization(1) | 66,245 | |||
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EBITDA | $ | 96,468 | ||
Exit costs, restructuring charges and associated impairments | 16,174 | |||
Stock and othernon-cash compensation | 23,718 | |||
Write-downs, net of recoveries including asset impairments and receivable provisions(1) | 24,015 | |||
Loss from equity accounted investments | 703 | |||
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Adjusted EBITDA beforenon-controlling interests | 161,078 | |||
Adjusted EBITDA attributable tonon-controlling interests(2) | (22,927 | ) | ||
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Adjusted EBITDA per Credit Facility | $ | 138,151 | * | |
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Adjusted EBITDA per Credit Facility, excluding impact from “Marvel’s Inhumans” | $ | 126,158 | * | |
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Playa Vista Financing
In 2014, IMAX PV Development Inc., (“PV Borrower”) a wholly-owned subsidiary of the Company, entered into a loan agreement with Wells Fargo to principally fund the costs of development and construction of the Company’s new West Coast headquarters, located in the Playa Vista neighborhood of Los Angeles, California (the “Playa Vista Loan”).
The Playa Vista Loan was fully drawn at $30.0 million and bore interest at a variable interest rate per annum equal to 2.0% above the30-day LIBOR rate. PV Borrower was required to make monthly payments of combined principal and interest over a10-year term with a lump sum payment at the end of year 10. The Playa Vista Loan is being amortized over 15 years. The Playa Vista Loan will be fully due and payable on October 19, 2025 (the “Maturity Date”), and may be prepaid at any time without premium, but with all accrued interest and other applicable payments.
The Playa Vista Loan is secured by a deed of trust from PV Borrower in favor of Wells Fargo and other documents evidencing and securing the loan, granting a first lien on and security interest in the Playa Vista property and the Playa Vista project, including all improvements to be constructed thereon. The company has also guaranteed Playa Vista Loan.
The Loan Documents contain affirmative, negative and financial covenants (including compliance with the financial covenants of the Company’s outstanding Credit Facility), agreements, representations, warranties, borrowing conditions, and events of default customary for development projects such as the Playa Vista Project.
Total amount drawn under the Playa Vista Loan as at December 31, 2017 was $25.7 million (December 31, 2016 — $27.7 million). Under the Playa Vista Loan, the effective interest rate for December 31, 2017 was 3.14% (December 31, 2016 — 2.52%).
Letters of Credit and Other Commitments
As at December 31, 2017 and 2016, the Company did not have any letters of credit and advance payment guarantees outstanding, under the Credit Facility.
The Company also has 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 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. The Bank of Montreal Facility is subject to periodic annual reviews. As at December 31, 2017, the Company did not have any letters of credit and advance payment guarantees outstanding under the Bank of Montreal Facility (December 31, 2016 – $0.1 million).
Cash and Cash Equivalents
As at December 31, 2017, the Company’s principal sources of liquidity included cash and cash equivalents of $158.7 million, the Credit Facility, anticipated collection from trade accounts receivable of $130.5 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 $27.0 million and payments expected in the next 12 months on existing backlog deals. As at December 31, 2017, the Company did not have any amount drawn on the Credit Facility (remaining availability of $200.0 million) and the Company had $25.7 million drawn on the Playa Vista Loan. There were no letters of credit and advance payment guarantees outstanding under the Credit Facility and the Bank of Montreal Facility. Cash held outside of North America as at December 31, 2017 was $119.4 million (December 31, 2016 — $117.4 million), of which $32.6 million was held in the People’s Republic of China (“PRC”) (December 31, 2016 — $31.5 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 $6.9 million.
During the year ended December 31, 2017, the Company’s operations provided cash of $85.4 million. The Company used cash of $73.5 million to fund capital expenditures, to build equipment for use in joint revenue sharing arrangements, to purchase other intangible assets, to invest in new business ventures such as its VR initiatives and to purchase property, plant and equipment. These uses of cash were partially offset by cash provided by operating activities. Based on management’s current operating plan for 2018, the Company expects to continue to use cash to deploy additional theater systems under joint revenue sharing arrangements, to fund DMR agreements with studios, invest in new business ventures and continued share repurchases. Cash flows from joint revenue sharing arrangements are derived from the theaterbox-office and concession revenues and the Company invested directly in the roll out of 105 new theater systems under joint revenue sharing arrangements in the year ending December 31, 2017, of which 86 new theater systems were capitalized by the Company.
The Company completed its previously announced $200.0 million share repurchase program in the second quarter of 2017 by repurchasing 1,736,150 common shares at an average price of $26.57 per share. The retired shares were repurchased for $46.1 million.
In June 2017, the Company announced a number of actions aimed at increasing Company value, including the approval by the Company’s Board of Directors of 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. There were no repurchases of shares under the new share repurchase program during the year.
In addition, the Company has implemented a cost reduction plan with the goal to create annualized cost savings aimed at increasing profitability, operating leverage and free cash flow. For more details see notes 14 and 22 to the accompanying consolidated financial statements in Item 8 of this 2017 Form10-K.
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 2017Form 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,Retirement Plan, the benefits were due to vest in full if the executive incurred a separation from service from the Company receives substantial cash payments before(as defined therein). In the fourth quarter of 2018, the executive incurred a separation from service from the Company, completesand as such, 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 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, thebox-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 $85.4 million for the year ended December 31, 2017. Changes in othernon-cash operating assets as compared to December 31, 2016 include:
Changes in other operating liabilities as compared to December 31, 2016 include: a net increase in deferred revenue of $22.9 million related to backlog payments received in the current period, offset by amount relieved from deferred revenue related to theater system installations; a net increase in accounts payable of $4.2 million; and a net decrease of $0.6 million in accrued liabilities, both of which are due to normal operational activity.
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 $106.6 million in 2017 as compared to $85.3 million in 2016. 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 $73.6 million in year ended December 31, 2017, which includes purchases of $24.1 million in property, plant and equipment of which $4.5 million is for the Company’s new business segment assets, an investment in joint revenue sharing equipment of $42.6 million, an investment in new business ventures of $1.6 million and an investment in other intangible assets of $5.2 million, primarily related to expanding the functionality of the Company’s enterprise resource planning system.
Financing Activities
Net cash used in financing activities in the year ended December 31, 2017 amounted to $57.5 million as compared to $125.8 million in the year ended December 31, 2016. In the year ended December 31, 2017, the Company paid $46.1 million for the repurchase of common shares under the Company’s share repurchase program and $25.5 million to purchase treasury stock for the settlement of restricted share units and options. In addition, the Company also made repayments of $2.0 million under the Playa Vista Loan. These cash outlays were offset by $16.7 million received from the issuance of common shares resulting from stock option exercises and a $0.6 million of taxes withheld and paid onRetirement Plan benefits became fully vested employee stock awards.
Prior Year Cash Flow Activities
Net cash provided by operating activities amounted to $77.9 million in the year ended December 31, 2016. Changes in othernon-cash operating assets as compared to 2015 included: a net increase of $1.4 million in accounts receivable; a net increase of $4.6 million in financing receivables; a net increase of $3.8 million in inventories; a net increase of $0.1 million in prepaid expenses; and a net increase of $6.7 million in other assets which includes an increase of $5.7 million in prepaid tax and a net increase of $1.0 million in other assets which reflect a change in commissions and other deferred selling expenses. Changes in other operating liabilities as compared to December 31, 2015 included: a net decrease in deferred revenue of $14.7 million related to amounts relieved from deferred revenue due to theater system installations, offset partially by payments received in the current year related to theater systems not yet installed; a net decrease in accounts payable of $3.4 million; and a net increase of $3.9 million in accrued liabilities.
Net cash used in investing activities amounted to $64.9 million in 2016, which included purchases of $15.3 million in property, plant and equipment, an investment in joint revenue sharing equipment of $42.9 million, an investment in new business ventures of $1.9 million and an investment in other intangible assets of $4.8 million.
Net cash provided by financing activities in 2016 amounted to $125.8 million as compared to cash used in financing activities of $204.7 million in 2015. In 2016, the Company paid $116.5 million for the repurchase of common shares under the Company’s share repurchase program and $19.9 million to purchase treasury stock for the settlement of restricted share units and options. In addition, the Company paid $2.4 million of taxes relating to secondary sales and repatriation dividends and $0.5 million of taxes relating to employee stock award vesting. Furthermore, the Company also made $2.0 million in repayments under the Playa Vista Loan. These cash outlays were offset by $13.1 million received from the issuance of common shares resulting from stock option exercises, and $2.5 million received from a capital contribution to the Film Fund made by third parties.
Capital expenditures including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, net of sales proceeds, other intangible assets and investments in film assets were $85.3 million in the year ended December 31, 2016.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations as of December 31, 2017 are as follows:2018 and the accelerated costs were recognized and reflected in Executive Transition Costs in the Consolidated Statements of Operations.
Payments Due by Fiscal Year | ||||||||||||||||||||
(In thousands of U.S. Dollars) | Total Obligations | 1 year | > 1 - 3 years | > 3 - 5 years | Thereafter | |||||||||||||||
Purchase obligations | $ | 38,055 | $ | 38,055 | $ | — | $ | — | $ | — | ||||||||||
Pension obligations | 20,076 | — | 20,076 | — | — | |||||||||||||||
Operating lease obligations | 24,933 | 6,226 | 5,007 | 2,761 | 10,939 | |||||||||||||||
Playa Vista Loan | 25,667 | 2,000 | 4,000 | 4,000 | 15,667 | |||||||||||||||
Postretirement benefits obligations | 4,569 | 746 | 1,093 | 908 | 1,822 | |||||||||||||||
Other financial commitments | 10,677 | 6,677 | 4,000 | — | — | |||||||||||||||
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$ | 123,977 | $ | 53,704 | $ | 34,176 | $ | 7,669 | $ | 28,428 | |||||||||||
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Pension and Postretirement Obligations
The Company has an unfunded defined benefit pension plan, the SERP, covering Mr. Gelfond. As at December 31, 2017,2020, the Company had an unfunded and accrued projected benefit obligation of approximately $19.0related to the Retirement Plan was $3.7 million (December 31, 20162019 — $19.6$3.6 million) in respectand is recorded on the Company’s Consolidated Balance Sheets within Accrued and Other Liabilities. As the Retirement Plan is fully vested, the benefit obligation is measured at the present value 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 isbenefits expected to be includedpaid in calculating his entitlement under the SERP.future with the accretion of interest recognized in the Consolidated Statements of Operations within Retirement Benefits Non-Service Expenses.
The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As at December 31, 2017, the Company had an unfunded benefit obligation of $1.7 million (December 31, 2016 — $1.7 million).
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s formerCo-CEO and current Chairman of its Board of Directors, upon retirement. As at December 31, 2017, the Company had an unfunded benefit obligation of $0.7 million (December 31, 2016 — $0.6 million).
The Company also maintains a Retirement Plan covering Greg Foster, CEO of IMAX Entertainment and Senior Executive Vice President of the Company. The Company has agreed to make a total contribution of $3.2 million over Mr. Foster’s employment term. The Retirement Plan is subject to a vesting schedule basedfunded by an investment in company-owned life insurance (“COLI”), which is recorded at its fair value on continued employment with the Company, such that 25% will vest July 2019; 50% will vest July 2022; 75% will vest July 2025; and Mr. Foster will be 100% vested in July 2027.Company’s Consolidated Balance Sheets within Prepaid Expenses. As atof December 31, 2017,2020, fair value of the Company had an unfunded benefit obligation recorded of $1.0COLI asset was $3.2 million (December 31, 20162019 — $0.5$3.2 million).
OFF-BALANCE SHEET ARRANGEMENTS
There are currently nooff-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition.
NON-GAAP FINANCIAL MEASURES
GAAP refers to generally accepted accounting principles in the United States of America. In this report, the Company presents financial measures in accordance with GAAP and also on a non-GAAP basis 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 (loss) income attributable to common shareholders; |
• | Adjusted net (loss) income attributable to common shareholders per diluted share; |
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• | EBITDA; and |
• | Adjusted EBITDA per Credit Facility. |
For the years ended December 31, 2020 and 2019, adjusted net (loss) income attributable to common shareholders and adjusted net (loss) income attributable to common shareholders per basic and diluted share exclude, where applicable: (i) share-based compensation; (ii) COVID-19 government relief benefits; (iii) legal judgment and arbitration awards; (iv) exit costs, restructuring charges and associated impairments; (v) loss in the fair value of investments, as well as the related tax impact of these adjustments, and (vi) income taxes resulting from management’s decision to no longer indefinitely reinvest the historical earnings of certain foreign subsidiaries.
The Company believes that these non-GAAP financial measures are important supplemental measures that allow management and users of the Company’s financial statements to view operating trends and analyze controllable operating performance on a comparable basis between periods without the after-tax impact of share-based compensation and certain unusual items included in net (loss) income attributable to common shareholders. Although share-based compensation is an important aspect of the Company’s employee and executive compensation packages, it is a non-cash expense and is excluded from certain internal business performance measures.
A reconciliation from net (loss) income attributable to common shareholders and the associated per share amounts to adjusted net (loss) income attributable to common shareholders and adjusted net (loss) income attributable to common shareholders per diluted share is presented in the table below. Net (loss) income attributable to common shareholders and the associated per share amounts are the most directly comparable GAAP measures because they reflect the earnings relevant to the Company’s shareholders, rather than the earnings attributable to non-controlling interests. Accordingly, beginning in the first quarter of 2020, the Company updated its reconciliations of these non-GAAP financial measures to reflect this approach.
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| Years Ended December 31, |
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| 2020 |
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| 2019 |
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(In thousands of U.S. Dollars, except per share amounts) |
| Net Loss |
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| Per Share |
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| Net Income |
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| Per Share |
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Net (loss) income attributable to common shareholders |
| $ | (143,775 | ) |
| $ | (2.43 | ) |
| $ | 46,866 |
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| $ | 0.76 |
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Adjustments(1): |
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Share-based compensation |
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| 20,558 |
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| 0.35 |
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| 22,236 |
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| 0.36 |
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COVID-19 government relief benefits(2) |
|
| (7,115 | ) |
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| (0.12 | ) |
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| — |
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| — |
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Legal judgment and arbitration awards |
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| 4,105 |
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| 0.07 |
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| — |
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| — |
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Exit costs, restructuring charges and associated impairments |
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| — |
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| — |
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| 850 |
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| 0.01 |
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Loss in fair value of investments |
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| 1,450 |
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| 0.02 |
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| 333 |
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| 0.01 |
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Tax impact on items listed above(3) |
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| (630 | ) |
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| (0.01 | ) |
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| (5,500 | ) |
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| (0.09 | ) |
Income taxes resulting from management's decision to no longer indefinitely reinvest the historical earnings of certain foreign subsidiaries |
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| 13,344 |
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| 0.23 |
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| — |
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| — |
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Adjusted net (loss) income(1) |
| $ | (112,063 | ) |
| $ | (1.89 | ) |
| $ | 64,785 |
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| $ | 1.05 |
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Weighted average diluted shares outstanding |
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| 59,237 |
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| 61,489 |
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(1) | Reflects amounts attributable to common shareholders. |
(2) | The Company recognized $6.4 million in benefits from the CEWS program and $0.7 million in benefits from the U.S. CARES Act, as reductions to Selling, General and Administrative Expenses ($6.0 million), Costs and Expenses Applicable to Revenues ($1.0 million) and Research and Development ($0.1 million) in the Consolidated Statements of Operations. |
(3) | For the year ended December 31, 2020, the Company recorded a valuation allowance to reduce the value of the deferred tax assets attributable to certain jurisdictions where management cannot reliably estimate future tax liabilities within the next five years, primarily due to uncertainties associated with the COVID-19 global pandemic. As a result, the calculated tax impact as a percentage of the related non-GAAP adjustments is lower than in the prior year. |
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In addition to the non-GAAP financial measures discussed above, management also uses “EBITDA,” as such term is defined in the Credit Agreement, and which is referred to herein as “Adjusted EBITDA per Credit Facility.” As allowed by the Credit Agreement, Adjusted EBITDA per Credit Facility includes adjustments in addition to the exclusion of interest, taxes, and depreciation and amortization. Adjusted EBITDA per Credit Facility is presented to allow a more comprehensive analysis of the Company’s operating performance and to provide additional information with respect to the Company’s compliance against its Credit Agreement requirements, when applicable. In addition, 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 to evaluate, assess and benchmark the Company’s results.
EBITDA is defined as net income or loss excluding: (i) interest expense, net of interest income; (ii) income tax expense or benefit; and (iii) depreciation and amortization, including film asset amortization. Adjusted EBITDA per Credit Facility is defined as EBITDA excluding: (i) share-based and other non-cash compensation; (ii) gain or loss in the fair value of investments; (iii) write-downs, net of recoveries, including asset impairments and credit loss expense; (iv) legal judgment and arbitration awards; and (iv) the gain or loss from equity accounted investments.
A reconciliation of net loss attributable to common shareholders, which is the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA per Credit Facility is presented in the table below. Net loss attributable to common shareholders is the most directly comparable GAAP measure because it reflects the earnings relevant to the Company’s shareholders, rather than the earnings attributable to non-controlling interests. Accordingly, beginning in the first quarter of 2020, the Company updated its reconciliations of these non-GAAP financial measures to reflect this approach.
| For the Twelve Months Ended December 31, 2020 (1) |
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(In thousands of U.S. Dollars) |
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Reported net loss | $ |
| (157,486 | ) |
| $ |
| (13,711 | ) |
| $ |
| (143,775 | ) |
Add (subtract): |
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|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 26,504 |
|
|
|
| 5,408 |
|
|
|
| 21,096 |
|
Interest expense, net of interest income |
|
| 3,720 |
|
|
|
| (370 | ) |
|
|
| 4,090 |
|
Depreciation and amortization, including film asset amortization |
|
| 53,606 |
|
|
|
| 4,570 |
|
|
|
| 49,036 |
|
EBITDA | $ |
| (73,656 | ) |
| $ |
| (4,103 | ) |
| $ |
| (69,553 | ) |
Share-based and other non-cash compensation |
|
| 22,038 |
|
|
|
| 968 |
|
|
|
| 21,070 |
|
Loss in fair value of investments |
|
| 2,081 |
|
|
|
| 631 |
|
|
|
| 1,450 |
|
Write-downs, including asset impairments and credit loss expense |
|
| 36,337 |
|
|
|
| 8,364 |
|
|
|
| 27,973 |
|
Legal judgment and arbitration awards |
|
| 4,105 |
|
|
|
| — |
|
|
|
| 4,105 |
|
Loss from equity accounted investments |
|
| 1,858 |
|
|
|
| — |
|
|
|
| 1,858 |
|
Adjusted EBITDA per Credit Facility | $ |
| (7,237 | ) |
| $ |
| 5,860 |
|
| $ |
| (13,097 | ) |
(1) | The Senior Secured Net Leverage Ratio is calculated using twelve months ended Adjusted EBITDA per Credit Facility. During the second quarter of 2020, the Company entered into the First Amendment to the Credit Facility Agreement which provides for, among other things, the suspension of the Senior Secured Net Leverage Ratio financial covenant through the first quarter of 2021. For more information see Note 14 of Notes to Consolidated Financial Statements in Part II, Item 8. |
The Company cautions users of its financial statements that these non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. Additionally, the non-GAAP financial measures used by the Company should not be considered in isolation, or as a substitute for, or superior to, the comparable GAAP amounts.
68
Item 7A. Quantitative and Qualitative Factors 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,Dollar, the Canadian dollarDollar 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. dollarsDollars while a significant portion of its costs and expenses is denominated in Canadian dollars.Dollars. A portion of the Company’s net U.S. dollarDollar cash flows is converted to Canadian dollarsDollars to fund Canadian dollarDollar expenses through the spot market. In addition, IMAX films generate box office in 7584 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S. dollarDollar 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 ongoingYen-denominated operating expenses related to its Japanese operations. Net Renminbi and Japanese Yen cash flows are converted to U.S. dollarsDollars through the spot market. The Company also has cash receipts under leases denominated in Renminbi, Japanese Yen, Euros and Canadian dollars.Dollars.
The Company manages its exposure to foreign exchange rate risks through the Company’sits 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.
TheCertain of the Company’s subsidiaries IMAX (Shanghai) Multimedia Technology Co., Ltd. and IMAX (Shanghai) Theatre Technology Services Co. Ltd., held approximately 213.0500.3 million Renminbi ($32.6 million U.S. dollars)76.7 million) in cash and cash equivalents in the PRC as atof December 31, 20172020 (December 31, 20162019 — 218.2471.6 million Renminbi or $31.5 million U.S. dollars)$67.6 million) 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 AdministrativeAdministration of Foreign Exchange to complete. Any developments relating to the Chinese economy and any actions taken by the ChinaChinese government are beyond the control of the Company,Company; however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements.
For the year ended December 31, 2017,2020, the Company recorded a foreign exchange net gain of $1.0$0.8 million as compared to a foreign exchange net loss of $0.9$(0.9) million in 2016,2019, associated with the translation of foreign currency denominated monetary assets and liabilities.
The Company has 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 2018 and 2019.2021. Foreign currency derivatives are recognized and measured in the balance sheetCompany’s Consolidated Balance Sheets at fair value. Changes in the fair value (gains or losses) are recognized in the consolidated statementConsolidated Statements of operationsOperations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. AllCertain of these foreign currency forward contracts held by the Company as atof December 31, 2017,2020, 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, Inventories 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 incomeOther Comprehensive Income and reclassified to the consolidated statementsConsolidated Statements of operationsOperations when the forecasted transaction occurs. For foreign currency cash flow hedging instruments related to Inventories, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in Other Comprehensive Income and reclassified to Inventories on the Consolidated Balance Sheets 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 Consolidated Balance Sheets when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statementConsolidated Statements of operations. Operations.
69
The notional value of foreign currency cash flow hedging instruments that qualify for hedge accounting at December 31, 20172020 was $35.2$26.4 million (December 31, 20162019 — $37.8$36.1 million). A gain of $2.5$0.6 million was recorded to Other Comprehensive Income with respect to the depreciation/appreciationchange in thefair value of these contracts in 2017 (20162020 (2019 — a gain of $1.0$0.6 million). A gainloss of $0.8$0.6 million was reclassified from Accumulated Other Comprehensive Income to selling, generalSelling, General and administrative expensesAdministrative Expenses, Inventories and Property, Plant and Equipment in 2017 (20162020 (2019 — loss of $3.1$1.2 million). Appreciation or depreciationA gain of $0.3 million resulting from the change in fair value on forward contracts not meeting the requirements for hedge accounting in the Derivatives and Hedging Topic of the FASB Accounting Standards Codification arewas recorded to selling, generalSelling, General and administrative expenses.Administrative Expenses. The notional value of forward contracts that do not qualify for hedge accounting at December 31, 2020 was $5.6 million (December 31, 2019 — $nil).
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 December 31, 2017,2020, the Company’s financing receivablesFinancing Receivables and working capital items denominated in Canadian dollars,Dollars, Renminbi, Japanese Yen, Euros and Eurosother foreign currencies translated into U.S. dollarsDollars was $90.1$133.5 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2017,2020, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $9.0$13.3 million. A significant portion of the Company’s selling, general,Selling, General, and administrative expensesAdministrative Expenses is denominated in Canadian dollars.Dollars. Assuming a 1% change appreciation or depreciation in foreign currency exchange rates at December 31, 2017,2020, the potential change in the amount of selling, general,Selling, General, and administrative expensesAdministrative Expenses would be $0.1 million for every $10.0 million in Canadian denominated expenditures.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 atof December 31, 2017 and 2016 the Company had not drawn down on its Credit Facility.
As at December 31, 2017,2020, the Company had drawn down $25.7$300.0 million on its Playa Vista LoanCredit Facility (December 31, 20162019 — $27.7$20.0 million) and $7.6 million on IMAX China’s Working Capital Facility (December 31, 2019 — $nil).
The Company’s largest exposure with respect to variable rate debt comes from changes in LIBOR. The Company had variable rate debt instruments representing 9.8%56.3% and 12.0%8.1% of its total liabilities at December 31, 20172020 and 2016,2019, respectively. If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by approximately $0.1$0.4 million and interest income from cash would increase by approximately $0.1$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 December 31, 2017.
70
Item 8.Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
72 | ||||
Consolidated Balance Sheets as | 77 | |||
78 | ||||
79 | ||||
80 | ||||
81 | ||||
82 |
************
71
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of IMAX Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of IMAX Corporation and its subsidiaries (together, the Company) as of December 31, 20172020 and December 31, 2016,2019, and the related consolidated statements of operations, comprehensive (loss) income, cash flows and shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes and the financial statement schedule of valuation and qualifying accountslisted in the accompanying index for each of the three years in the period then ended December 31, 2017 appearing on page 1402020 (collectively referred to as the consolidated financial statements). We also have audited the entity’sCompany’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the entityCompany as of December 31, 20172020 and December 31, 20162019, and its consolidatedthe results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 20172020 in conformity with accounting principles generally accepted in the United States of America (US GAAP).America. Also in our opinion, the entityCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the COSO.
Change in accounting principleAccounting Principle
As discussed in notenotes 3, 4, 5 and 6 to the consolidated financial statements, the entityCompany changed the manner in which it accounts for its allowance for current expected credit losses in 2020, the income tax effect ofmanner in which it accounts for leases in 2019 and the intra-entity transfers of assets other than inventorymanner in 2017.which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A.9A of this Annual Report on Form 10-K. Our responsibility is to express opinions on the entity’sCompany’s consolidated financial statements and on the entity’sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the entityCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
72
Definition and limitationsLimitations of internal controlInternal Control over financial reportingFinancial Reporting
A Company’scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. An entity’sA company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity;company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entitycompany are being made only in accordance with authorizations of management and directors of the entity;company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’scompany’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition – Theater Systems Revenue
As described in notes 3(n) and 21 to the consolidated financial statements, the Company recognized revenue from IMAX Systems related to the IMAX Technology Sales and Maintenance category (theater systems) of $54.1 million for the year ended December 31, 2020. Management evaluates whether a theater system arrangement involves either a sale or a lease of a theater system, and for those arrangements that are accounted for as a sale of a theater system, determines the transaction price and the allocation thereof to each separate performance obligation based on estimated standalone selling prices. For arrangements accounted for as a sale of a theater system, the transaction price allocated to the performance obligation is recognized when the conditions signifying transfer of control have been met. For theater system arrangements, management applied significant judgment in (i) determining whether the theater system arrangement related to either a sale or a lease by considering the terms of the arrangement including title to the theater system equipment and payment consideration; (ii) estimating the transaction price which may include the discounted present value of fixed ongoing payments and variable consideration (such as indexed minimum payment increases and additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded); (iii) allocating the transaction price to each separate performance obligation based on estimated standalone selling prices; and (iv) determining the timing of revenue recognition based on when performance obligations are met.
The principal considerations for our determination that performing procedures relating to the revenue recognition of theater systems revenue is a critical audit matter are that management identified the matter as a critical accounting estimate, and there was significant judgment required by management in (i) determining whether the theater system arrangement related to a sale or a lease; (ii) estimating the transaction price which may include the discounted present value of fixed ongoing payments and variable consideration; (iii) allocating the transaction price to each separate performance obligation; and (iv) determining the timing of revenue recognition. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the revenue recognition of theater systems revenue.
73
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over management’s review and approval of revenue recognition memorandums produced for each theater system arrangement which include the determination of the type of theater system arrangement, the estimate of the transaction price and allocation thereof and the timing of the related revenue recognition. These procedures also included, among others, evaluating the reasonableness of management’s assessment of whether the theater system arrangement related to either a sale or a lease by considering the contractual terms and conditions of the executed contracts. Procedures were also performed to test management’s process for estimating the transaction price for a sample of contracts with customers, including (i) evaluating the appropriateness of management’s discounted present value method; (ii) testing the completeness, accuracy and relevance of the data used in estimating the transaction price; and (iii) evaluating the reasonableness of significant assumptions used by management, including the discount rate and expected future performance of underlying theaters associated with the arrangement. Evaluating management’s assumption related to the discount rate involved evaluating whether the assumption was reasonable considering consistency with external market data. Evaluating management’s assumption related to expected future performance of underlying theaters associated with the arrangement involved evaluating whether the assumption was reasonable considering the current and past performance of the underlying theaters. Procedures were also performed to test management’s process for allocating the transaction price to each separate performance obligation, including (i) evaluating the appropriateness of management’s method of allocating the transaction price; (ii) testing the completeness, accuracy and relevance of the data used in allocating the transaction price; and (iii) evaluating the reasonableness of significant assumptions used by management, including estimated standalone selling prices. Evaluating management’s assumption related to estimated standalone selling prices involved evaluating whether the assumption was reasonable by comparing the estimate to current and historical transactions. Evaluating the appropriateness of management’s assessment of the timing of revenue recognition involved inspecting the customers’ certificates of acceptance and theater openings during the year.
Uncertain Tax Positions
As described in notes 3(m) and 12 to the consolidated financial statements, the Company had total tax reserves of $17.4 million as of December 31, 2020 related to uncertain tax positions. The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. As disclosed by management, tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. As disclosed by management, tax audits can result in subsequent assessments where the ultimate resolution may result in the Company owing additional taxes above what was originally recognized. Tax reserves for uncertain tax positions are adjusted by management to reflect their best estimate of the outcome of examinations and assessments and in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with the uncertain tax positions until they are resolved. The estimate of the Company’s tax reserves relating to uncertain tax positions required management to assess uncertainties and to make significant judgments about the application of complex tax laws.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are (i) the significant judgment by management in determining uncertain tax positions, including a high degree of estimation uncertainty relative to the numerous and complex tax laws, frequency of tax audits, and potential for significant adjustments as a result of such audits; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s timely identification, recognition and measurement of uncertain tax positions; (iii) the evaluation of audit evidence available to support the tax reserves for uncertain tax positions resulted in significant auditor judgment as the nature of the evidence is often subjective; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge.
74
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the tax reserves for uncertain tax positions, controls addressing completeness of the uncertain tax positions, and controls over measurement of the tax reserves. These procedures also included, among others (i) testing the information used in the calculation of the tax reserves for uncertain tax positions; (ii) testing the calculation of the tax reserves for uncertain tax positions by jurisdiction; and (iii) evaluating the status and results of income tax audits with the relevant tax authorities, as applicable. Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the Company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained and the amount of potential benefit to be realized, the application of relevant tax laws, and estimated interest and penalties.
Annual Goodwill Impairment Assessment
As described in notes 2 and 3(j) to the consolidated financial statements, the Company’s goodwill balance was $39.0 million as of December 31, 2020, of which $19.1 million relates to the IMAX Systems reporting unit, $13.5 million relates to the Joint Revenue Sharing Arrangement reporting unit, and $6.4 million relates to the IMAX Maintenance reporting unit. Management conducts an impairment test annually in the fourth quarter of the year and between annual tests if indicators of potential impairment exist. As a result of the negative effects of the COVID-19 pandemic on revenue and earnings, management also performed quantitative goodwill impairment tests as of the reporting date of each of the first, second and third quarters of 2020 considering the latest available information and determined that its goodwill was not impaired. The impairment test was performed on a reporting unit level by comparing each unit’s carrying value, including goodwill, to its fair value. The fair value of each reporting unit was estimated using a discounted cash flow model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses were performed. Management applied significant judgment in estimating the fair value of each reporting unit, which included the use of significant assumptions relating to estimated long-term projections and discount rates.
The principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimated long-term projections and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions used by management related to estimated long-term projections and discount rates. Evaluating management’s assumptions related to estimated long-term projections involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s discounted cash flow models and the reasonableness of the discount rate assumptions.
75
Allowance for Credit Losses on Accounts Receivable, Financing Receivables and Variable Consideration Receivables
As described in notes 2, 3(d) and 5 to the consolidated financial statements, the Company’s allowance for credit losses related to accounts receivable was $14.3 million, the allowance for credit losses related to financing receivables was $7.8 million and the allowance for credit losses related to variable consideration receivables was $1.9 million as of December 31, 2020 (together allowance for credit losses on receivables). Accounts receivable, financing receivables and variable consideration receivables are measured on the amortized cost basis and presented at the net amount expected to be collected. As disclosed by management, management increased its provision for current expected credit losses by $18.6 million for the year ended December 31, 2020, in part reflecting a reduction in the credit quality of its theater related accounts receivable, financing receivables and variable consideration receivables, which management believes is primarily related to the COVID-19 pandemic. Management develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors. Management applied significant judgment in estimating the allowance for credit losses on receivables, which included assessing credit quality classifications, macro-economic and industry risk factors.
The principal considerations for our determination that performing procedures relating to the allowance for credit losses on accounts receivable, financing receivables and variable consideration receivables is a critical audit matter are (i) the significant judgment by management in estimating the allowance for credit losses on receivables; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s assessment of credit quality classifications, macro-economic and industry risk factors.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate of the allowance for credit losses on receivables, including controls related to management’s assessment of credit quality classifications, macro-economic and industry risk factors. These procedures also included, among others (i) testing management’s process for estimating the allowance for credit losses on receivables; (ii) evaluating the appropriateness of management’s method; (iii) testing the completeness and accuracy of underlying data used in the method; and (iv) evaluating the reasonableness of management’s assessment of credit quality classifications, macro-economic and industry risk factors. Evaluating the reasonableness of management’s assessment of credit quality classifications, macro-economic and industry risk factors on a sample basis involved considering (i) recent payment patterns of customers; (ii) consistency with external market and industry data; (iii) inquiries with management regarding adjustments for forward-looking information on economic factors affecting the ability of customers to settle the receivables; (iv) recent correspondence with customers; (v) recent public filings by customers; and (vi) whether this assessment was consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
February 27, 2018
Toronto, Canada March 4, 2021 |
We have served as the entity’sCompany's auditor since 1987, which includes periods before the entity became subject to SEC reporting requirements.
76
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)Dollars except share amounts)
|
| As of December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 317,379 |
|
| $ | 109,484 |
|
Accounts receivable, net of allowance for credit losses (see Note 5) |
|
| 56,300 |
|
|
| 99,513 |
|
Financing receivables, net of allowance for credit losses (see Note 5) |
|
| 131,810 |
|
|
| 128,038 |
|
Variable consideration receivable, net of allowance for credit losses (see Note 5) |
|
| 40,526 |
|
|
| 40,040 |
|
Inventories |
|
| 39,580 |
|
|
| 42,989 |
|
Prepaid expenses |
|
| 10,420 |
|
|
| 10,237 |
|
Film assets, net of accumulated amortization |
|
| 5,777 |
|
|
| 17,921 |
|
Property, plant and equipment, net of accumulated depreciation |
|
| 277,397 |
|
|
| 306,849 |
|
Investment in equity securities |
|
| 13,633 |
|
|
| 15,685 |
|
Other assets |
|
| 21,673 |
|
|
| 25,034 |
|
Deferred income tax assets |
|
| 17,983 |
|
|
| 23,905 |
|
Other intangible assets, net of accumulated amortization |
|
| 26,245 |
|
|
| 30,347 |
|
Goodwill |
|
| 39,027 |
|
|
| 39,027 |
|
Total assets |
| $ | 997,750 |
|
| $ | 889,069 |
|
Liabilities |
|
|
|
|
|
|
|
|
Bank indebtedness, net of unamortized debt issuance costs |
| $ | 305,676 |
|
| $ | 18,229 |
|
Accounts payable |
|
| 20,837 |
|
|
| 20,414 |
|
Accrued and other liabilities |
|
| 99,354 |
|
|
| 112,779 |
|
Deferred revenue |
|
| 87,982 |
|
|
| 94,552 |
|
Deferred income tax liabilities |
|
| 19,134 |
|
|
| — |
|
Total liabilities |
|
| 532,983 |
|
|
| 245,974 |
|
Commitments and contingencies (see Notes 15 and 16) |
|
|
|
|
|
|
|
|
Non-controlling interests |
|
| 759 |
|
|
| 5,908 |
|
Shareholders' equity |
|
|
|
|
|
|
|
|
Capital stock common shares — no par value. Authorized — unlimited number. |
|
|
|
|
|
|
|
|
58,921,731 issued and 58,921,008 outstanding (December 31, 2019 — 61,362,872 issued and 61,175,852 outstanding) |
|
| 407,031 |
|
|
| 423,386 |
|
Less: Treasury stock, 723 shares at cost (December 31, 2019 — 187,020) |
|
| (11 | ) |
|
| (4,038 | ) |
Other equity |
|
| 180,330 |
|
|
| 171,789 |
|
Accumulated deficit |
|
| (202,849 | ) |
|
| (40,253 | ) |
Accumulated other comprehensive income (loss) |
|
| 988 |
|
|
| (3,190 | ) |
Total shareholders' equity attributable to common shareholders |
|
| 385,489 |
|
|
| 547,694 |
|
Non-controlling interests |
|
| 78,519 |
|
|
| 89,493 |
|
Total shareholders' equity |
|
| 464,008 |
|
|
| 637,187 |
|
Total liabilities and shareholders' equity |
| $ | 997,750 |
|
| $ | 889,069 |
|
As at December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 158,725 | $ | 204,759 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,613 (December 31, 2016 — $1,250) | 130,546 | 96,349 | ||||||
Financing receivables (notes 4 and 19(c)) | 129,494 | 122,125 | ||||||
Inventories (note 5) | 30,788 | 42,121 | ||||||
Prepaid expenses | 7,549 | 6,626 | ||||||
Film assets (note 6) | 5,026 | 16,522 | ||||||
Property, plant and equipment (note 7) | 276,781 | 245,415 | ||||||
Other assets (notes 8 and 19(e)) | 26,757 | 33,195 | ||||||
Deferred income taxes (note 9) | 30,708 | 20,779 | ||||||
Other intangible assets (note 10) | 31,211 | 30,416 | ||||||
Goodwill | 39,027 | 39,027 | ||||||
|
|
|
| |||||
Total assets | $ | 866,612 | $ | 857,334 | ||||
|
|
|
| |||||
Liabilities | ||||||||
Bank indebtedness (note 11) | $ | 25,357 | $ | 27,316 | ||||
Accounts payable | 24,235 | 19,990 | ||||||
Accrued and other liabilities (notes 6, 12, 13, 14(c), 19(b), 19(d), 20 and 22) | 100,140 | 93,208 | ||||||
Deferred revenue | 113,270 | 90,266 | ||||||
|
|
|
| |||||
Total liabilities | 263,002 | 230,780 | ||||||
|
|
|
| |||||
Commitments and contingencies (notes 12 and 13) | ||||||||
Non-controlling interests (note 21) | 1,353 | 4,980 | ||||||
|
|
|
| |||||
Shareholders’ equity | ||||||||
Capital stock (note 14) common shares — no par value. Authorized — unlimited number. 64,902,201 — issued and 64,695,550 — outstanding (December 31, 2016 — 66,224,467 — issued and 66,159,902 — outstanding) | 445,797 | 439,213 | ||||||
Less: Treasury stock, 206,651 shares at cost (December 31, 2016 — 64,565) | (5,133 | ) | (1,939 | ) | ||||
Other equity | 175,300 | 177,304 | ||||||
Accumulated deficit | (87,592 | ) | (47,366 | ) | ||||
Accumulated other comprehensive loss | (626 | ) | (5,200 | ) | ||||
|
|
|
| |||||
Total shareholders’ equity attributable to common shareholders | 527,746 | 562,012 | ||||||
Non-controlling interests (note 21) | 74,511 | 59,562 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 602,257 | 621,574 | ||||||
|
|
|
| |||||
Total liabilities and shareholders’ equity | $ | 866,612 | $ | 857,334 | ||||
|
|
|
|
(See the accompanying notes, which are an integral part of these consolidated financial statements)
77
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars,Dollars, except per share amounts)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Equipment and product sales (note 15(c)) | $ | 103,294 | $ | 122,382 | $ | 118,937 | ||||||
Services (note 15(c)) | 195,594 | 166,862 | 161,964 | |||||||||
Rentals (note 15(c)) | 72,281 | 77,315 | 83,651 | |||||||||
Finance income | 9,598 | 9,500 | 9,112 | |||||||||
Other (note 15(a)) | — | 1,275 | 141 | |||||||||
|
|
|
|
|
| |||||||
380,767 | 377,334 | 373,805 | ||||||||||
|
|
|
|
|
| |||||||
Costs and expenses applicable to revenues (note 2(m)) | ||||||||||||
Equipment and product sales | 48,172 | 69,680 | 63,635 | |||||||||
Services (note 15(c)) | 120,629 | 83,780 | 70,855 | |||||||||
Rentals | 26,720 | 21,086 | 20,027 | |||||||||
Other | — | 110 | — | |||||||||
|
|
|
|
|
| |||||||
195,521 | 174,656 | 154,517 | ||||||||||
|
|
|
|
|
| |||||||
Gross margin | 185,246 | 202,678 | 219,288 | |||||||||
Selling, general and administrative expenses (note 15(b)) (including share-based compensation expense of $20.4 million, $30.5 million and $21.9 million for 2017, 2016 and 2015, respectively) | 110,400 | 124,745 | 115,345 | |||||||||
Research and development | 20,855 | 16,315 | 12,730 | |||||||||
Amortization of intangibles | 3,019 | 2,079 | 1,860 | |||||||||
Receivable provisions, net of recoveries (note 16) | 2,647 | 954 | 752 | |||||||||
Asset impairments (notes 7 and 19(e)) | 1,225 | 417 | 830 | |||||||||
Exit costs, restructuring charges and associated impairments (note 22) | 16,174 | — | — | |||||||||
|
|
|
|
|
| |||||||
Income from operations | 30,926 | 58,168 | 87,771 | |||||||||
Interest income | 1,027 | 1,490 | 968 | |||||||||
Interest expense | (1,942 | ) | (1,805 | ) | (1,661 | ) | ||||||
|
|
|
|
|
| |||||||
Income from operations before income taxes | 30,011 | 57,853 | 87,078 | |||||||||
Provision for income taxes | (16,790 | ) | (16,212 | ) | (20,052 | ) | ||||||
Loss from equity-accounted investments, net of tax | (703 | ) | (2,321 | ) | (2,402 | ) | ||||||
|
|
|
|
|
| |||||||
Net income | 12,518 | 39,320 | 64,624 | |||||||||
Less: net income attributable tonon-controlling interests (note 21) | (10,174 | ) | (10,532 | ) | (8,780 | ) | ||||||
|
|
|
|
|
| |||||||
Net income attributable to common shareholders | $ | 2,344 | $ | 28,788 | $ | 55,844 | ||||||
|
|
|
|
|
| |||||||
Net income per share attributable to common shareholders - basic and diluted: (note 14(d)) |
| |||||||||||
Net income per share — basic | $ | 0.04 | $ | 0.43 | $ | 0.79 | ||||||
|
|
|
|
|
| |||||||
Net income per share — diluted | $ | 0.04 | $ | 0.42 | $ | 0.78 | ||||||
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Technology sales |
| $ | 49,728 |
|
| $ | 118,245 |
|
| $ | 106,591 |
|
Image enhancement and maintenance services |
|
| 59,318 |
|
|
| 188,547 |
|
|
| 181,740 |
|
Technology rentals |
|
| 17,841 |
|
|
| 77,961 |
|
|
| 74,472 |
|
Finance income |
|
| 10,116 |
|
|
| 10,911 |
|
|
| 11,598 |
|
|
|
| 137,003 |
|
|
| 395,664 |
|
|
| 374,401 |
|
Costs and expenses applicable to revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Technology sales |
|
| 33,170 |
|
|
| 63,627 |
|
|
| 54,853 |
|
Image enhancement and maintenance services |
|
| 53,598 |
|
|
| 88,175 |
|
|
| 84,236 |
|
Technology rentals |
|
| 28,695 |
|
|
| 29,690 |
|
|
| 27,383 |
|
|
|
| 115,463 |
|
|
| 181,492 |
|
|
| 166,472 |
|
Gross margin |
|
| 21,540 |
|
|
| 214,172 |
|
|
| 207,929 |
|
Selling, general and administrative expenses |
|
| 108,485 |
|
|
| 123,456 |
|
|
| 117,477 |
|
Research and development |
|
| 5,618 |
|
|
| 5,203 |
|
|
| 13,728 |
|
Amortization of intangibles |
|
| 5,394 |
|
|
| 4,955 |
|
|
| 4,145 |
|
Credit loss expense (see Note 5) |
|
| 18,608 |
|
|
| 2,430 |
|
|
| 3,130 |
|
Asset impairments |
|
| 1,151 |
|
|
| — |
|
|
| — |
|
Legal judgment and arbitration awards (see Note 16) |
|
| 4,105 |
|
|
| — |
|
|
| 11,737 |
|
Executive transition costs (see Note 25) |
|
| — |
|
|
| — |
|
|
| 2,994 |
|
Exit costs, restructuring charges and associated impairments (see Note 26) |
|
| — |
|
|
| 850 |
|
|
| 9,542 |
|
(Loss) income from operations |
|
| (121,821 | ) |
|
| 77,278 |
|
|
| 45,176 |
|
Loss in fair value of investments |
|
| (2,081 | ) |
|
| (517 | ) |
|
| — |
|
Retirement benefits non-service expense |
|
| (600 | ) |
|
| (737 | ) |
|
| (499 | ) |
Interest income |
|
| 2,388 |
|
|
| 2,105 |
|
|
| 1,844 |
|
Interest expense |
|
| (7,010 | ) |
|
| (2,793 | ) |
|
| (2,916 | ) |
(Loss) income before taxes |
|
| (129,124 | ) |
|
| 75,336 |
|
|
| 43,605 |
|
Income tax expense |
|
| (26,504 | ) |
|
| (16,768 | ) |
|
| (9,518 | ) |
Equity in (losses) income of investees, net of tax |
|
| (1,858 | ) |
|
| 3 |
|
|
| (492 | ) |
Net (loss) income |
|
| (157,486 | ) |
|
| 58,571 |
|
|
| 33,595 |
|
Net loss (income) attributable to non-controlling interests |
|
| 13,711 |
|
|
| (11,705 | ) |
|
| (10,751 | ) |
Net (loss) income attributable to common shareholders |
| $ | (143,775 | ) |
| $ | 46,866 |
|
| $ | 22,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to common shareholders - basic and diluted: |
| |||||||||||
Net (loss) income per share — basic and diluted |
| $ | (2.43 | ) |
| $ | 0.76 |
|
| $ | 0.36 |
|
(See the accompanying notes, which are an integral part of these consolidated financial statements)
78
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands of U.S. dollars)Dollars)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net income | $ | 12,518 | $ | 39,320 | $ | 64,624 | ||||||
|
|
|
|
|
| |||||||
Unrealized defined benefit plan actuarial gain (note 20(a)) | 1,004 | 159 | 180 | |||||||||
Unrealized postretirement benefit plans actuarial gain (notes 20(c) and 20(d)) | 125 | 184 | 79 | |||||||||
Amortization of postretirement benefit plan actuarial loss (note 20(c)) | — | 69 | 135 | |||||||||
Unrealized net gain (loss) from cash flow hedging instruments (note 19(d)) | 2,545 | 1,049 | (5,881 | ) | ||||||||
Realization of cash flow hedging net (gain) loss upon settlement (note 19(d)) | (824 | ) | 3,078 | 3,217 | ||||||||
Foreign currency translation adjustments (note 2) | 3,618 | (2,851 | ) | (2,121 | ) | |||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), before tax | 6,468 | 1,688 | (4,391 | ) | ||||||||
Income tax (expense) benefit related to other comprehensive income (loss) (note 9(h)) | (746 | ) | (1,180 | ) | 511 | |||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), net of tax | 5,722 | 508 | (3,880 | ) | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income | 18,240 | 39,828 | 60,744 | |||||||||
Less: Comprehensive income attributable tonon-controlling interests | (11,322 | ) | (8,797 | ) | (9,196 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income attributable to common shareholders | $ | 6,918 | $ | 31,031 | $ | 51,548 | ||||||
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Net (loss) income |
| $ | (157,486 | ) |
| $ | 58,571 |
|
| $ | 33,595 |
|
Unrealized defined benefit plan actuarial (loss) gain |
|
| (897 | ) |
|
| 157 |
|
|
| 1,448 |
|
Unrealized postretirement benefit plans actuarial (loss) gain |
|
| (351 | ) |
|
| (153 | ) |
|
| 85 |
|
Prior service cost arising during the period |
|
| — |
|
|
| (456 | ) |
|
| — |
|
Amortization of prior service cost |
|
| 87 |
|
|
| — |
|
|
| — |
|
Unrealized net gain (loss) from cash flow hedging instruments |
|
| 500 |
|
|
| 552 |
|
|
| (2,219 | ) |
Realization of cash flow hedging net loss (gain) upon settlement |
|
| 604 |
|
|
| 1,183 |
|
|
| (408 | ) |
Foreign currency translation adjustments |
|
| 5,992 |
|
|
| (729 | ) |
|
| (3,170 | ) |
Other comprehensive income (loss), before tax |
|
| 5,935 |
|
|
| 554 |
|
|
| (4,264 | ) |
Income tax benefit (expense) related to other comprehensive income (loss) |
|
| 55 |
|
|
| (378 | ) |
|
| 286 |
|
Other comprehensive income (loss), net of tax |
|
| 5,990 |
|
|
| 176 |
|
|
| (3,978 | ) |
Comprehensive (loss) income |
|
| (151,496 | ) |
|
| 58,747 |
|
|
| 29,617 |
|
Comprehensive loss (income) attributable to non-controlling interests |
|
| 11,899 |
|
|
| (11,483 | ) |
|
| (9,735 | ) |
Comprehensive (loss) income attributable to common shareholders |
| $ | (139,597 | ) |
| $ | 47,264 |
|
| $ | 19,882 |
|
(See the accompanying notes, which are an integral part of these consolidated financial statements)
79
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)Dollars)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash provided by (used in): | ||||||||||||
Operating Activities | ||||||||||||
Net income | $ | 12,518 | $ | 39,320 | $ | 64,624 | ||||||
Adjustments to reconcile net income to cash from operations: | ||||||||||||
Depreciation and amortization (notes 17(c) and 18(a)) | 66,807 | 46,485 | 42,803 | |||||||||
Write-downs, net of recoveries (notes 17(d) and 18(a)) | 29,568 | 5,940 | 3,725 | |||||||||
Change in deferred income taxes | (4,017 | ) | 4,940 | (1,336 | ) | |||||||
Stock and othernon-cash compensation | 24,075 | 31,586 | 22,379 | |||||||||
Unrealized foreign currency exchange (gain) loss | (502 | ) | 462 | 785 | ||||||||
Loss from equity-accounted investments | 306 | 2,685 | 3,838 | |||||||||
Gain onnon-cash contribution to equity-accounted investees | 397 | (364 | ) | (1,436 | ) | |||||||
Investment in film assets | (34,645 | ) | (22,308 | ) | (15,119 | ) | ||||||
Changes in othernon-cash operating assets and liabilities (note 17(a)) | (9,141 | ) | (30,874 | ) | (36,058 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 85,366 | 77,872 | 84,205 | |||||||||
|
|
|
|
|
| |||||||
Investing Activities | ||||||||||||
Purchase of property, plant and equipment | (24,143 | ) | (15,278 | ) | (43,257 | ) | ||||||
Investment in joint revenue sharing equipment | (42,634 | ) | (42,910 | ) | (28,474 | ) | ||||||
Investment in new business ventures | (1,606 | ) | (1,911 | ) | (2,000 | ) | ||||||
Acquisition of other intangible assets | (5,214 | ) | (4,787 | ) | (5,065 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (73,597 | ) | (64,886 | ) | (78,796 | ) | ||||||
|
|
|
|
|
| |||||||
Financing Activities | ||||||||||||
Increase in bank indebtedness (note 11) | — | — | 25,290 | |||||||||
Repayment of bank indebtedness (note 11) | (2,000 | ) | (2,000 | ) | (333 | ) | ||||||
Repurchase of common shares | (46,140 | ) | (116,518 | ) | (34,276 | ) | ||||||
Settlement of restricted share units and options | (20,331 | ) | (17,889 | ) | (10,000 | ) | ||||||
Exercise of stock options | 16,668 | 13,113 | 35,609 | |||||||||
Taxes paid on secondary sales and repatriation dividend | — | (2,443 | ) | — | ||||||||
Treasury stock repurchased for future settlement of restricted share units | (5,133 | ) | (1,996 | ) | — | |||||||
Taxes withheld and paid on employee stock awards vested | (600 | ) | (528 | ) | (520 | ) | ||||||
Issuance of subsidiary shares tonon-controlling interests - private offering | — | 2,479 | 40,000 | |||||||||
Share issuance costs from the issuance of subsidiary shares tonon-controlling interests - private offering | — | — | (2,000 | ) | ||||||||
Issuance of subsidiary shares tonon-controlling interests - public offering | — | — | 178,226 | |||||||||
Share issuance expenses - public offering | — | — | (16,257 | ) | ||||||||
Dividends paid tonon-controlling interests | — | — | (9,511 | ) | ||||||||
Credit facility amendment fees paid | — | — | (1,533 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by financing activities | (57,536 | ) | (125,782 | ) | 204,695 | |||||||
|
|
|
|
|
| |||||||
Effects of exchange rate changes on cash | (267 | ) | 106 | 842 | ||||||||
|
|
|
|
|
| |||||||
(Decrease) increase in cash and cash equivalents during year | (46,034 | ) | (112,690 | ) | 210,946 | |||||||
Cash and cash equivalents, beginning of year | 204,759 | 317,449 | 106,503 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 158,725 | $ | 204,759 | $ | 317,449 | ||||||
|
|
|
|
|
|
|
| Years Ended December 31, |
| ||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ |
| (157,486 | ) |
| $ |
| 58,571 |
|
| $ |
| 33,595 |
|
Adjustments to reconcile net (loss) income to cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
| 53,606 |
|
|
|
| 63,487 |
|
|
|
| 57,437 |
|
Credit loss expense |
|
|
| 18,608 |
|
|
|
| 2,430 |
|
|
|
| 3,130 |
|
Write-downs |
|
|
| 17,729 |
|
|
|
| 4,376 |
|
|
|
| 8,640 |
|
Deferred income tax expense (benefit) |
|
|
| 23,618 |
|
|
|
| 6,762 |
|
|
|
| (6,923 | ) |
Share-based and other non-cash compensation |
|
|
| 22,038 |
|
|
|
| 23,570 |
|
|
|
| 23,723 |
|
Unrealized foreign currency exchange (gain) loss |
|
|
| (1,355 | ) |
|
|
| 32 |
|
|
|
| 631 |
|
Loss in fair value of investments |
|
|
| 2,081 |
|
|
|
| 517 |
|
|
|
| — |
|
Equity in losses (income) of investees |
|
|
| 1,858 |
|
|
|
| (3 | ) |
|
|
| 492 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
| 33,597 |
|
|
|
| (8,621 | ) |
|
|
| 33,942 |
|
Inventories |
|
|
| 1,637 |
|
|
|
| 1,942 |
|
|
|
| (14,022 | ) |
Film assets |
|
|
| (7,665 | ) |
|
|
| (23,437 | ) |
|
|
| (23,200 | ) |
Deferred revenue |
|
|
| (6,637 | ) |
|
|
| (12,242 | ) |
|
|
| (6,494 | ) |
Changes in other operating assets and liabilities |
|
|
| (24,640 | ) |
|
|
| (27,008 | ) |
|
|
| (979 | ) |
Net cash (used in) provided by operating activities |
|
|
| (23,011 | ) |
|
|
| 90,376 |
|
|
|
| 109,972 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
| (697 | ) |
|
|
| (7,421 | ) |
|
|
| (13,368 | ) |
Investment in equipment for joint revenue sharing arrangements |
|
|
| (6,654 | ) |
|
|
| (40,489 | ) |
|
|
| (34,810 | ) |
Acquisition of other intangible assets |
|
|
| (1,904 | ) |
|
|
| (2,931 | ) |
|
|
| (8,696 | ) |
Investment in equity securities |
|
|
| — |
|
|
|
| (15,153 | ) |
|
|
| — |
|
Net cash used in investing activities |
|
|
| (9,255 | ) |
|
|
| (65,994 | ) |
|
|
| (56,874 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in revolving credit facility borrowings |
|
|
| 287,610 |
|
|
|
| 35,000 |
|
|
|
| 65,000 |
|
Repayment of revolving credit facility borrowings |
|
|
| — |
|
|
|
| (55,000 | ) |
|
|
| (50,667 | ) |
Credit facility amendment fees paid |
|
|
| (1,073 | ) |
|
|
| — |
|
|
|
| (1,909 | ) |
Settlement of restricted share units and options |
|
|
| (3,075 | ) |
|
|
| (9,795 | ) |
|
|
| (5,249 | ) |
Treasury stock repurchased for future settlement of restricted share units |
|
|
| (11 | ) |
|
|
| (4,038 | ) |
|
|
| (916 | ) |
Repurchase of common shares, IMAX China |
|
|
| (1,534 | ) |
|
|
| (19,162 | ) |
|
|
| (6,084 | ) |
Taxes withheld and paid on employee stock awards vested |
|
|
| (512 | ) |
|
|
| (590 | ) |
|
|
| (1,437 | ) |
Common shares issued - stock options exercised |
|
|
| — |
|
|
|
| 2,404 |
|
|
|
| 1,017 |
|
Repurchase of common shares |
|
|
| (36,624 | ) |
|
|
| (2,659 | ) |
|
|
| (71,479 | ) |
Issuance of subsidiary shares to non-controlling interests (net of return on capital) |
|
|
| — |
|
|
|
| 1,106 |
|
|
|
| 7,796 |
|
Dividends paid to non-controlling interests |
|
|
| (4,214 | ) |
|
|
| (4,384 | ) |
|
|
| (6,934 | ) |
Net cash provided by (used in) financing activities |
|
|
| 240,567 |
|
|
|
| (57,118 | ) |
|
|
| (70,862 | ) |
Effects of exchange rate changes on cash |
|
|
| (406 | ) |
|
|
| 630 |
|
|
|
| 629 |
|
Increase (decrease) in cash and cash equivalents during year |
|
|
| 207,895 |
|
|
|
| (32,106 | ) |
|
|
| (17,135 | ) |
Cash and cash equivalents, beginning of year |
|
|
| 109,484 |
|
|
|
| 141,590 |
|
|
|
| 158,725 |
|
Cash and cash equivalents, end of year |
| $ |
| 317,379 |
|
| $ |
| 109,484 |
|
| $ |
| 141,590 |
|
(See the accompanying notes, which are an integral part of these consolidated financial statements)
80
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars)Dollars except share amounts)
Common Shares Issued and Outstanding | Capital Stock | Other Equity | Accumulated (Deficit) Earnings | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||
Balance as at December 31, 2014 | 68,988,050 | $ | 344,862 | $ | 47,319 | $ | (6,259 | ) | $ | (3,147 | ) | $ | — | $ | 382,775 | |||||||||||||
Net income | — | — | — | 64,624 | — | — | 64,624 | |||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (4,296 | ) | 416 | (3,880 | ) | |||||||||||||||||||
Net income attributable tonon-controlling interests | — | — | — | (8,780 | ) | — | 9,113 | 333 | ||||||||||||||||||||
Paid-in capital fornon-employee stock options granted | — | — | 81 | — | — | — | 81 | |||||||||||||||||||||
Employee stock options exercised | 1,650,643 | 49,756 | (14,278 | ) | — | — | — | 35,478 | ||||||||||||||||||||
Non-employee stock options exercised | 9,000 | 206 | (75 | ) | — | — | — | 131 | ||||||||||||||||||||
Paid-in capital for employee stock options granted | — | — | 12,225 | — | — | — | 12,225 | |||||||||||||||||||||
Paid-in capital for restricted share units granted | — | — | 8,075 | — | — | — | 8,075 | |||||||||||||||||||||
Restricted share units vested (net of shares withheld for tax) | 25,551 | 626 | (1,151 | ) | — | — | — | (525 | ) | |||||||||||||||||||
Restricted share units vested and issued to employees purchased on open market | — | — | (6,203 | ) | — | — | — | (6,203 | ) | |||||||||||||||||||
Stock options exercises settled from treasury shares purchased on open market | — | — | (3,797 | ) | — | — | — | (3,797 | ) | |||||||||||||||||||
Repurchase of common shares | (1,000,000 | ) | (5,390 | ) | — | (28,886 | ) | — | — | (34,276 | ) | |||||||||||||||||
Accretion charges associated with redeemable common stock | — | — | — | (769 | ) | — | — | (769 | ) | |||||||||||||||||||
Utilization of windfall tax benefits from vested restricted share units and expensed stock options | — | — | 529 | — | — | — | 529 | |||||||||||||||||||||
Issuance of subsidiary shares, initial public offering | — | 71,291 | 106,935 | — | — | — | 178,226 | |||||||||||||||||||||
Share issuance expenses, initial public offering | — | (13,041 | ) | (3,216 | ) | — | — | — | (16,257 | ) | ||||||||||||||||||
Dividends paid | — | — | — | — | — | (9,511 | ) | (9,511 | ) | |||||||||||||||||||
Tax impact of sale of subsidiary shares in initial public offering | — | — | (12,450 | ) | — | — | — | (12,450 | ) | |||||||||||||||||||
Reduction innon-controlling interest value upon qualified initial public offering | — | — | 29,100 | — | — | (29,100 | ) | — | ||||||||||||||||||||
Conversion of Class C Shares upon initial public offering | — | — | — | — | — | 79,041 | 79,041 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at December 31, 2015 | 69,673,244 | $ | 448,310 | $ | 163,094 | $ | 19,930 | $ | (7,443 | ) | $ | 49,959 | $ | 673,850 | ||||||||||||||
Retrospective adjustment related to forfeiture rate | — | — | 5,331 | (4,431 | ) | — | — | 900 | ||||||||||||||||||||
Net income | — | — | — | 39,320 | — | — | 39,320 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 2,243 | (1,735 | ) | 508 | ||||||||||||||||||||
Net income attributable tonon-controlling interests | — | — | — | (10,532 | ) | — | 11,338 | 806 | ||||||||||||||||||||
Paid-in capital fornon-employee stock options granted | — | — | 30 | — | — | — | 30 | |||||||||||||||||||||
Employee stock options exercised | 347,814 | 11,431 | (3,139 | ) | — | — | — | 8,292 | ||||||||||||||||||||
Fair value of stock options exercised at the grant date | — | 3,139 | — | — | — | — | 3,139 | |||||||||||||||||||||
Paid-in capital for employee stock options granted | — | — | 13,766 | — | — | — | 13,766 | |||||||||||||||||||||
Paid-in capital for restricted share units granted | — | — | 16,493 | — | — | — | 16,493 | |||||||||||||||||||||
Restricted share units vested (net of shares withheld for tax) | 52,631 | 1,198 | (14,731 | ) | — | — | — | (13,533 | ) | |||||||||||||||||||
Stock options exercises settled from treasury shares purchased on open market | — | — | (5,224 | ) | — | — | — | (5,224 | ) | |||||||||||||||||||
Cash received from the issuance of common shares in excess of par value | — | — | 1,684 | — | — | — | 1,684 | |||||||||||||||||||||
Repurchase of common shares | (3,849,222 | ) | (24,865 | ) | — | (91,653 | ) | — | — | (116,518 | ) | |||||||||||||||||
Shares held in treasury | (64,565 | ) | (1,939 | ) | — | — | — | — | (1,939 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at December 31, 2016 | 66,159,902 | $ | 437,274 | $ | 177,304 | $ | (47,366 | ) | $ | (5,200 | ) | $ | 59,562 | $ | 621,574 | |||||||||||||
Retrospective adjustment related to intra-entity transfers | — | — | — | (8,314 | ) | — | — | (8,314 | ) | |||||||||||||||||||
Net income | — | — | — | 12,518 | — | — | 12,518 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 4,574 | 1,148 | 5,722 | |||||||||||||||||||||
Net income attributable tonon-controlling interests | — | — | — | (10,174 | ) | — | 13,801 | 3,627 | ||||||||||||||||||||
Paid-in capital fornon-employee stock options granted | — | — | 17 | — | — | — | 17 | |||||||||||||||||||||
Employee stock options exercised | 405,229 | 14,652 | (3,542 | ) | — | — | — | 11,110 | ||||||||||||||||||||
Fair value of stock options exercised at the grant date | — | 3,542 | — | — | — | — | 3,542 | |||||||||||||||||||||
Paid-in capital for employee stock options granted | — | — | 5,496 | — | — | — | 5,496 | |||||||||||||||||||||
Paid-in capital for restricted share units granted | — | — | 17,157 | — | — | — | 17,157 | |||||||||||||||||||||
Restricted share units vested (net of shares withheld for tax) | 7,127 | 274 | (14,756 | ) | — | — | — | (14,482 | ) | |||||||||||||||||||
Stock options exercises settled from treasury shares purchased on open market | 66,093 | — | (8,393 | ) | — | — | — | (8,393 | ) | |||||||||||||||||||
Cash received from the issuance of common shares in excess of par value | — | — | 2,017 | — | — | — | 2,017 | |||||||||||||||||||||
Repurchase of common shares | (1,736,150 | ) | (11,884 | ) | — | (34,256 | ) | — | — | (46,140 | ) | |||||||||||||||||
Shares held in treasury | (206,651 | ) | (3,194 | ) | — | — | — | — | (3,194 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at December 31, 2017 | 64,695,550 | $ | 440,664 | $ | 175,300 | $ | (87,592 | ) | $ | (626 | ) | $ | 74,511 | $ | 602,257 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Adjustments to capital stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
| $ | 419,348 |
|
| $ | 421,539 |
|
| $ | 440,664 |
|
Change in shares held in treasury |
|
| 4,027 |
|
|
| (3,122 | ) |
|
| 4,216 |
|
Restricted share units vested |
|
| 1,448 |
|
|
| — |
|
|
| — |
|
Employee stock options exercised |
|
| — |
|
|
| 1,752 |
|
|
| 218 |
|
Fair value of stock options exercised at the grant date |
|
| — |
|
|
| 104 |
|
|
| 70 |
|
Average carrying value of repurchased and retired common shares |
|
| (17,803 | ) |
|
| (925 | ) |
|
| (23,629 | ) |
Balance, end of year |
|
| 407,020 |
|
|
| 419,348 |
|
|
| 421,539 |
|
Adjustments to other equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
| 171,789 |
|
|
| 179,595 |
|
|
| 175,300 |
|
Amortization of share-based payment expense - stock options |
|
| 2,707 |
|
|
| 8,910 |
|
|
| 5,907 |
|
Amortization of share-based payment expense - restricted share units |
|
| 14,162 |
|
|
| 13,985 |
|
|
| 16,325 |
|
Amortization of share-based payment expense - performance stock units |
|
| 2,771 |
|
|
| — |
|
|
| — |
|
Restricted share units vested |
|
| (9,565 | ) |
|
| (10,525 | ) |
|
| (12,582 | ) |
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 |
|
| — |
|
|
| (104 | ) |
|
| (70 | ) |
Common shares repurchased, IMAX China |
|
| (1,534 | ) |
|
| (19,162 | ) |
|
| (6,084 | ) |
Stock options exercised from treasury shares purchased on open market |
|
| — |
|
|
| (1,561 | ) |
|
| — |
|
Balance, end of year |
|
| 180,330 |
|
|
| 171,789 |
|
|
| 179,595 |
|
Adjustments to accumulated deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
| (40,253 | ) |
|
| (85,385 | ) |
|
| (87,592 | ) |
Retrospective adoption of ASC Topic 606, Revenue from Contracts with Customers |
|
| — |
|
|
| — |
|
|
| 27,213 |
|
Net (loss) income attributable to common shareholders |
|
| (143,775 | ) |
|
| 46,866 |
|
|
| 22,844 |
|
Common shares repurchased and retired |
|
| (18,821 | ) |
|
| (1,734 | ) |
|
| (47,850 | ) |
Balance, end of year |
|
| (202,849 | ) |
|
| (40,253 | ) |
|
| (85,385 | ) |
Adjustments to accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
| (3,190 | ) |
|
| (3,588 | ) |
|
| (626 | ) |
Other comprehensive income (loss), net of tax |
|
| 4,178 |
|
|
| 398 |
|
|
| (2,962 | ) |
Balance, end of year |
|
| 988 |
|
|
| (3,190 | ) |
|
| (3,588 | ) |
Adjustments to non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
| 89,493 |
|
|
| 80,757 |
|
|
| 74,511 |
|
Retrospective adoption of ASC Topic 606, Revenue from Contracts with Customers |
|
| — |
|
|
| — |
|
|
| 735 |
|
Net (loss) income attributable to non-controlling interests |
|
| (8,572 | ) |
|
| 13,343 |
|
|
| 13,461 |
|
Other comprehensive income (loss), net of tax |
|
| 1,812 |
|
|
| (223 | ) |
|
| (1,016 | ) |
Dividends paid to non-controlling shareholders |
|
| (4,214 | ) |
|
| (4,384 | ) |
|
| (6,934 | ) |
Balance, end of year |
|
| 78,519 |
|
|
| 89,493 |
|
|
| 80,757 |
|
Total Shareholders' Equity |
| $ | 464,008 |
|
| $ | 637,187 |
|
| $ | 592,918 |
|
Common shares issued and outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
| 61,175,852 |
|
|
| 61,433,589 |
|
|
| 64,695,550 |
|
Employee stock options exercised |
|
| — |
|
|
| 19,088 |
|
|
| 12,750 |
|
Restricted share units and stock option exercises settled from treasury shares purchased on open market |
|
| 187,020 |
|
|
| 44,579 |
|
|
| 206,651 |
|
Restricted share units settled with new treasury shares |
|
| 42,982 |
|
|
| — |
|
|
| — |
|
Repurchase of common shares |
|
| (2,484,123 | ) |
|
| (134,384 | ) |
|
| (3,436,783 | ) |
Shares held in treasury |
|
| (723 | ) |
|
| (187,020 | ) |
|
| (44,579 | ) |
Balance, end of year |
|
| 58,921,008 |
|
|
| 61,175,852 |
|
|
| 61,433,589 |
|
(TheSee the accompanying notes, which are an integral part of these consolidated financial statements)
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars,Dollars, unless otherwise stated)
1. Description of the Business
IMAX Corporation, together with its consolidated subsidiaries (the “Company”), is anone of the world’s leading entertainment technology companycompanies, specializing in digitaltechnological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and film-basedspecialized equipment, IMAX offers a unique end-to-end cinematic solution to create the highest-quality, most immersive motion picture technologies, whose principal activities are the:and other entertainment event experiences for which the IMAX® brand has become known globally. Top filmmakers and movie studios utilize the cutting-edge visual and sound technology of IMAX to connect with audiences in innovative ways, and as a result, IMAX’s network is among the most important and successful distribution platforms for major films and other events around the world.
Theater Systems”). The Company refers to all theaters using the IMAX theater systemTheater System as “IMAX theaters.”
The Company’s revenues from equipment and product sales includeFor all IMAX theaters, theater owners or operators are also responsible for paying the sale and sales-type leasing of its theater systems and sales of their associated parts and accessories, contingent rentals on sales-type leases and contingent additional payments on sales transactions.
The Company’s revenues from services include the provision ofCompany an annual maintenance and extended warranty fee. Under these arrangements, the Company provides proactive and emergency maintenance services digitalre-mastering services,to every theater in its network to ensure that each presentation is up to the highest IMAX quality standard. The Company’s theater business activities also include the after-market sale of IMAX projection system parts and 3D glasses.
As of December 31, 2020, there were 1,650 IMAX Theater Systems operating in 84 countries and territories, including 1,562 commercial multiplexes, 12 commercial destinations and 76 institutional locations. This compares to 1,624 IMAX Theater Systems operating in 81 countries and territories as of December 31, 2019 including 1,529 commercial multiplexes, 14 commercial destinations and 81 institutional locations.
The Company also licenses film productioncontent and distributes large-format films, primarily for its institutional theater partners and provides film post-production and quality control services film distribution,for large-format films (whether produced by IMAX or third parties), and digital post-production services.
The Company has the following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements; (iii) IMAX Systems, (iv) IMAX Maintenance; (v) Other Theater Business; (vi) New Business Initiatives; (vii) Film Distribution; and (viii) Film Post-Production, which are described in Note 21.
2. Impact of COVID-19 Pandemic
In late January 2020, in response to the public health risks associated with the novel coronavirus and the operationdisease that it causes (“COVID-19”), the Chinese government directed exhibitors in China to temporarily close more than 70,000 movie theaters, including all of the approximately 700 IMAX theaters in mainland China. On March 11, 2020, due to the worsening public health crisis associated with the novel coronavirus, COVID-19 was characterized as a pandemic by the World Health Organization, and in the following weeks, local, state and national governments instituted stay-at-home orders and restrictions on large public gatherings which caused movie theaters in countries around the world to temporarily close, including substantially all of the IMAX theaters in those countries. As a result of the theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms. More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures. As of December 31, 2020, a significant number of the theaters in the IMAX commercial multiplex network were open, including substantially all of the theaters in Greater China. In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance levels despite the continued delay of Hollywood theatrical releases, which typically account for 70% of box office ticket sales in those regions. Management believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and they feel safe. However, ticket sales have been significantly lower than normal levels in theaters outside of Asia as Hollywood movie studios have further delayed the theatrical release dates for a number of films. As a result, certain theater chains have remained closed or have reduced their operating hours. In addition, theaters in major markets remain temporarily closed.
82
The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the Company’s revenues, earnings and operating cash flows in 2020 as gross box office (“GBO”) results from the Company’s theater customers declined significantly, the installation of certain theaters.
The Company’s rentals include revenues from the leasing of its theater systems was delayed, and maintenance services were generally suspended for theaters that were closed. While there continues to be a lack of new films released by movie studios and a significant number of theaters in the IMAX network are closed, the Company is experiencing a significant decline in earnings and operating leases, contingent rentals on operating leases,cash flows as it is generating significantly lower than normal levels of GBO-based revenue from its joint revenue sharing arrangements and the rentaldigital remastering services, it is unable to provide normal maintenance services to any of the theaters that remain closed, and while some installation activity is continuing, certain theater system installations have, and may continue to be delayed. In addition, the Company has experienced and is likely to continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor customers who are facing financial difficulties as a result of the theater closures. In response, the Company has provided temporary relief to exhibitor customers by waiving or reducing maintenance fees during periods when theaters are closed or operating with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement. As discussed in Note 5, in 2020, the Company increased its provision for current expected credit losses by $18.6 million, in part reflecting a reduction in the credit quality of its theater related accounts receivable, financing receivables and variable consideration receivables, which management believes is primarily related to the COVID-19 pandemic and adequately addresses the risk of not collecting these receivables in full.
The Company may continue to be significantly impacted by the COVID-19 global pandemic even after a significant portion or all theaters are reopened. The global economic impact of COVID-19 has led to record levels of unemployment in certain countries, which has led to, and may continue to result in lower consumer spending. The timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s camerasability to generate significant GBO-based revenue as consumer behavior normalizes and camera equipment.consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough, reducing the working hours of other employees and reducing all non-essential capital expenditures to minimum levels.
The Company’s finance income represents interest income arisingCompany has also implemented an active cash management process, which, among other things, requires senior management approval of all outgoing payments. In addition, in the first quarter of 2020, the Company drew down $280.0 million in remaining available borrowing capacity under the Credit Facility provided by the Credit Agreement, which was then amended in June 2020 to, among other things,suspend the Senior Secured Net Leverage Ratio financial covenant in the Credit Agreement through the first quarter of 2021 and substitute quarterly EBITDA from the sales-type leasesthird and financed salesfourth quarters of 2019 in lieu of the Company’s theater systems.EBITDA for the corresponding quarters of 2020 to meet the original Senior Secured Net Leverage Ratio financial covenant (see Note 14).
As of December 31, 2020, the Company was in compliance with all of its requirements under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
Furthermore, the Company has applied for and received wage subsidies, tax credits and other revenues includefinancial support under COVID-19 relief legislation that has been enacted in the settlementcountries in which it operates. During 2020, the Company recognized $6.4 million in benefits from the Canada Emergency Wage Subsidy (“CEWS”) program and $0.7 million in benefits from the U.S. CARES Act, as reductions to Selling, General and Administrative Expenses ($6.0 million), Costs and Expenses Applicable to Revenues ($1.0 million) and Research and Development ($0.1 million) in the Consolidated Statements of contractual obligationsOperations. The CEWS program has been extended to June 2021. The Company will continue to review and apply for additional subsidies and credits for the remaining terms of these programs, where applicable.
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In the fourth quarter of 2020, the Company performed its annual goodwill impairment test considering the latest available information and determined that its goodwill was not impaired. As of December 31, 2020, the Company’s total Goodwill was $39.0 million, of which $19.1 million relates to the IMAX Systems reporting unit, $13.5 million relates to the Joint Revenue Sharing Arrangement reporting unit, and $6.4 million relates to the IMAX Maintenance reporting unit. The impairment test was performed on a reporting unit level by comparing each unit’s carrying value, including goodwill, to its fair value. The carrying value of each reporting unit is based on a systematic and rational allocation of certain assets and liabilities. The fair value of each reporting unit is assessed using a discounted cash flow model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses are performed. The discount rates used in the cash flow model are derived based on the Company’s estimated weighted average cost of capital. These estimates and the likelihood of future changes in these estimates depend on a number of underlying variables and a range of possible outcomes. Actual results may differ materially from management’s estimates, especially due to the uncertainties associated with customers.the COVID-19 pandemic (see Note 3).
2.In the fourth quarter of 2020, the Company also updated its recoverability tests of the carrying values of the theater system equipment supporting its joint revenue sharing arrangements, which are recorded within Property, Plant and Equipment. In performing its reviews of recoverability, the Company estimated the undiscounted future cash flows expected to result from the use of the assets. The cash flow estimates used in these tests are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 global pandemic; therefore, management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may differ materially from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic. For the year ended December 31, 2020, the Company recorded impairment losses of $0.3 million related to the theater system equipment supporting its joint revenue sharing arrangements. (See Note 3.)
In the third quarter of 2020, the Company assessed the recoverability of its deferred tax assets and recorded a $23.7 million valuation allowance to reduce the value of deferred tax assets. The valuation allowance was recorded in the jurisdictions where management could not reliably forecast that future tax liabilities would arise within the next five years, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic. In the fourth quarter of 2020, the Company increased the valuation allowance against its deferred tax assets by $4.9 million due to additional losses recorded in the period. The valuation allowance is expected to reverse when the Company determines it is more likely than not that the deferred tax assets in these jurisdictions will be realized. Despite this valuation allowance, the Company remains entitled to benefit from the tax attributes which currently have a valuation allowance applied to them. (See Note 12.)
If business conditions deteriorate further, or should they remain depressed for a more prolonged period of time, management’s estimates of operating results and future cash flows for the IMAX Systems and Joint Revenue Sharing Arrangements reporting units may be insufficient to support the goodwill assigned to them, thus requiring impairment charges. The Company will continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate there may be a potential impairment. In addition, estimates related to future expected credit losses (see Note 5) and the recoverability of deferred tax assets (see Note 12), as well as the recoverability of joint revenue sharing equipment assets and the realization of variable consideration assets, could be further impacted by changes in estimates in the future (see Note 3).
3. Summary of Significant Accounting Policies
Significant accounting policies are summarized as follows:
The Company prepares its consolidated financial statementsConsolidated Financial Statements in accordance with U.S. GAAP.
(a) BasisGAAP and pursuant to the rules and regulations of Consolidationthe Securities and Exchange Commission. The significant accounting policies used by the Company are summarized below.
(a) | Principles of Consolidation |
The consolidated financial statementsConsolidated Financial Statements include the accounts of the Company together with its consolidated subsidiaries, except for subsidiaries which the Company hashave been identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary.
All intercompany accounts and transactions have been eliminated. 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”).U.S. GAAP.
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The Company has 11 film and content related companies that are VIEs. For five of the Company’sinterests in ten film production companies, thewhich have been identified as VIEs. The Company has determined that it is the primary beneficiary of and consolidates fiveof these entities as the Companyit has the power to direct the activities of the respective VIE that most significantly impact the respective VIE’s economic performance of the VIE, and it 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.significant. The majority of the assets relating to these consolidated assets production companies are held by the IMAX Original Film Fund (the “Original Film Fund”) and the virtual reality fund (the “VR Fund”) as described in note 21(b)Note 24(b). ForThe Company does not consolidate the other six fivefilm production companies which are VIEs, the Company did not consolidate these film entities sincebecause it does not have the power to direct their activities and it does not have the obligation to absorb the majority of the expected losses or the right to receive expected residual returns. The Company uses the equity accountsmethod of accounting for these entities.entities, which are not material to the Company’s Consolidated Financial Statements. A loss in value of an investment that is other than a temporary decline is recognized as a charge toin the consolidated statementsConsolidated Statements of operations.Operations.
TotalAs of December 31, 2020 and 2019, total assets and liabilities of the Company’sCompany's consolidated VIEs are as follows:
December 31, | December 31, | |||||||
2017 | 2016 | |||||||
Total assets | $ | 7,539 | $ | 10,346 | ||||
Total liabilities | 7,178 | 6,368 |
Total assets and liabilities of the VIE entities which the Company does not consolidate are as follows:
|
| December 31, |
|
| December 31, |
| ||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||
Total assets |
| $ | 1,543 |
|
| $ | 9,677 |
|
Total liabilities(1) |
| $ | 230 |
|
| $ | 308 |
|
December 31, | December 31, | |||||||
2017 | 2016 | |||||||
Total assets | $ | 448 | $ | 444 | ||||
Total liabilities | 388 | 363 |
The Company’s exposure, which is determined based on the level of funding contributed by the Company and the development stage of the respective film, is $nil at December 31, 2017 (2016 — $nil).
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”) and 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.
(b) Use of Estimates
(1) | Prior year comparative amounts have been updated to conform with current year presentation. As a result, total liabilities as of December 31, 2019 have been updated to exclude the non-controlling interest in temporary equity. |
(b) | Estimates and Assumptions |
The preparation of consolidated financial statements and related disclosures in conformityaccordance with U.S. GAAP requires management to make estimatesjudgments, assumptions, and judgmentsestimates that affect the amounts reported amountsin the Company’s Consolidated Financial Statements and accompanying notes. Management’s judgments, assumptions, and estimates are based on historical experience, future expectations and other factors that are believed to be reasonable as of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statementsthe Company’s Consolidated Financial Statements. Actual results may ultimately differ from the Company’s original estimates, as future events and circumstances sometimes do not develop as expected, and the reported amounts of revenues and expenses during the reporting period. Actual results coulddifferences may be materially different from these estimates. material.
Significant estimates made by management include, but are not limited to: selling prices associated with(i) the individual elementsallocation of the transaction price in multiple element arrangements; residual valuesan IMAX Theater System arrangement to distinct performance obligations; (ii) constraints on the recognition of leased theater systems; economic livesvariable consideration related to sales of leased assets; allowances for potential uncollectability ofIMAX Theater Systems; (iii) expected credit losses on accounts receivable, financing receivables and net investment in leases;variable consideration receivables; (iv) provisions for inventory obsolescence; ultimate revenues for film assets; impairment provisions for film assets,the write-down of excess and obsolete inventory; (v) the fair values of the reporting units used in assessing the recoverability of goodwill; (vi) the cash flow estimates used in testing the recoverability of long-lived assets and goodwill; depreciablesuch as the theater system equipment supporting joint revenue sharing arrangements; (vii) the economic lives of property, plant and equipment;the theater system equipment supporting joint revenue sharing arrangements; (viii) the useful lives of intangible assets; (ix) the ultimate revenue forecasts used to test the recoverability of film assets; (x) the discount rates used to determine the present value of lease liabilities; (xi) pension plan assumptions; accruals for contingencies including tax contingencies;(xii) estimates related to the fair value and projected vesting of share-based payment awards; (xiii) the valuation allowances forof deferred income tax assets; and estimates of the fair value of stock-based payment awards.(xiv) reserves related to uncertain tax positions.
(c) Cash and Cash Equivalents
(c) | Cash and Cash Equivalents |
The Company considers all highly liquid investments convertible to a known amount of cash and with an original maturity to the Company of three months or less to be cash equivalents.
(d) | Current Expected Credit Losses |
(d) Accounts Receivable and Financing Receivables
Allowances for doubtfulIn 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The standard requires financial assets measured on the amortized cost basis to be presented at the net amount expected to be collected. The Company’s accounts receivable, financing receivables and variable consideration receivables are basedwithin the scope of ASU No. 2016-13. The Company adopted ASU No. 2016-13 and several associated ASUs on January 1, 2020 with no required cumulative-effect adjustment to accumulated deficit.
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The ability of the Company to collect its accounts receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators and, in certain situations, movie studios, may experience financial difficulties that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
The Company considers financing receivables with an aging between 60-89 days as indications of theaters with potential collection concerns. At this point, 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 perform an enhanced review to assess collectibility of the theater’s past due accounts. The over 90 days past due category may be an indicator of potential impairment as up to 90 days outstanding is considered to be a reasonable time to resolve any issues. Given the impacts of the COVID-19 global pandemic on the Company’s assessment of the collectability of specific customer balances, which is based upon a review of the customer’s credit worthiness, past collection history and the underlying asset value of the equipment, where applicable. Interest oncustomers, management has enhanced its monitoring procedures with respect to overdue accounts receivable is recognized as income as the amounts are collected.
For trade accounts receivable that have characteristics of both a contractual maturity of one year or less, and arose from the sale of other goods or services, the Company charges off the balance against the allowance(See Note 5 for doubtful accounts when it is known that a provided amount will not be collected.
The Company monitors the performance of the theaters to which it has leased or sold theater systems which are subject to ongoing payments. When facts and circumstances indicate that there is a potential impairment in the net investment in lease or a financing receivable, the Company will evaluate the potential outcome of either a renegotiation involving changes in the terms of the receivable or defaults on the existing lease or financed sale agreements. The Company will record a provision if it is considered probable that the Company will be unable to collect all amounts due under the contractual terms of the arrangement or a renegotiated lease amount will cause a reclassification of the sales-type lease to an operating lease.
When the net investment in lease or the financing receivable is impaired, the Company will recognize a provision for the difference between the carrying value in the investment and the present value of expected future cash flows discounted using the effective interest rate for the net investment in the lease or the financing receivable. If the Company expects to recover the theater system, the provision is equalmore information related to the excess of the carrying value of the investment over the fair value of the equipment.
When the minimum lease payments are renegotiatedCompany’s receivables and the lease continues to be classified as a sales-type lease, the reduction in payments is applied to reduce unearned finance income.
These provisions are adjusted when there is a significant change in the amount or timing of thecurrent expected future cash flows or when actual cash flows differ from cash flow previously expected.credit losses.)
Once a net investment in lease or financing receivable is considered impaired, the Company does not recognize interest income until the collectability issues are resolved. When finance income is not recognized, any payments received are applied against outstanding gross minimum lease amounts receivable or gross receivables from financed sales. Once the collectability issues are resolved, the Company will once again commence the recognition of interest income.
(e) Inventories
(e) | Inventories |
Inventories are carried at the lower of cost, determined on an average cost basis, and net realizable value except for raw materials, which are carried at the lower of cost and replacement cost. Finished goods andwork-in-process include includes the cost of raw materials, direct labor, theater design costs, and an applicable share of manufacturing overhead costs.
The costs related to theater systemsIMAX Theater Systems under sales and sales-type lease arrangements are relievedtransferred from inventoryInventories to costsCosts and expenses applicableExpenses Applicable to revenues-equipment and product salesRevenues – Technology Sales in the period when revenue recognition criteria are met.the sale is recognized in the Consolidated Statements of Operations. The costs related to theater systemsIMAX Theater Systems under operating lease arrangements and joint revenue sharing arrangements are transferred from inventoryInventories to assets under construction in property, plantProperty, Plant and equipmentEquipment when allocated to a signed joint revenue sharing arrangement or when the arrangement is first classified as an operating lease.arrangement.
The Company records provisionswrite-downs for excess and obsolete inventory based upon current estimates ofmanagement’s judgments regarding future events and business conditions, including the anticipated installation dates for the current backlog of theater system contracts, contracts in negotiation, technological developments, signings in negotiation, growth prospects within the customers’ ultimate marketplace and anticipated market acceptance of the Company’s current and pending theater systems.
Finished goods inventories can contain theater systemsincludes IMAX Theater Systems for which title has passed to the Company’s customer (asin situations when the theater system has been delivered to the customer)customer, but the revenue recognition criteria as discussed in note 2(m)Note 3(n) have not been met.
(f) Film Assets
(f) | Film Assets |
Costs of producing films, including labor, allocated overhead, capitalized interest, and costs of acquiring film rights are recorded as film assets and accounted for in accordance with Entertainment-Films Topic of the FASB ASC.Film Assets. Production financing provided by third parties that acquire substantive rights in the film is recorded as a reduction of the cost of the production. Film assets are amortized and participation costs are accrued using the individual-film-forecast method in the same ratio that current gross revenues bear to current and anticipated future ultimate revenues. Estimates of ultimate revenues are prepared on atitle-by-title basis and reviewed regularly by management and revised where necessary to reflect the most current information. Ultimate revenues for films include estimates of revenue over a period not to exceed ten years following the date of initial release.
Film exploitation costs, including advertising costs, are expensed as incurred.
Costs, including labor and allocated overhead, of digitallyre-mastering remastering films where the copyright is owned by a third party and the Company shares in the revenue of the third party are included in film assets.Film Assets. These costs are amortized using the individual-film-forecast method in the same ratio that current gross revenues bear to current and anticipated future ultimate revenues from there-mastered remastered film.
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The recoverability of the Company’s film assets is dependent upon the commercial acceptance of the films. underlying films and the resulting level of box office results and, in certain situations, ancillary revenues. If events or circumstancesmanagement’s projections of future net cash flows resulting from the exploitation of a film indicate that the recoverable amountcarrying value of athe film asset is less than the unamortized film costs,not recoverable, the film asset is written down to its fair value. The Company determines the fair value of its film assets using a discounted cash flow model.
(g) | Property, Plant and Equipment |
(g) Property, Plant and Equipment
Property, plant and equipment are is recorded at cost and areis depreciated on a straight-line basis over theirthe estimated useful lives of the underlying assets as follows:
Theater system components(1) | — | Over the equipment’s anticipated useful life (7 to 20 years) | ||
Camera equipment | — | Over a period between 5 to 10 years | ||
Buildings | — | Over a period between 20 to 25 years | ||
Office and product equipment | — | Over a period between 3 to 5 years | ||
Leasehold improvements | — | Over the shorter of the initial term of the underlying leases plus any reasonably assured renewal | ||
terms, and the useful life of the asset |
(1) | Includes equipment under joint revenue sharing arrangements. |
Equipment and theater system components allocated to be used in future operating leases and joint revenue sharing arrangements, as well as related direct labor costs and an allocation of direct production costs, are included in assets under construction until such equipment is installed and in working condition, at which time the equipment is depreciated on a straight-line basis over the lesser of the term of the joint revenue sharing arrangement and the equipment’s anticipated useful life. The estimated useful lives of the equipment and theater system components used in joint revenue sharing arrangements are reviewed periodically to determine if any adjustments are required.
The Company reviews the carrying values of its property, plantProperty, Plant and equipmentEquipment is grouped and reviewed for impairment at the lowest level for which identifiable cash flows are largely independent whenever events or changes in circumstances indicate that the carrying amount of anthe asset or(or asset group mightgroup) may not be recoverable. Assets are grouped atIn such situations, the lowest level for which identifiable cash flows are largely independentasset (or asset group) is considered impaired when testing for, and measuring for, impairment. In performing its review of recoverability, the Company estimates theestimated future cash flows expected to result(undiscounted and without interest charges) resulting from the use of the asset or(or asset groupgroup) and its eventual disposition. If the sum of the expected undiscounted future cash flows isdisposition are less than the carrying amountvalue of the asset or(or asset group, angroup). In such situations, the asset (or asset group) is written down to its fair value, which is the present value of the estimated future cash flows. Factors that are considered when evaluating such assets for impairment lossinclude a current expectation that it is recognizedmore likely than not that the long-lived asset will be sold significantly before the end of its useful life, a significant decrease in the consolidated statements of operations. Measurementmarket price of the impairment losslong-lived asset, and a significant change in the extent or manner in which the long-lived asset is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows.being used.
A liability for the fair value of an asset retirement obligation associated with the retirement of tangible long-lived assets and the associated asset retirement costs are recognized in the period in which the liability and costs are incurred if a reasonable estimate of fair value can be made using a discounted cash flow model. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized over the asset’s useful life. The liability is accreted over the period to expected cash outflows.
(h) | Investment in Equity Securities |
(h) Other AssetsEquity securities with readily determinable fair values are reported at fair value with changes in fair value recorded within Gain (Loss) in Fair Value of Investments in the Consolidated Statements of Operations.
(i) | Other Assets |
Other assets include lease incentives provided to theater customers, sales commissions and other deferred selling costsexpenses that are direct and incremental to the acquisition of sales contracts, various investments, insurance recoverable,and foreign currency derivatives, deferred charges on debt financing, and prepaid taxes.derivatives.
Costs of debt financing are deferred and amortized over the term of the debt using the effective interest method.
Selling costs related to an arrangement incurred prior to recognition of the related revenue are deferred and expensed to costs and expenses applicable to revenues upon: (i) recognition of the contract’s theater system revenue; or (ii) abandonment of the sale arrangement.
Foreign currency derivatives are accounted for at fair value using quoted prices in closed exchanges (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy).
The Company may provide lease incentives to certain exhibitors which are essential to entering into the respective lease arrangement. Lease incentives include payments made to or on behalf of the exhibitor. These lease incentives are recognized as a reduction in rental revenue on a straight-line basis over the term of the lease.
Investments in new business ventures87
Sales commissions and other selling expenses paid prior to the recognition of the related revenue are deferred and recognized within Costs and Expenses Applicable to Revenues upon the recognition of the related theater system revenue or the abandonment of the sale arrangement.
Foreign currency derivatives are accounted for using ASC 323 as described in note 2(a). The Company currently accounts for its joint venture investment with TCL Multimedia Technology Holdings Limited (“TCL”), using the equity method of accounting. The Company accounts forin-kind contributions to its equity investment in accordance with ASC 845“Non-Monetary Transactions” (“ASC 845”) whereby if the fair value of the asset or assets contributed is greater than the carrying value a partial gain shall be recognized.
The Company’s investment in debt securities is classified as anavailable-for-sale investment in accordance with ASC 320. Unrealized holding gains and losses for this investment is excluded from earnings and reported in other comprehensive income until realized. Realization occurs upon sale of a portion of or the entire investment. The investment is impaired if the fair value is less than cost, which is assessed in each reporting period. When the Company intends to sell a specifically identified beneficial interest, a write-down for other-than-temporary impairment shall be recognized in earnings.
The Company’s investment in preferred shares, which meets the criteria for classification as an equity security in accordance with ASC 325, is accounted for at cost. The Company records the related warrants at fair value upon recognition date. Warrantsusing quoted prices in closed exchanges.
In periods when there are recognizedno outstanding borrowings under the Company’s revolving credit facility arrangements, any related debt issuance costs are recorded within Other Assets and amortized on a straight-line basis over the term of the agreement.facility. In periods when there are outstanding borrowings under the Company’s revolving credit facility arrangements, any related debt issuance costs are reclassified to reduce the principal amount of outstanding borrowings and amortized on a straight-line basis over the term of the facility. (See Note 14 for information related to the Company’s credit facilities.)
(i) Goodwill
(j) | Goodwill |
Goodwill represents the excess of the purchase price paid over the fair value of net identifiable assets acquired in a purchase business combination. Goodwill is not subject to amortization andamortized, but is tested annually for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. The Company performs a qualitative assessment of its reporting units and certain select quantitative calculations against its current long-range plan to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. The Company first assesses certain qualitative factors to determine whether the existence of events or circumstances leads to determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carry amount, then performing thetwo-step impairment test is unnecessary. When necessary, impairment of goodwill is tested at the reporting unit level by comparingin the fourth quarter of the year and between annual tests if indicators of potential impairment exist. These indicators could include a decline in the Company’s stock price and market capitalization, a significant change in the outlook for the reporting unit’sunit's business, lower than expected operating results, increased competition, legal factors, or the sale or disposition of a significant portion of a reporting unit. For reporting units with goodwill, an impairment loss is recognized for the amount by which the reporting unit's carrying amount,value, including goodwill, to theexceeds its fair value. The carrying value of theeach reporting unit.unit is based on a systematic and rational allocation of certain assets and liabilities. The fair value of theeach reporting unit is estimatedassessed using a discounted cash flow approach. If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable assetmodel based on management’s current short-term forecast and liabilityestimated long-term projections, against which various sensitivity analyses are performed. The discount rates used in the reporting unit tocash flow model are derived based on the total fair valueCompany’s estimated weighted average cost of capital. These estimates and the reporting unit. Any impairment loss is expensedlikelihood of future changes in the consolidated statementthese estimates depend on a number of operationsunderlying variables and is not reversed if the fair value subsequently increases.a range of possible outcomes.
(j) Other Intangible Assets
(k) | Other Intangible Assets |
Patents, trademarks and other intangiblesintangible assets are recorded at cost and are amortized on a straight-line basis over estimated useful lives ranging from 4 to 10 years except for intangible assets that have an identifiable pattern of consumption of the economic benefit of the asset, whichasset. Such intangible assets are amortized over the consumption pattern.
The Company reviewsIntangible Assets are grouped and reviewed for impairment at the carrying values of its other intangible assetslowest level for impairmentwhich identifiable cash flows are largely independent whenever events or changes in circumstances indicate that the carrying amount of anthe asset or(or asset group mightgroup) may not be recoverable. Assets are grouped atIn such situations, the lowest level for which identifiable cash flows are largely independentasset (or asset group) is considered impaired when testing for, and measuring for, impairment. In performing its review for recoverability, the Company estimates theestimated future cash flows expected to result(undiscounted and without interest charges) resulting from the use of the asset or(or asset groupgroup) and its eventual disposition. If the sum of the expected undiscounted future cash flows isdisposition are less than the carrying amountvalue of the asset or(or asset group, angroup). In such situations, the asset (or asset group) is written down to its fair value, which is the present value of the estimated future cash flows. Factors that are considered when evaluating intangible assets for impairment lossinclude a current expectation that it is recognizedmore likely than not that the intangible asset will be sold significantly before the end of its useful life, a significant decrease in the consolidated statement of operations. Measurementmarket price of the impairment lossintangible asset, and a significant change in the extent or manner in which the intangible asset is based onbeing used.
(l) | Deferred Revenue |
In instances where the excessCompany receives consideration prior to satisfying its performance obligations, the recognition of revenue is deferred.The majority of the carrying amountDeferred Revenue balance relates to payments received by the Company for IMAX Theater Systems where control of the asset or asset group oversystem has not transferred to the fair value calculated using discounted expected future cash flows.
(k)customer. The Deferred Revenue
balance related to an individual theater increases as progress payments are made and is then derecognized when control of the system is transferred to the customer. To a lesser extent, the Deferred revenue represents cash receivedRevenue balance relates to situations when a theater customer pays the contractual maintenance fee prior to revenuethe recognition criteria being met for theater system sales or leases, film contracts, maintenance and extended warranty services, film related services and film distribution.
(l) Income Taxes88
(m) | Income Taxes |
Income taxes are accounted for under the liability method whereby deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the accounting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in the consolidated statementCompany’s Consolidated Statements of operationsOperations in the period in which the change is enacted. Investment tax credits are recognized as a reduction of income tax expense.
The Company assesses the realization of deferred income tax assets and, based on all available evidence, concludes whether it is more likely than not that the net deferred income tax assets will be realized. A valuation allowance is provided for the amount of deferred income tax assets not considered to be realizable. In assessing the need for a valuation allowance, management considers, among other things, projections of future taxable income and ongoing prudent and feasible tax planning strategies. If management determines that sufficient negative evidence exists (for example, if the Company experiences cumulative three-year losses in a certain jurisdiction), then management will consider recording a valuation allowance against a portion or all of the deferred tax assets in that jurisdiction. If, after recording a valuation allowance, management’s projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove more difficult to support the realization of these deferred tax assets. As a result, an additional valuation allowance could be required, which would have an adverse impact on the Company’s effective income tax rate and results. Conversely, if, after recording a valuation allowance, management determines that sufficient positive evidence exists in the jurisdiction in which a valuation allowance is recorded (for example, if the Company is no longer in a three-year cumulative loss position in the jurisdiction, and management expects to have future taxable income in that jurisdiction based upon management’s forecasts and the expected timing of deferred tax asset reversals), the Company may reverse a portion or all of the valuation allowance in that jurisdiction. In such situations, the adjustment made to the deferred tax asset would have a favorable impact on the Company’s effective income tax rate and results in the period such determination was made.
The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly,Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date. Although management believes that the Company has adequately accounted for its uncertain tax positions, tax audits can result in subsequent assessments where the ultimate resolution may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable,result in the Company adjustsowing additional taxes above what was originally recognized in its financial statements.
Tax reserves for uncertain tax expensepositions are adjusted by the Company to reflect the Company’s ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results. The Company provides for such exposures in accordance with the Income Taxes Topicbest estimate of the FASB ASC.
(m) Revenue Recognition
Multiple Element Arrangements
The Company’s revenue arrangements with certain customers may involve multiple elements consistingoutcome of examinations and assessments and in light of changing facts and circumstances, such as the completion of a theater system (projector, sound system, screen systemtax audit, expiration of a statute of limitations, the refinement of an estimate, and if applicable, 3D glasses cleaning machine); servicesinterest accruals associated with the theater system including theater design support, supervisionuncertain tax positions until they are resolved. Some of installation,these adjustments require significant judgment in estimating the timing and projectionist training; a license to useamount of the additional tax expense.
(n) | Revenue Recognition |
IMAX brand; 3D glasses; maintenance and extended warranty services; and licensing of films. Theater Systems
The Company evaluates all elementseach of the performance obligations in an IMAX Theater System arrangement to determine whatwhich are considered deliverablesdistinct, 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 LeasesASC Topic 606, “Revenue from Contracts with Customers,” ASC Topic 842, “Leases,” and ASC Topic 460, “Guarantees”.
The Company’s “System Obligation” consists of the FASB ASC;following: (i) an IMAX Theater System, which includes the Guarantees Topic of the FASB ASC; the Entertainment – Films Topic of FASB ASC; and the Revenue Recognition Topic of the FASB. 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 consideration received or receivable in the arrangement is allocated based on the applicable guidance in the above noted standards.
Theater Systems
The Company has identified the projection system,projector, sound system, screen system and, if applicable, a 3D glasses cleaning machine,machine; (ii) services associated with the IMAX Theater System, including theater design support, the supervision of installation services, and projectionist trainingtraining; and the(iii) a license to use of the IMAX brand to bemarket the theater. The System Obligation, as a single deliverable andgroup, is a single unit of accounting (the “System Deliverable”). When an arrangement does not include all the elements of a System Deliverable, the elements of the System Deliverable included in the arrangement are considered by the Company to be a single deliverabledistinct performance obligation and a single unit of accounting. The Company is not responsible for the physical installation of the equipment in the customer’s facility; however, the Companyit supervises the installation by the customer. The customer has the right to use the IMAX brand from the date the Company and the customer enter into an arrangement.
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IMAX Theater System arrangements also include a requirement for the Company to provide maintenance services over the life of the arrangement in exchange for an extended warranty and annual maintenance fee, which is subject to a consumer price index increase on renewal each year. Consideration related to the provision of maintenance services is included in the allocation of the transaction price to the separate performance obligations in the arrangement at contract inception, as discussed in more detail below. The Company’s maintenance services are a stand ready obligation and, as a result, are recognized on a straight-line basis over the contract term.
The transaction price in an IMAX Theater System Deliverablearrangement is allocated to each good or service that is identified as a separate performance obligation based on estimated standalone selling prices. This allocation is based on observable prices when the Company sells the good or service separately. The Company has established standalone prices for the System Obligation and maintenance and extended warranty services, as well as for film license arrangements. The Company uses an adjusted market assessment approach for separate performance obligations that do not have standalone selling prices or third-party evidence of estimated standalone selling prices. The Company considers multiple factors including its historical pricing practices, product class, market competition and geography.
IMAX Theater System arrangements involve either athe lease or athe sale of the theater system. Considerationan IMAX Theater System. The transaction price for the System Deliverable,Obligation, other than for those delivered pursuant to joint revenue sharing arrangements, consist of upfront or initial payments made before and after the final installation of the theater system equipmentIMAX Theater System and ongoing payments throughout the term of the leasearrangement. The Company estimates the transaction price, including an estimate of future variable consideration, received in exchange for the goods delivered or services rendered. The arrangement for the sale of an IMAX Theater System includes indexed minimum payment increases over the term of the arrangement, as well as the potential for additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded. In addition, hybrid sales arrangements include amounts owed by the customer based on a periodpercentage of time, as specified intheir box office receipts over the term of the arrangement. The ongoing paymentsThese contract provisions are the greater of an annual fixed minimum amount or a certain percentageconsidered to be variable consideration under ASC Topic 606. An estimate of the theaterbox-office. Amounts received in excesspresent value of such variable consideration is recognized as revenue upon the transfer of control of the annual fixed minimum amountsSystem Obligation to the customer, subject to constraints to ensure that there is not a risk of significant revenue reversal. This estimate is based on management’s box office projections for the individual theater, which are considered contingent payments. The Company’sdeveloped using historical data for the theater and, if necessary, comparable theaters and territories. Transfer of control of the System Obligation occurs at the earlier of client acceptance of the installation of the IMAX Theater System, including projectionist training, and the opening of the theater to the public, as discussed in more detail below.
IMAX Theater System arrangements arenon-cancellable, unless the Company fails to perform its obligations. In the absence of a material default by the Company, there is no right to any remedy for the customer under the Company’s arrangements. If a material default by the Company exists, the customer has the right to terminate the arrangement and seek a refund only if the customer provides notice to the Company of a material default and only if the Company does not cure the default within a specified period.
For arrangements entered into or materially modified after January 1, 2011, consideration is allocated to each unit of accounting based on the unit’s relative selling prices. The Company uses vender-specific objective evidence of selling price (VSOE) when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. VSOE is established for the Company’s System Deliverable, maintenance and extended warranty services and film license arrangements. The Company uses a best
estimate of selling price (BESP) for units of accounting that do not have VSOE or third-party evidence of selling price. The Company determines BESP for a deliverable by considering multiple factors including the Company’s historical pricing practices, product class, market competition and geography.
Sales Arrangements
For IMAX Theater System arrangements qualifyingthat qualify as sales,a sale, the revenuetransaction price allocated to the System DeliverableObligation is recognized in accordance with the Revenue Recognition TopicConsolidated Statements of Operations upon the transfer of control of the FASB ASC,system to the customer, which is when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation andrun-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided there is persuasive evidence of an arrangement, the price is fixed or determinable and collectability is reasonably assured.theater.
The initial revenue recognized consists of payments made before and in connection with installation of the initial payments receivedIMAX Theater System and the present value of any future initial payments, andincluding ongoing fixed minimum ongoing payments, that have been attributedwhich are subject to this unit of accounting. Contingent payments in excessindexed increases over the term of the fixedarrangement, and the potential for additional payments owed by the customer if certain minimum ongoing paymentsbox office receipt thresholds are exceeded. In addition, hybrid sales arrangements include amounts owed by the customer based on a percentage of their box office receipts over the term of the arrangement. These contract provisions are considered to be variable consideration under ASC Topic 606. An estimate of the present value of such variable consideration is recognized when reported by theater operators, provided collectabilityas revenue upon the transfer of control of the System Obligation to the customer, subject to constraints to ensure that there is reasonably assured.not a risk of significant revenue reversal.
The Company has also agreed, on occasion, to sell equipment under lease or at the end of a lease term. ConsiderationThe transaction price agreed to for these lease buyouts is includedreflected in revenuesthe Company’s Consolidated Statements of Operations within Revenues – Technology Sales.
Taxes assessed by governmental authorities that are both imposed on and concurrent with the specific revenue-producing transactions and collected by the Company have been excluded from equipmentthe measurement of the transaction prices discussed above.
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Constraints on the Recognition of Variable Consideration
The recognition of variable consideration involves a significant amount of judgment. Variable consideration is recognized subject to appropriate constraints to avoid a significant reversal of revenue in future periods. The Company reviews its variable consideration assets on at least a quarterly basis. ASC Topic 606 identifies several examples of situations when constraining variable consideration is appropriate:
• | The amount of consideration is highly susceptible to factors outside the entity’s influence; |
• | The uncertainty about the amount of consideration is not expected to be resolved for a long period of time; |
• | The Company’s experience (or other evidence) with similar types of contracts is limited, or that experience has limited predictive value; and |
• | The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. |
As discussed above, the Company’s significant streams of variable consideration relate to arrangements for the sale of IMAX Theater Systems which include indexed minimum payment increases over the term of the arrangement, as well as the potential for additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded. In addition, hybrid sales arrangements include variable consideration based on a percentage of the customer’s box office receipts over the term of the arrangement.
Variable consideration related to indexed minimum payment increases is outside of the Company’s control, but the movement in the rates is historically well documented and product sales, when persuasive evidenceeconomic trends in inflation are easily accessible. For each contract subject to an indexed minimum payment increase, the Company estimates the most likely amount using published indices. The amount of an arrangement exists, the fees are fixed or determinable, collectabilityestimated minimum payment increase is reasonably assured and titlethen recorded at its present value as of the date of recognition using the customer’s implied borrowing rate.
Variable consideration related to the level of the customer’s box office receipts is outside of the Company’s control as it is dependent upon the commercial success of film content in future periods. The Company tracks numerous performance statistics for box office performance in regions worldwide and applies its understanding of these theater system passes frommarkets to estimate the most likely amount of variable consideration to be earned over the term of the arrangement. The Company then applies a constraint to this estimate by reducing the projection by a percentage factor for theaters or markets with no or limited historical box office experience. In cases where direct historical experience can be observed, average experience, eliminating significant outliers, is used. The resulting amount of variable consideration is then recorded at its present value as of the date of recognition using a risk-weighted discount rate.
Lease Arrangements
As a lessor, the Company provides IMAX Theater Systems to customers through long-term lease arrangements. Under these arrangements, in exchange for providing the customer.
Lease Arrangements
The Company uses the Leases Topic of FASB ASC to evaluate whether an arrangement is a lease within the scope of the accounting standard. Arrangements not within the scope of the accounting standard are accounted for either as a sales or services arrangement, as applicable.
For lease arrangements,IMAX Theater System, the Company determines the classification of the lease in accordance with the Lease Topic of FASB ASC. earns fixed upfront and ongoing consideration. A lease arrangement that transfers substantially all of the benefits and risks incident to ownership of the equipmentIMAX Theater System is classified as a sales-type lease based on the criteria established by the accounting standard;lease; otherwise the lease is classified as an operating lease. Prior to commencement of the lease term for the equipment,IMAX Theater System, the Company may modify certain payment terms or make concessions. If these circumstances occur, the Company reassesses the classification of the lease based on the modified terms and conditions.
For sales-type leases, the revenue allocated to the System DeliverableObligation is recognized when the lease term commences, which the Company deems to be when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition; (ii) the 3D glasses cleaning machine, if applicable, has been delivered; (iii) projectionist training has been completed; and (iv) the earlier of (a) receipt of the written customer acceptance certifying the completion of installation andrun-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided collectabilitycollectibility is reasonably assured.
The initial revenue recognized for sales-type leases consists of the initial payments received and the present value of future initial payments and fixed minimum ongoing payments computed at the interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments are recognized when reported by theater operators, provided collectabilitycollectibility is reasonably assured.
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For joint revenue sharing arrangements that are classified as operating leases, initial payments and fixed minimum ongoing payments are recognized as revenue on a straight-line basis over the lease term. For operatingthese leases, the lease term is considered to commence when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition; (ii) the 3D glasses cleaning machine, if applicable, has been delivered; (iii) projectionist training has been completed; and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation andrun-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater. Contingent payments in excess of fixed minimum ongoing payments are recognized as revenue when reported by theater operators, provided collectabilitycollectibility is reasonably assured.
Revenues from joint revenue sharing arrangements with upfront payments that qualify for classification as sales and sales-type leases are recognized in accordance with the sales and sales-type lease criteria discussed above. Contingent revenues from joint revenue sharing arrangements are recognized asbox-office results and concessions revenues are reported by the theater operator, provided collectabilitycollectibility is reasonably assured.
Finance IncomeOn April 10, 2020, the FASB staff issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance allows concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. Entities do not have to adopt the FASB relief guidance for all lease concessions related to the effects of the COVID-19 pandemic and can choose to apply the FASB relief guidance consistently to leases with similar characteristics and in similar circumstances and should apply reasonable judgment in doing so. In the second quarter of 2020, the Company adopted the FASB relief guidance and elected to account for any such lease concessions as if no change was made to the underlying contracts except for the sales-type leases of which IMAX China is a lessor as they are in different economic environments. The lease concessions for these sales-type leases were accounted for in accordance with the lease modification guidance, which did not have a material effect on the Company’s Consolidated Financial Statements. The adoption of the FASB relief guidance did not have a material effect on the Company’s Consolidated Financial Statements.
Finance incomeIncome
Finance Income is recognized over the term of the sales-type lease or financed salessale receivable, provided collectabilitycollectibility is reasonably assured. A theater operator that is classified within the “All Transactions Suspended” category under the Company’s internal credit quality guidelines is placed on nonaccrual status and Finance incomeRevenue recognition ceases whenrelated to the Company determines thattheater is stopped. While the associated receivable is not collectible.
recognition of Finance incomeIncome is suspended, whenpayments received from a customer are applied against the Company identifiesoutstanding balance owed. If payments are sufficient to cover any unreserved receivables, a theater thatrecovery of provision taken on the billed amount, if applicable, is delinquent,non-responsive or not negotiatingrecorded to the extent of the residual cash received. Once the collectibility issues are resolved and the customer has returned to being in good faith with the Company. Once the collectability issues are resolvedstanding, the Company will resume recognition of finance income.Finance Income.
Improvements and Modifications
Improvements and modifications to the theater systeman IMAX Theater System after installation are treated as a separate revenue transactions,performance obligation, if and when the Company is requested to perform these services. Revenue is recognized for these services when the performanceonce they have been provided.
Cost and Expenses Applicable to Revenues – Technology Sales
Cost and Expenses Applicable to Revenues – Technology Sales relates to sales and sales-type leases of the services has been completed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured.
Cost of Equipment and Product Sales
IMAX Theater systemsSystems and other equipment, subject to sales-type leases and sales arrangements includes the cost of the equipment and costs related to project management, design, delivery and installation supervision services, as applicable. The costs related to theater systemsIMAX Theater Systems under sales and sales-type lease arrangements are relievedtransferred from inventoryInventories to costsCosts and expenses applicableExpenses Applicable to revenues-equipment and product salesRevenues – Technology Sales in the period when revenue recognition criteria are met. the sale is recognized in the Consolidated Statements of Operations.
In addition, the Company defers direct selling costs such as sales commissions and other amounts related to these contracts until the related revenue is recognized. These costs included in costs and expenses applicable to revenues-equipment and product sales, totaled $2.7 million in 2017 (2016 — $3.3 million; 2015 — $3.4 million). The cost of equipment and product sales prior to direct selling costs was $45.5 million in 2017 (2016 — $66.5 million; 2015 — $60.2 million). The Company may have warranty obligations at or after the time revenue is recognized which require the replacement of certain parts that do not affect the functionality of the theater system or services. The costs for warranty obligations for known issues are accrued as charges to costsCosts and expenses applicableExpenses Applicable to revenues-equipment and product salesRevenues – Technology Sales at the time revenue is recognized based on the Company’s past historical experience and cost estimates.
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Cost and Expenses Applicable to Revenues – Technology Rentals
Cost and Expenses Applicable to Revenues – Technology Rentals relates to operating leases of Rentals
For theater systems and other equipment subject to an operating lease or placed in a theater operators’ venueIMAX Theater Systems under a joint revenue sharing arrangement,arrangements, and includes the cost of equipment and those costs that result directly from and are essential to the arrangement, is included within property, plant and equipment.arrangement. Depreciation and impairment losses, if any, are included in cost of rentalsCost and Expenses Applicable to Revenues – Technology Rentals based on the accounting policy set out in note 2(g)Note 3(g). CommissionsSales commissions related to these arrangements are deferred and recognized as costsCosts and expenses applicableExpenses Applicable to revenues-rentalsRevenues – Technology Rentals in the month they are earned by the salesperson, which is typically the month of installation. These costs totaled $1.6 million in 2017 (2016 — $1.8 million; 2015 — $1.1 million). Direct advertising and marketing costs for each theater are charged to costsCosts and expenses applicableExpenses Applicable to revenues-rentalsRevenues – Technology Rentals as incurred. These costs totaled $2.6 million in 2017 (2016 — $0.9 million; 2015 — $1.9 million).
Terminations, Consensual Buyouts and Concessions
The Company enters into theater systemIMAX Theater System arrangements with customers that contain customer payment obligations prior to the scheduled installation of the theater system. During the period of time between signing and the installation of the theater system,IMAX Theater System, which may extend several years, certain customers may be unable to, or may elect not to, proceed with the theater system installation for a number of reasons including business considerations, or the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the arrangement may be terminated under the default provisions of the arrangement or by mutual agreement between the Company and the customer (a “consensual buyout”). Terminations by default are situations when a customer does not meet the payment obligations under an arrangement and the Company retains the amounts paid by the customer. Under a consensual buyout, the Company and the customer agree, in writing, to a settlement and to release each other of any further obligations under the arrangement or an arbitrated settlement is reached. Any initial payments retained or additional payments received by the Company are recognized as revenue when the settlement arrangements are executed and the cash is received, respectively. These termination and consensual buyout amounts are recognized in Other revenues.
In addition, the Company could agree with customers to convert their obligations for other theater system configurations that have not yet been installed to arrangements to acquire or lease thea digital IMAX digital theater system.Theater System. The Company considers these situations to be a termination of the previous arrangement and origination of a new arrangement for the digital IMAX digital theater system. For all
arrangements entered into or modified prior to the date of adoption of the amended FASB ASC605-25, the Company continues to defer an amount of any initial fees received from the customer such that the aggregate of the fees deferred and the net present value of the future fixed initial and ongoing payments to be received from the customer equals the selling price of the IMAX digital theater system to be leased or acquired by the customer. Any residual portion of the initial fees received from the customer for the terminated theater system is recorded in other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed. Under the amended FASB ASC605-25, for all arrangements entered into or materially modified after the date of adoption, the total arrangement consideration to be received is allocated on a relative selling price basis to the digital upgrade and the termination of the previous theater system. The arrangement consideration allocated to the termination of the existing arrangement is recorded in Other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed.Theater System.
The Company may offer certain incentives to customers to complete theater systemIMAX Theater System transactions including payment concessions or free services and products such as film licenses or 3D glasses. Reductions in, and deferral of, payments are taken into account in determining the salestransaction price either by a direct reduction in the sales price or a reduction of payments to be discounted in accordance with the Leases or Interests Topic of the FASB ASC.discounted. Free products and services are accounted for as separate units of accounting. Other consideration given by the Company to customers are accounted for in accordance with the Revenue Recognition Topic of the FASB ASC.
Maintenance and Extended Warranty Services
Maintenance and extended warranty services may be provided under aan arrangement with multiple element arrangementperformance obligations or as a separately priced contract. Revenues related to these services are deferred and recognized on a straight-line basis over the contract period and are recognized within Revenues – Image Enhancement and Maintenance Services in Services revenues.the Consolidated Statements of Operations. Maintenance and extended warranty services includes maintenance of the customer’s equipment and replacement parts. Under certain maintenance arrangements, maintenance services may include additional training services to the customer’s technicians. All costs associated with this maintenance and extended warranty program are expensed as incurred. A loss on maintenance and extended warranty services is recognized if the expected cost of providing the services under the contracts exceeds the related deferred revenue. As the maintenance services are a stand ready obligation with the cost of providing the service expected to increase throughout the term, revenue is recognized over the term of the arrangement such that increased amounts are recognized in later periods.
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IMAX DMR Services
In an IMAX DMR arrangement, the Company receives a percentage of the box office receipts from a third party who owns the copyright to a film in exchange for converting the film into IMAX DMR format and distributing it through the IMAX network. In these arrangements, although the Company does not hold rights to the intellectual property in the form of the film content, it is compensated for the application of its intellectual property in the form of its patented DMR processes to create new intellectual property in the form of an IMAX DMR version of film. Revenues associated with both IMAX DMR arrangements qualify for the variable consideration exemption for sales- or usage-based royalties in ASC Topic 606 and are recognized within Revenues – Image Enhancement and Maintenance Services in the period when the corresponding box office sales occur.
Losses on IMAX DMR services are recognized as Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services in the period when it is determined that the Company’s estimate of total revenues to be realized by the remastered film will not exceed the corresponding cost of IMAX DMR services.
Film Production Services
In certain film arrangements, the Company produces a film financed by third parties whereby the third party retains the copyright and the Company obtains exclusive distribution rights. Under these arrangements, the Company is entitled to receive a fixed fee or to retain as a fee the excess of funding over the cost of the production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which is charged to costsCosts and expenses applicableExpenses Applicable to revenues-services.Revenues – Image Enhancement and Maintenance Services. The production fees are deferred, and are recognized as a reduction in the cost of the film based on the ratio of the Company’s distribution revenues recognized in the current period to the ultimate distribution revenues expected from the film. Film exploitation costs, including advertising and marketing totaled $15.4 million in 2017 (2016 — $17.5 million; 2015 — $13.3 million) and are recorded in costsCosts and expenses applicableExpenses Applicable to revenues-servicesRevenues – Image Enhancement and Maintenance Services as incurred.
Revenue from film production services where the Company does not hold the associated distribution rights are recognized in Services revenues when performance ofobligations associated with the contractual service is complete, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collectability is reasonably assured.
Revenues from digitallyre-mastering (IMAX DMR) films where third parties own or hold the copyrights and the rights to distribute the film are derived in the form of processing fees and recoupments calculated as a percentage ofbox-office receipts generated from there-mastered films. Processing fees are recognized as Services revenues when the performance of the relatedre-mastering service is completed provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured. Recoupments, calculated as a percentage ofbox-office receipts, are recognized as Services revenue whenbox-office receipts are reported by the third party that owns or holds the related film rights, provided collectability is reasonably assured.satisfied.
Losses on film production and IMAX DMR services are recognized as costsCosts and expenses applicableExpenses Applicable to revenues-servicesRevenues – Image Enhancement and Maintenance Services in the period when it is determined that the Company’s estimate of total revenues to be realized by the Company will not exceed estimated total production costs to be expended on the film productionproduction.
Film Distribution Services
In a Film Distribution arrangement, the Company licenses film content and the cost of IMAX DMR services.
distributes large-format films, primarily for its institutional theater partners. The Company’s Film Distribution
revenues are strictly from the license of its intellectual property in the form of documentary film content to which the Company holds exclusive distribution rights. Revenue from the licensing of films qualifies for the variable consideration exemption for sales- or usage-based royalties in ASC Topic 606 and is recognized inwithin Revenues – Image Enhancement and Maintenance Services revenues when persuasive evidenceall performance obligations have been satisfied, which includes the completion and delivery of a licensing arrangement exists, the film has been completed and delivered,the commencement of the license period has begun, the fee is fixed or determinable and collectability is reasonably assured.period. When license fees are based on a percentage ofbox-office receipts, revenue is recognized whenbox-office receipts are reported by exhibitors, provided collectability is reasonably assured.exhibitors. Film exploitation costs, including advertising and marketing totaled a recovery of $0.7 million in 2017 (2016 — expense of $2.2 million; 2015 — recovery of $0.1 million) and are recorded in costsCosts and expenses applicableExpenses Applicable to revenues-servicesRevenues – Image Enhancement and Maintenance Services as incurred.
Film Post-Production Services
Revenues from post-production film services are recognized inwithin Revenues – Image Enhancement and Maintenance Services revenues when performance of the contracted services is complete provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured.are satisfied.
Other
The Company recognizesreports revenue in Services revenues fromrelated to its owned and operated theaters resulting fromwithin Revenues – Image Enhancement and Maintenance Services. Such revenues include box-office ticket and concession sales, which are recognized in the Consolidated Statements of Operations as tickets are sold films are shown and upon the sale of various concessions. The sales are cash or credit card transactions with theater goers based on fixed prices per seat or per concession item.
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In addition, the Company enters into commercial arrangements with third party theater owners resulting in the sharing of profits and losses which are recognized inwithin Revenues – Image Enhancement and Maintenance Services revenues when reported by such theaters. The Company also provides management services to certain theaters and recognizes such revenue over the term of such services.
Revenues on camera rentals are recognized in Rental revenueswithin Revenues – Technology Rentals over the rental period.
Revenue from the sale of 3D glasses is recognized in Equipment and product sales revenuewithin Revenues – Technology Sales when the 3D glasses have been delivered to the customer.
Other service revenues are recognized in Service revenueswithin Revenues – Image Enhancement and Maintenance Services when the performance of contracted services is complete.
(o) | Leases |
(n) ResearchAs a lessee, the Company’s lease arrangements principally involve office and Developmentwarehouse space, which are classified as operating leases. The corresponding operating lease right-of-use (“ROU”) assets and liabilities are recorded within Property, Plant and Equipment and Accrued and Other Liabilities in the Company’s Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The incremental borrowing rate used in the calculation of the Company’s lease liability is based on the location of each leased property. NaN of the Company’s leases include options to purchase the leased property. Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it is reasonably certain that the renewal options on its warehouse leases will be exercised based on previous history, its current understanding of future business needs and its level of investment in leasehold improvements, among other factors. The depreciable lives of ROU assets and related 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. When there are modifications to the lease agreements, the Company remeasures the lease liabilities to reflect changes to lease payments and recognizes the amount of the remeasurement of the lease liability as an adjustment to the ROU assets. The Company reviews the carrying values of the ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. Impairment losses, if any, are recognized in the Consolidated Statements of Operations. Amortization of ROU assets and interest on lease liabilities are included in the Selling, General and Administrative Expenses in the Company’s Consolidated Statements of Operations. (See Note 6 for additional information related to the Company’s operating leases.)
(p) | Research and Development |
Research and development costs, which are expensed as incurred, and primarily include projector and sound parts, labor, consulting fees, allocation of overheads and other related materials which pertain to the Company’s development of ongoing productnew products and services. Research and development costs pertaining to fixed and intangible assets that have alternative future uses are capitalized and amortized under their related policies.
(o) Foreign Currency Translation
(q) | Foreign Currency Translation |
Monetary assets and liabilities of the Company’s operations which are denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the end of the period. In 2013, the Company determined that the functional currency of one of its consolidated subsidiaries had changed from the Company’s reporting currency to the currency of the nation in which it is domiciled. As a result, in accordance with the FASB ASC 830 “Foreign Currency Matters”, the adjustment attributable to current-rate translation ofnon-monetary assets as of the date of the change was reported in other comprehensive income (“OCI”)Other Comprehensive Income (Loss). The functional currency of its other consolidated subsidiaries continues to be the United States dollar.U.S. dollars. Foreign exchange translation gains and losses are included in the determination of earnings in the period in which they arise.
Foreign currency derivatives are recognized and measured in the balance sheetConsolidated Balance Sheets at their fair value. Changes in the fair value (gains or losses) are recognized in the consolidated statementConsolidated Statements of operationsOperations except for derivatives designated and qualifying as foreign currency hedging instruments. For foreign currency hedging instruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income (loss)within Other Comprehensive Income (Loss) and reclassified to the consolidated statementConsolidated Statements of operationsOperations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statementConsolidated Statements of operations.
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(r) | Share-Based Compensation |
(p) Stock-Based Compensation
The Company issues share-based compensation to eligible employees, directors, and consultants under the IMAX Corporation Second Amended and Restated Long-Term Incentive Plan (as may be amended, the “IMAX LTIP”) and the China Long-Term Incentive Plan (the “China LTIP”) as summarized in Note 17. The IMAX LTIP is the Company’s stock-based compensation generally includesgoverning document and awards to employees, directors, and consultants under this plan may consist of stock options, and restricted share units (“RSUs”). Stock-based compensation is recognized, performance share units (“PSUs”) and other awards. A separate stock option plan, the China LTIP, was adopted by a subsidiary of the Company in accordance with the FASB ASC Topic 505, “Equity” and Topic 718, “Compensation-Stock Compensation.”October 2012.
The Company estimatesmeasures share-based compensation expense using the grant date fair value of stock option awards on the date of grant using fair value measurement techniques such as an option-pricing model. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant. The value of the portion of the employee award, that is ultimately expected to vestwhich is recognized as an expense in the Consolidated Statements of Operations on a straight-line basis over the requisite service periods in the Company’s consolidated statement of operations.period. Share-based compensation expense is not adjusted for estimated forfeitures, but is instead adjusted when and if actual forfeitures occur.
Stock Options
The Company utilizes a lattice-binomial option-pricing model (“Binomial Model”) to determine the fair value of stock option awards.awards on the grant date. The fair value determined by the Binomial Model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards,award, and actual and projected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises are expected to occur on average.average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model best provides a fair measure of the fair value of the Company’s employee stock options. See note 14(c) for the assumptions used to determine the fair value of stock-based payment awards.
Stock-based compensation expense includes compensation cost for employee stock-based payment awards granted and all modified, repurchased or cancelled employee awards. In addition, compensation expense includes the compensation cost, based on the grant-date fair value calculated for pro forma disclosures under ASC718-10-55, for the portion of awards for which required service had not been rendered that were outstanding. Compensation expense for these employee awards is recognized using the straight-line single-option method. Stock-based compensation expense is not adjusted for estimated forfeitures, but instead adjusted upon an actual forfeiture of a stock option or RSU award. The Company utilizes the market yield on U.S. treasury securities (also known as nominal rate) over the contractual term of the instrument being issued.
Stock Options
As the Company stratifies its employees into homogeneous groups in order to calculate the grant date fair value underof stock options using the Binomial Model,Model. As a result, ranges of assumptions are used are presented for the expected option life.life of the option. The Company uses historical data to estimate option exercise behavior within the valuation model;Binomial Model and various groups of employees that have similar historical exercise behavior are considered separatelygrouped together for valuation purposes. The expected volatility rate is estimated based on a blended volatility method which takes into consideration the Company’s historical share price volatility, the Company’s implied volatility which is implied by thedetermined in reference to observed current market prices offor the Company’s traded options and the Company’s peer group volatility. The Company utilizes
(See Note 17(c) for the Binomial Modelassumptions used to determine expected option life based on such data as vesting periodsthe fair value of awards, historical data that includes past exercise and post-vesting cancellations andthe Company’s stock price history.options.)
The Company’s policy is to issue new common shares from treasury or shares purchased in the open market to satisfy stock options which are exercised.
Restricted Share Units
The Company’s RSUs have been classified as equity in accordance with Topic 505. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The Company’s RSUs have been classified as equity.
Performance Share Units
The Company grants two types of PSU awards, one which vests based on a combination of employee service and the achievement of certain EBITDA-based targets and one which vests based on a combination of employee service and the achievement of certain stock-price targets. These awards vest over a three-year performance period. The grant date fair value of PSUs with EBITDA-based targets is equal to the closing price on the date of grant or the average closing price of the Company’s common stock for five days prior to the date of grant. The grant date fair value of PSUs with stock-price targets is determined on the grant date using a Monte Carlo simulation, which is a valuation model that takes into account the likelihood of achieving the stock-price targets embedded in the award (“Monte Carlo Model”). The compensation expense attributable to each type of PSU is recognized on a straight-line basis over the requisite service period. At the conclusion of the three-year performance period, the number of PSUs that ultimately vest can range from 0% to a maximum vesting opportunity of 175% of the initial award, depending upon actual performance versus the established EBITDA and stock-price targets.
The fair value determined by the Monte Carlo Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, market conditions as of the grant date, the Company’s expected stock price volatility over the term of the awards, and other relevant data. The compensation expense is fixed on the date of grant based on the dollar value granted.
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The amount and timing of compensation expense recognized for PSUs with EBITDA-based targets is dependent upon management's assessment of the likelihood and timing of achieving these targets. If, as a result of management’s assessment, it is projected that a greater number of PSUs will vest than previously anticipated, a life-to-date adjustment to increase compensation expense is recorded in the period such determination is made. Conversely, if, as a result of management’s assessment, it is projected that a lower number of PSUs will vest than previously anticipated, a life-to-date adjustment to decrease compensation expense is recorded in the period such determination is made.
The Company’s PSUs have been classified as equity.
Share-Based Payment Awards toNon-Employees
Stock-basedShare-based payment awards for services provided bynon-employees are accounted for based on themeasured at grant date fair value of the services received or the stock-based award, whichever is more reliably determinable. If the fair value of the stock-based award is used, the fair value is measured at the date of the award and remeasured until the earlier of the dateequity instruments that the Company is obligated to issue when the service has a performance commitmentbeen rendered and any other conditions necessary to earn the right to benefit from thenon-employees, instruments have been satisfied. The grant date is the date which the Company and the non-employees reach a mutual understanding of the key terms and conditions of the share-based payment awards. When there are performance is completed, orconditions related to the vesting of the share-based awards, the Company assesses the probability of vesting at each reporting date and adjusts the awards vest.compensation costs based on the probability assessment.
(q) Pension Plans and Postretirement Benefits
(s) | Pension Plans and Postretirement Benefits |
The Company has a defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”). As the Company’s SERP is unfunded, as atof December 31, 2017,2020, a liability is recognized for the projected benefit obligation.
Assumptions used in computing the defined benefit obligations are reviewed annually by management in consultation with its actuaries and adjusted for current conditions. Actuarial gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefits cost are recognized as a component of other comprehensive income.Other Comprehensive Income. Amounts recognized in accumulated other comprehensive incomeAccumulated Other Comprehensive Income including unrecognized actuarial gains or losses and prior service costs are adjusted as they are subsequently recognized in the consolidated statementConsolidated Statements of operationsOperations as components of net periodic benefit cost. Prior service costs resulting from the pension plan inception or amendments are amortized over the expected future service life of the employees, cumulative actuarial gains and losses in excess of 10% of the projected benefit obligation are amortized over the expected average remaining service life of the employees, and current service costs are expensed when earned. The remaining weighted average future service life of the employee used in computing the defined benefit obligation for the year ended December 31, 20172020 was 2.0 years.year.
For defined contribution pension plans, required contributions by the Company are recorded as an expense.
A liability is recognized for the unfunded accumulated benefit obligation of the postretirement benefits plan. Assumptions used in computing the accumulated benefit obligation are reviewed by management in consultation with its actuaries and adjusted for current conditions. CurrentNet benefit cost is split between operating income and non-operating income, where only the service cost is recognized as incurredincluded in income from operations and actuarialthe non-service components are included in Retirement Benefits Non-Service Expenses. Actuarial gains and losses are recognized as a component of other comprehensive income (loss)Other Comprehensive Income (Loss). Amounts recognized in accumulated other comprehensive income (loss)Accumulated Other Comprehensive Income (Loss) including unrecognized actuarial gains or losses are adjusted as they are subsequently recognized within Retirement Benefits Non-Service Expense in the consolidated statementConsolidated Statements of operations as components of net periodic benefit cost.Operations.
(r) Guarantees
(t) | Guarantees |
The FASB ASC Guarantees Topic 460 “Guarantees” requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. Disclosures as required under the accounting guidance have been included in note 13(f)Note 16(e).
3.
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4. New Accounting Standards and Accounting Changes
Adoption of New Accounting Policies
The Company adopted several standards on January 1, 2017, which are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter, which did not have a material impact on its consolidated financial statements.in 2020, as summarized below.
In October 2016, the FASB issued ASUNo. 2016-16, “Income Taxes (Topic 740)”. The purpose of ASU2016-16 is to eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments require the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company elected to early adopt ASU2016-16 during the first quarter of 2017. The impact from the adoption was reflected in the Company’s consolidated financial statements on a modified retrospective basis resulting in an increase to Accumulated deficit of $8.3 million, a decrease to Other assets of $14.8 million, an increase to Deferred taxes of $7.9 million and an increase to Accrued and other liabilities of $1.4 million.
Recently Issued FASB Accounting Standard Codification Updates
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842)” (“ASU2016-02”). The purpose of the amendment is to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. New disclosures will include qualitative and quantitative requirements to provide additional information about the amounts recorded in the financial statements. Lessor accounting will remain largely unchanged from current guidance; however, ASU2016-02 will provide improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. For public entities, the amendments in ASU2016-02 are effective for interim and annual reporting periods beginning after December 15, 2018. As a lessor, the Company has a significant portion of its revenue derived from leases, including its joint revenue sharing arrangements, and while the lessor accounting model is not fundamentally different, the Company continues to evaluate the effect of the standard on this revenue stream.
In March 2016, the FASB issued ASUNo. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU2016-08”). The purpose of ASU2016-08 is to clarify the implementation of guidance on principal versus agent considerations.
In April 2016, the FASB issued ASUNo. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU2016-10”). The purpose of ASU2016-10 is to provide more detailed guidance in the following key areas: identifying performance obligations and licenses of intellectual property.
In May 2016, the FASB issued ASUNo. 2016-11, to rescind from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements at the March 3, 2016 meeting.
In May 2016, the FASB issued ASUNo. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU2016-12”). The purpose of ASU2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical corrections.
In December 2016, the FASB issued ASUNo. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The amendments in ASU2016-20 represent changes to clarify the accounting standard codification, correct unintended application of guidance, or make minor improvements to the accounting standards codification that are related to Topic 606, Revenue from Contracts with Customers.
In November 2017, the FASB issued ASUNo. 2017-14, to eliminate or amend from the FASB Accounting Standards Codification Topic 220, Topic 605 and Topic 606 certain SEC paragraphs.
For public companies, ASU2016-08, ASU2016-10, ASU2016-11, ASU2016-12, ASU2016-20, and ASU2017-14 which are all related to Topic 606, are effective for interim and annual reporting periods beginning after December 15, 2017.
Effective January 1, 2018, for the 2018 fiscal year, the Company adopted Topic 606, “Revenue from Contracts with Customers” (ASC 606) utilizing the modified retrospective approach with a cumulative catch up adjustment and will provide additional disclosures comparing results to previous U.S. GAAP in its 2018 consolidated financial statements. The Company plans to apply the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. All system sales and maintenance contracts with the existing network of IMAX theaters and the backlog of sales contracts make up a significant majority of the Company’s open contracts at any point in time. DMR arrangements where the film continues to be shown by the Company’s exhibitor partners, film distribution arrangements with remaining terms, aftermarket sales orders that have been received but for which control of the assets has not yet transferred to the customer are all also considered open contracts.
The Company’s revenues from the sales of projection systems, provision of maintenance services, sale of aftermarket 3D glasses and parts, conversion of film content into the IMAX DMR format, distribution of documentary film content and the provision of post production services are within the scope of the standard. The Company’s joint revenue sharing revenue arrangements, with the exception of those where the title transfers to the customer prior to recognition of the system revenue (hybrid sales arrangements), are not in scope of the standard due to their classification as leases. Similarly, any system revenue transactions classified as sales-type leases are excluded from the provisions of the new standard.
The Company has assessed its performance obligations under its arrangements pursuant to ASC 606 and has concluded that there are no significant differences between the performance obligations required to be units of account under ASC 606 and the deliverables considered to be units of account under ASC 605. Specifically, the Company has concluded that its “System Deliverable”, which consists 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 services, and projectionist training; a license to use the IMAX brand to market the theater; 3D glasses; maintenance and extended warranty services; and potentially the licensing of films. remains unchanged when considered under ASC 606.
Certain of the Company’s revenue streams will be impacted by the variable consideration provisions of the new standard. 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. Both contract provisions constitute variable consideration under the new standard that, subject to constraints to ensure significant reversal of revenues do not occur, require estimation and recognition at the point of revenue recognition, which is at the
earlier of client acceptance of the installation of the system, including projectionist training, and the theater’s opening to the public. As this variable consideration extends through the entire term of the arrangement, which typically last 10 years, the Company applies constraints to its estimates and recognizes the variable consideration on a discounted present value basis at recognition. Under the previous standard, these amounts were recognized as reported by exhibitors (or customers) in future periods.
In certain joint revenue sharing arrangements, specifically the Company’s hybrid sales arrangements, the Company’s arrangements call for sufficient upfront revenues to cover the cost of the arrangement, with monthly payments calculated based on the theater’s net box office earned. 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, 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 does not believe that hybrid sales arrangements should be considered as part of the Joint Revenue Sharing Arrangement segment since the revenue recognition patterns of the arrangements now very closely resemble those of the traditional sale arrangements.
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. Under the new standard, the Company has included the future consideration from the provision of maintenance services in the relative selling price calculation at revenue recognition. The amount allocated to maintenance services is deferred and recognized over the full life of the arrangement. As the maintenance services are a stand ready obligation revenue is recognized evenly over time, which is consistent with past treatment. Under the previous recognition standard, only the first year’s extended warranty and maintenance services included as part of the upfront consideration received by the Company was included in the relative selling price allocation to determine the allocation of consideration between deliverables, while the future years maintenance services were recognized and amortized over each year’s renewal term. The Company does not expect a significant change in the allocation of consideration between performance obligations to arise as a result of this change.
The DMR and Film Distribution revenue streams fall under the variable consideration exemption for sales- or usage-based royalties. While the Company does not hold rights to the intellectual property in the form of the film content, the Company is being reimbursed for the application of its intellectual property in the form of its patented DMR processes used in the creation of new intellectual property in the form of an IMAX DMR version of film. The Company’s Film Distribution revenues are strictly from the license of its intellectual property in the form of documentary film content to which the Company holds distribution rights.
The Company’s remaining revenue streams are not significantly impacted by the new standard. The Company’s balance sheet will require adjustment for contract assets and liabilities arising from the variable consideration calculations noted above.
At this point, the Company is in the process of calculating the opening retained earnings impacts of the above. The Company is implementing changes to its revenue accounting system, processes and internal controls over revenue recognition as part of the adoption of the new standard.
In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”)., which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The purpose of ASU2016-13 is to require astandard requires financial assetassets measured on the amortized cost basis to be presented at the net amount expected to be collected. Credit losses relatingThe Company’s accounts receivable, financing receivables and variable consideration receivables are within the scope of ASU No. 2016-13. The Company adopted 2016-13 and several associated ASUs on January 1, 2020 with no required cumulative-effect adjustment toavailable-for-sale debt securities should be recorded through accumulated deficit. See Note 5 for a further discussion of the Company’s adoption of ASC Topic 326.
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 adoption of this standard was applied prospectively and did not have an allowanceimpact on the Company’s Consolidated Financial Statements.
Recently Issued FASB Accounting Standard Codification Updates Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2019-05 is to provide optional expedients and exceptions for credit losses. For public entities, theapplying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU2016-13 are effective for all entities from the beginning of an interim and annual reporting periods beginning afterperiod that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 15, 2019.31, 2022. The Company is currently assessing the impact of ASU2016-13 2020-04 on its consolidated financial statements.Consolidated Financial Statements.
In January 2017,August 2020, the FASB issued ASUNo. 2017-01, “Business Combinations (Topic 805): Clarifying2020-06, “Accounting for Convertible Instruments and Contracts in an Entity's Own Equity” (“ASU 2020-06”), which eliminates certain models associated with accounting for convertible instruments, makes targeted improvements to the Definition of a Business” (“ASU2017-01”).disclosures for convertible instruments and earnings per share guidance, and amends the guidance for the derivative scope exception for contracts in an entity's own equity. The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the amendments in ASU2017-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The2021 including interim periods within those periods. Early adoption of this standard in January 2018 did not have a material impact to the Company’s consolidated financial statements.
In January 2017, the FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU2017-04”). The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. For public entities, the amendments in ASU
2017-04 are effective for interim and annual reporting periodspermitted, but no earlier than fiscal years beginning after December 15, 2019.2020, including interim periods within those periods. The Company is currently assessing the impact of ASU2017-04 2020-06 on its consolidated financial statements.
In March 2017, the FASB issued ASUNo. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU2017-07”). The amendment requires the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and other components of the net periodic benefit cost be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. For public entities, the amendments in ASU2017-07 are effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of this standard in January 2018 did not have a material impact to the Company’s consolidated financial statements.
In May 2017, the FASB issued ASUNo. 2017-09, “Compensation - Stock compensation (Topic 718): Scope of modification accounting” (“ASU2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment awards, ASU2017-09 are effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of this standard in January 2018 did not have a material impact to the Company’s consolidated financial statements.
In August 2017, the FASB issued ASUNo. 2017-12, “Derivatives and Hedging (Topic 815)”. The purpose of the amendment is to better align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. For public entities, the amendments in ASU2017-12 are effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently assessing the impact of ASU2017-12 on its consolidated financial statements.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 consolidated financial statementsConsolidated Financial Statements for the period ended December 31, 2017.
5. Current Expected Credit Losses
4.In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The standard requires financial assets measured on the amortized cost basis to be presented at the net amount expected to be collected. The Company’s accounts receivable, financing receivables and variable consideration receivables are within the scope of ASU No. 2016-13. The Company adopted ASU No. 2016-13 and several associated ASUs on January 1, 2020 with no required cumulative-effect adjustment to accumulated deficit.
Accounts Receivable
Accounts receivable principally includes amounts currently due to the Company under theater sale and sales-type lease arrangements such as contingent fees owed by theater operators as a result of box office performance and fees for theater maintenance services. Accounts receivable also includes amounts due to the Company from movie studios and other content creators for digital remastering services, as well as for film distribution and post-production services.
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In order to mitigate the credit risk associated with accounts receivable, management performs an initial credit evaluation prior to entering into an arrangement with a customer and then regularly monitors the credit quality of each customer through an analysis of collections history and aging. This monitoring process includes meetings on at least a monthly basis to identify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or when the customer has agreed to a payment plan and payments have commenced in accordance with that plan. Changes in credit quality classification are dependent upon management approval. The Company’s internal credit quality classifications for theater operators are as follows:
• | Good Standing — The theater operator continues to be in good standing and payments are up to date. |
• | Credit Watch — The theater operator has demonstrated a delay in payments but continues to be in active communication with the Company. Theater operators placed on Credit Watch are subject to enhanced monitoring. In addition, depending on the size of the outstanding balance, length of time in arrears and other factors, future transactions may need to be approved by management. These receivables are in better condition than those in the Pre-Approved Transactions Only category, but are not in as good condition as the receivables in the Good Standing category. |
• | Pre-Approved Transactions Only — The theater operator has demonstrated a delay in payments with little or no communication with the Company. All services and shipments to the theater operator must be reviewed and approved by management. These receivables are in better condition than those in the All Transactions Suspended category, but are not in as good condition as the receivables in the Credit Watch category. In certain situations, depending on the individual facts and circumstances related to each customer, Finance Income recognition may be suspended for the net investment in lease and financed sale receivable balances for customers in the Pre-Approved Transactions Only category. See below for a discussion of the Company’s net investment in leases and financed sale receivables. |
• | All Transactions Suspended — The theater operator is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater operator is classified within the All Transactions Suspended category, the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped. |
The ability of the Company to collect its accounts receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators and, in certain situations, movie studios, may experience financial difficulties, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
The following table summarizes the activity in the Allowance for Credit Losses related to Accounts Receivable for the year ended December 31, 2020:
|
| Year Ended December 31, 2020 |
| |||||||||||||
(In thousands of U.S. Dollars) |
| Theater Operators |
|
| Studios |
|
| Other |
|
| Total |
| ||||
Beginning balance |
| $ | 3,302 |
|
| $ | 893 |
|
| $ | 943 |
|
| $ | 5,138 |
|
Current period provision |
|
| 5,793 |
|
|
| 3,393 |
|
|
| 522 |
|
|
| 9,708 |
|
Write-offs |
|
| (975 | ) |
|
| — |
|
|
| — |
|
|
| (975 | ) |
Recoveries |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Foreign exchange |
|
| 248 |
|
|
| 195 |
|
|
| (19 | ) |
|
| 424 |
|
Ending balance |
| $ | 8,368 |
|
| $ | 4,481 |
|
| $ | 1,446 |
|
| $ | 14,295 |
|
For the year ended December 31, 2020, the Company recorded provisions for current expected credit losses of $9.7 million, reflecting a reduction in the credit quality of its theater and studio related accounts receivable and the heightened collection risk associated with certain movie studios in foreign markets, which management believes is primarily related to the COVID-19 global pandemic and adequately addresses the risk of not collecting these receivables in full. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect (see Note 2).
99
Financing Receivables
Financing receivables are due from theater operators and consist of the Company’s net investment in sales-type leases and receivables associated with financed sales of IMAX Theater Systems. Similar to accounts receivable, management performs an initial credit evaluation prior to entering into an arrangement with a customer and then regularly monitors the credit quality of each customer through an analysis of collections history and aging. This monitoring process includes meetings on at least a monthly basis to identify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or when the customer has agreed to a payment plan and payments have commenced in accordance with that plan. Changes in credit quality classification are dependent upon management approval. The internal credit quality classifications utilized by the Company for accounts receivable, as described above, are also used for financing receivables.
The ability of the Company to collect its financing receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators may experience financial difficulties, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
As of December 31, 2020 and December 31, 2019, financing receivables consist of the following:
|
| December 31, |
|
| December 31, |
| ||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||
Net investment in leases |
|
|
|
|
|
|
|
|
Gross minimum payments due under sales-type leases |
| $ | 20,830 |
|
| $ | 16,766 |
|
Unearned finance income |
|
| (859 | ) |
|
| (1,005 | ) |
Present value of minimum payments due under sales-type leases |
|
| 19,971 |
|
|
| 15,761 |
|
Allowance for credit losses |
|
| (557 | ) |
|
| (155 | ) |
Net investment in leases |
|
| 19,414 |
|
|
| 15,606 |
|
Financed sales receivables |
|
|
|
|
|
|
|
|
Gross minimum payments due under financed sales |
|
| 150,917 |
|
|
| 146,660 |
|
Unearned finance income |
|
| (31,247 | ) |
|
| (33,313 | ) |
Present value of minimum payments due under financed sales |
|
| 119,670 |
|
|
| 113,347 |
|
Allowance for credit losses |
|
| (7,274 | ) |
|
| (915 | ) |
Net financed sales receivables |
|
| 112,396 |
|
|
| 112,432 |
|
Total financing receivables |
| $ | 131,810 |
|
| $ | 128,038 |
|
|
|
|
|
|
|
|
|
|
Net financed sales receivables due within one year |
| $ | 34,937 |
|
| $ | 27,595 |
|
Net financed sales receivables due after one year |
| $ | 77,459 |
|
| $ | 84,837 |
|
Total financed sales receivables |
| $ | 112,396 |
|
| $ | 112,432 |
|
As of December 31, 2020 and December 31, 2019, the weighted-average remaining lease term and weighted-average interest rate associated with the Company’s sales-type lease arrangements and financed sale receivables, as applicable, are as follows:
|
|
| December 31, |
| December 31, | ||||||
|
|
| 2020 |
| 2019 | ||||||
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
|
|
|
| |
Sales-type lease arrangements |
|
|
| 8.3 |
|
|
|
| 8.1 |
|
|
Weighted-average interest rate |
|
|
|
|
|
|
|
|
|
|
|
Sales-type lease arrangements |
|
|
| 6.56 |
| % |
|
| 6.68 |
| % |
Financed sales receivables |
|
|
| 8.92 |
| % |
|
| 9.00 |
| % |
100
The following tables provide information on the Company’s net investment in leases by credit quality indicator as of December 31, 2020 and December 31, 2019:
(In thousands of U.S. Dollars) |
| By Origination Year |
|
|
|
|
| |||||||||||||||||||||
As of December 31, 2020 |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Total |
| |||||||
Net investment in leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
| $ | 2,143 |
|
| $ | 1,190 |
|
| $ | 2,730 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,826 |
|
| $ | 7,889 |
|
Credit Watch |
|
| 2,005 |
|
|
| 7,278 |
|
|
| — |
|
|
| 988 |
|
|
| — |
|
|
| 1,047 |
|
|
| 11,318 |
|
Pre-approved transactions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Transactions suspended |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 764 |
|
|
| 764 |
|
Total net investment in leases |
| $ | 4,148 |
|
| $ | 8,468 |
|
| $ | 2,730 |
|
| $ | 988 |
|
| $ | — |
|
| $ | 3,637 |
|
| $ | 19,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. Dollars) |
| By Origination Year |
|
|
|
|
| |||||||||||||||||||||
As of December 31, 2019 |
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| Prior |
|
| Total |
| |||||||
Net investment in leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
| $ | 7,874 |
|
| $ | 3,045 |
|
| $ | 989 |
|
| $ | — |
|
| $ | — |
|
| $ | 3,186 |
|
| $ | 15,094 |
|
Credit Watch |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 667 |
|
|
| 667 |
|
Pre-approved transactions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Transactions suspended |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total net investment in leases |
| $ | 7,874 |
|
| $ | 3,045 |
|
| $ | 989 |
|
| $ | — |
|
| $ | — |
|
| $ | 3,853 |
|
| $ | 15,761 |
|
The following tables provide information on the Company’s financed sale receivables by credit quality indicator as of December 31, 2020 and December 31, 2019:
(In thousands of U.S. Dollars) |
| By Origination Year |
|
|
|
|
| |||||||||||||||||||||
As of December 31, 2020 |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Total |
| |||||||
Financed sales receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
| $ | 6,830 |
|
| $ | 5,480 |
|
| $ | 3,547 |
|
| $ | 3,740 |
|
| $ | 5,072 |
|
| $ | 12,660 |
|
| $ | 37,329 |
|
Credit Watch |
|
| 1,986 |
|
|
| 6,501 |
|
|
| 11,356 |
|
|
| 12,520 |
|
|
| 11,446 |
|
|
| 34,351 |
|
|
| 78,160 |
|
Pre-approved transactions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 613 |
|
|
| 755 |
|
|
| 1,368 |
|
Transactions suspended |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 987 |
|
|
| 728 |
|
|
| 1,098 |
|
|
| 2,813 |
|
Total financed sales receivables |
| $ | 8,816 |
|
| $ | 11,981 |
|
| $ | 14,903 |
|
| $ | 17,247 |
|
| $ | 17,859 |
|
| $ | 48,864 |
|
| $ | 119,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. Dollars) |
| By Origination Year |
|
|
|
|
| |||||||||||||||||||||
As of December 31, 2019 |
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| Prior |
|
| Total |
| |||||||
Financed sales receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
| $ | 11,981 |
|
| $ | 14,414 |
|
| $ | 16,556 |
|
| $ | 15,208 |
|
| $ | — |
|
| $ | 44,291 |
|
| $ | 102,450 |
|
Credit Watch |
|
| — |
|
|
| — |
|
|
| 637 |
|
|
| 1,687 |
|
|
| — |
|
|
| 6,955 |
|
|
| 9,279 |
|
Pre-approved transactions |
|
| — |
|
|
| — |
|
|
| 250 |
|
|
| 295 |
|
|
| — |
|
|
| 285 |
|
|
| 830 |
|
Transactions suspended |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 165 |
|
|
| — |
|
|
| 623 |
|
|
| 788 |
|
Total financed sales receivables |
| $ | 11,981 |
|
| $ | 14,414 |
|
| $ | 17,443 |
|
| $ | 17,355 |
|
| $ | — |
|
| $ | 52,154 |
|
| $ | 113,347 |
|
101
The following tables provide an aging analysis for the Company’s net investment in leases and financed sale receivables as of December 31, 2020 and December 31, 2019:
|
| As of December 31, 2020 |
| |||||||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Accrued and Current |
|
| 30-89 Days |
|
| 90+ Days |
|
| Billed |
|
| Unbilled |
|
| Recorded Receivable |
|
| Allowance for Credit Losses |
|
| Net |
| ||||||||
Net investment in leases |
| $ | 298 |
|
| $ | 180 |
|
| $ | 689 |
|
| $ | 1,167 |
|
| $ | 18,804 |
|
| $ | 19,971 |
|
| $ | (557 | ) |
| $ | 19,414 |
|
Financed sales receivables |
|
| 3,307 |
|
|
| 1,943 |
|
|
| 10,699 |
|
|
| 15,949 |
|
|
| 103,721 |
|
|
| 119,670 |
|
|
| (7,274 | ) |
|
| 112,396 |
|
Total |
| $ | 3,605 |
|
| $ | 2,123 |
|
| $ | 11,388 |
|
| $ | 17,116 |
|
| $ | 122,525 |
|
| $ | 139,641 |
|
| $ | (7,831 | ) |
| $ | 131,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2019 |
| |||||||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Accrued and Current |
|
| 30-89 Days |
|
| 90+ Days |
|
| Billed |
|
| Unbilled |
|
| Recorded Receivable |
|
| Allowance for Credit Losses |
|
| Net |
| ||||||||
Net investment in leases |
| $ | 30 |
|
| $ | 68 |
|
| $ | 251 |
|
| $ | 349 |
|
| $ | 15,412 |
|
| $ | 15,761 |
|
| $ | (155 | ) |
| $ | 15,606 |
|
Financed sales receivables |
|
| 1,678 |
|
|
| 2,772 |
|
|
| 5,446 |
|
|
| 9,896 |
|
|
| 103,451 |
|
|
| 113,347 |
|
|
| (915 | ) |
|
| 112,432 |
|
Total |
| $ | 1,708 |
|
| $ | 2,840 |
|
| $ | 5,697 |
|
| $ | 10,245 |
|
| $ | 118,863 |
|
| $ | 129,108 |
|
| $ | (1,070 | ) |
| $ | 128,038 |
|
The Company considers Financing Receivables with an aging between 60-89 days as indications of theaters with potential collection concerns. At this point, 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 perform an enhanced review to assess collectibility of the theater’s past due accounts. The over 90 days past due category may be an indicator of potential impairment as up to 90 days outstanding is considered to be a reasonable time to resolve any issues. Given the potential impacts of the COVID-19 global pandemic on the Company’s customers, management is enhancing its monitoring procedures with respect to overdue receivables.
The following tables provide information about the Company’s net investment in leases and financed sale receivables with billed amounts past due for which it continues to accrue finance income as of December 31, 2020 and December 31, 2019:
|
| As of December 31, 2020 |
| |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Accrued and Current |
|
| 30-89 Days |
|
| 90+ Days |
|
| Billed |
|
| Unbilled |
|
| Allowance for Credit Losses |
|
| Net |
| |||||||
Net investment in leases |
| $ | 231 |
|
| $ | 162 |
|
| $ | 359 |
|
| $ | 752 |
|
| $ | 13,912 |
|
| $ | (310 | ) |
| $ | 14,354 |
|
Financed sales receivables |
|
| 2,026 |
|
|
| 1,551 |
|
|
| 10,249 |
|
|
| 13,826 |
|
|
| 62,602 |
|
|
| (4,434 | ) |
|
| 71,994 |
|
Total |
| $ | 2,257 |
|
| $ | 1,713 |
|
| $ | 10,608 |
|
| $ | 14,578 |
|
| $ | 76,514 |
|
| $ | (4,744 | ) |
| $ | 86,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2019 |
| |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Accrued and Current |
|
| 30-89 Days |
|
| 90+ Days |
|
| Billed |
|
| Unbilled |
|
| Allowance for Credit Losses |
|
| Net |
| |||||||
Net investment in leases |
| $ | 9 |
|
| $ | 19 |
|
| $ | 251 |
|
| $ | 279 |
|
| $ | 578 |
|
| $ | — |
|
| $ | 857 |
|
Financed sales receivables |
|
| 1,146 |
|
|
| 1,290 |
|
|
| 5,523 |
|
|
| 7,959 |
|
|
| 29,173 |
|
|
| — |
|
|
| 37,132 |
|
Total |
| $ | 1,155 |
|
| $ | 1,309 |
|
| $ | 5,774 |
|
| $ | 8,238 |
|
| $ | 29,751 |
|
| $ | — |
|
| $ | 37,989 |
|
The following table provides information about the Company’s net investment in leases and financed sale receivables that are on nonaccrual status as of December 31, 2020 and December 31, 2019:
|
| As of December 31, 2020 |
|
| As of December 31, 2019 |
| ||||||||||||||||||
(In thousands of U.S. Dollars) |
| Recorded Receivable |
|
| Allowance for Credit Losses |
|
| Net |
|
| Recorded Receivable |
|
| Allowance for Credit Losses |
|
| Net |
| ||||||
Net investment in leases |
| $ | 764 |
|
| $ | (18 | ) |
| $ | 746 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Net financed sales receivables |
|
| 2,813 |
|
|
| (1,482 | ) |
|
| 1,331 |
|
|
| 788 |
|
|
| (732 | ) |
|
| 56 |
|
Total |
| $ | 3,577 |
|
| $ | (1,500 | ) |
| $ | 2,077 |
|
| $ | 788 |
|
| $ | (732 | ) |
| $ | 56 |
|
102
A theater operator that is classified within the “All Transactions Suspended” category is placed on nonaccrual status and all revenue recognitions related to the theater are stopped. While the 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.
For the year ended December 31, 2020, the Company recognized $0.2 million (2019 — $0.1 million) in Finance Income related to the net investment in leases with billed amounts past due. For the year ended December 31, 2020, the Company recognized $5.7 million (2019 — $6.2 million) in Finance Income related to the financed sale receivables with billed amounts past due.
The following table summarizes the activity in the Allowance for Credit Losses related to the Company’s net investment in leases and financed sale receivables for years ended December 31, 2020 and 2019:
|
| Year Ended December 31, 2020 |
| |||||
|
| Net Investment |
|
| Financed |
| ||
(In thousands of U.S. Dollars) |
| in Leases |
|
| Sales Receivables |
| ||
Beginning balance |
| $ | 155 |
|
| $ | 915 |
|
Current period provision |
|
| 451 |
|
|
| 6,574 |
|
Write-offs |
|
| (69 | ) |
|
| (330 | ) |
Recoveries |
| — |
|
| — |
| ||
Foreign exchange |
|
| 20 |
|
|
| 115 |
|
Ending balance |
| $ | 557 |
|
| $ | 7,274 |
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2019 |
| |||||
|
| Net Investment |
|
| Net Financed |
| ||
(In thousands of U.S. Dollars) |
| in Leases |
|
| Sales Receivables |
| ||
Beginning balance |
| $ | 155 |
|
| $ | 839 |
|
Charge-offs |
|
| — |
|
|
| — |
|
Recoveries |
|
| — |
|
|
| — |
|
Provision |
|
| — |
|
|
| 76 |
|
Ending balance |
| $ | 155 |
|
| $ | 915 |
|
For the year ended December 31, 2020, the Company recorded a provision for current expected credit losses of $7.0 million reflecting a reduction in the credit quality of its theater related financing receivables, which management believes is primarily related to the COVID-19 global pandemic and adequately addresses the risk of not collecting these receivables in full. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect (see Note 2).
Variable Consideration Receivable
In sale arrangements, variable consideration may become due to the Company from theater operators if certain annual minimum box office receipt thresholds are exceeded. Such variable consideration is recorded as revenue in the period when the sale is recognized and adjusted in future periods based on actual results and changes in estimates. Variable consideration is only recognized to the extent the Company believes there is not a risk of significant revenue reversal.
The ability of the Company to collect its variable consideration receivables is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators may experience financial difficulties, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation utilizing historical loss rates for financed sale receivables which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
103
The following table summarizes the activity in the Allowance for Credit Losses related to Variable Consideration Receivables for the year ended December 31, 2020:
|
| Year Ended December 31, 2020 |
| |
(In thousands of U.S. Dollars) |
| Theater Operators |
| |
Beginning balance |
| $ | — |
|
Current period provision |
|
| 1,875 |
|
Write-offs |
|
| — |
|
Recoveries |
|
| — |
|
Foreign Exchange |
|
| 12 |
|
Ending balance |
| $ | 1,887 |
|
For the year ended December 31, 2020, the Company recorded a provision of $1.9 million for current expected credit losses, reflecting a reduction in the credit quality of its theater related Variable Consideration Receivables, which management believes is primarily related to the COVID-19 global pandemic and adequately addresses the risk of not collecting these receivables in full. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect (see Note 2).
6. Lease Arrangements
(a) General TermsOn January 1, 2019, the Company adopted ASC Topic 842, “Leases,” utilizing the modified retrospective transition method and elected not to recast comparative prior year periods. Accordingly, comparative amounts for periods prior to January 1, 2019 are presented in accordance with the previous guidance in ASC Topic 840 or other applicable standards.
The Company elected the package of Lease Arrangementspractical expedients available under the transition provisions of ASC Topic 842, including (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing previous lease classification, and (iii) not revaluing initial direct costs for 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. As a result, for qualifying leases with a term of less than 12 months, the Company does 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.
A numberFor situations where the Company is a lessee, the adoption of ASC Topic 842 on January 1, 2019 resulted in the recording an increase to net lease assets and lease liabilities of approximately $17.4 million. This amount consists of gross right-of-use assets and lease liabilities of $20.0 million, while unamortized lease incentives, prepaid expenses, and other accruals of $2.6 million were reclassified from accrued liabilities to partially offset the applicable right-of-use asset. The adoption of ASC Topic 842 did not change the lease classification for situations when the Company is a lessee. As a result, these leases continued to be classified as operating leases similar to the previous guidance under ASC Topic 840. For situations where the Company is a lessor, the adoption of ASC Topic 842 on January 1, 2019 did not result in any material changes to the Company’s accounting when compared to the previous 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 its cash flows.
104
IMAX Corporation as a Lessee
The Company’s operating lease arrangements principally involve office and warehouse space. Office equipment is generally purchased outright. Leases with an initial term of less than 12 months are not recorded on the Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it is reasonably certain that the renewal options on its warehouse leases will be exercised based on previous history, its current understanding of future business needs and its level of investment in leasehold improvements, among other factors. The incremental borrowing rate used in the calculation of the Company’s lease liability is based on the location of each leased property. NaN of the Company’s leases include options to purchase the leased property. The depreciable lives of right-of-use assets and related 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.
For the years ended December 31, 2020 and 2019, the components of lease expense recorded within Selling, General and Administrative expenses are as follows:
|
| Years Ended December 31, |
| |||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Operating lease cost (1) |
| $ | 540 |
|
| $ | 850 |
|
| $ | 4,863 |
|
Amortization of lease assets |
|
| 3,114 |
|
|
| 2,370 |
|
|
| 0 |
|
Interest on lease liabilities |
|
| 1,052 |
|
|
| 1,102 |
|
|
| 0 |
|
Total lease cost |
| $ | 4,706 |
|
| $ | 4,322 |
|
| $ | 4,863 |
|
(1) Includes rent expense associated with short-term leases and variable lease costs, which are not significant for the years ended December 31, 2020 and 2019
For the years ended December 31, 2020 and 2019, supplemental cash and non-cash information related to leases is as follows:
|
| Years Ended December 31, |
| |||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||
Cash paid for amounts included in the measurement of lease liabilities |
| $ | 3,743 |
|
| $ | 3,607 |
|
Right-of-use assets obtained in exchange for lease obligations |
| $ | 563 |
|
| $ | 17,147 |
|
(1) Mainly includes right-of-use assets recognized upon the adoption of ASC Topic 842 “Leases”.
For the years ended December 31, 2020 and 2019, supplemental balance sheet information related to leases is as follows:
|
|
| Years ended December 31, |
| |||||
(In thousands of U.S. Dollars) |
|
| 2020 |
|
| 2019 |
| ||
Assets | Balance Sheet Classification |
|
|
|
|
|
|
|
|
Right-of-Use-Assets | Property, plant and equipment |
| $ | 13,911 |
|
| $ | 16,262 |
|
Liabilities | Balance Sheet Classification |
|
|
|
|
|
|
|
|
Operating Leases | Accrued and other liabilities |
| $ | 16,634 |
|
| $ | 18,677 |
|
For the years ended December 31, 2020 and 2019, the weighted-average remaining lease term and weighted-average interest rate associated with the Company’s operating leases are as follows:
|
|
| Years ended December 31, |
|
| |||||
|
|
| 2020 |
|
| 2019 |
|
| ||
Weighted-average remaining lease term (years) |
|
| 7.6 |
|
|
| 8.1 |
|
| |
Weighted-average discount rate |
|
|
| 5.91 |
| % |
| 5.90 |
| % |
105
As of December 31, 2020, the maturities of the Company’s operating lease liabilities are as follows:
(In thousands of U.S. Dollars) |
| Operating Leases |
| |
2021 |
| $ | 3,398 |
|
2022 |
|
| 2,942 |
|
2023 |
|
| 2,299 |
|
2024 |
|
| 2,236 |
|
2025 |
|
| 2,082 |
|
Thereafter |
|
| 8,022 |
|
Total undiscounted operating lease payments |
| $ | 20,979 |
|
Less: imputed interest |
|
| (4,345 | ) |
Present value of operating lease liabilities |
| $ | 16,634 |
|
IMAX Corporation as a Lessor
The Company provides IMAX Theater Systems to customers through long-term lease arrangements that for accounting purposes are classified as sales-type leases. Under these arrangements, in exchange for providing the IMAX Theater System, the Company earns fixed upfront and ongoing consideration. 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 sales-type lease arrangements are described in note 2(m)Note 3(n). 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 leases or operating leases. Under the Company’s sales-type 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 typicallynon-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 sales-type 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 an 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 systemsIMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered backIMAX Theater System is returned to the Company.
The Company has assessedprovides IMAX Theater Systems to customers through joint revenue sharing arrangements. Under the naturetraditional form of itsthese arrangements, in exchange for providing the IMAX Theater System under a long-term lease, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront fee or annual minimum payments. Under certain other joint revenue sharing arrangements, knowns as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and concluded that, based on the guidance in the Revenue Recognition Topicinstallation of the ASC, the arrangements contain a lease. IMAX Theater System. 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 typicallynon-cancellable for 10 years or longer with renewal provisions. Title to equipmentthe IMAX Theater System under a joint revenue sharing arrangementsarrangement 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 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 an extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the theater systemsIMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered backIMAX Theater System is returned to the Company. See
106
7. Variable Consideration from Contracts with Customers
The arrangement for the sale of an IMAX Theater System includes indexed minimum payment increases over the term of the arrangement, as well as the potential for additional details regardingpayments owed by the customer if certain minimum box office receipt thresholds are exceeded. In addition, hybrid sales arrangements include amounts owed by the customer based on a percentage of their box office receipts over the term of the arrangement. These contract provisions are considered to be variable consideration under ASC Topic 606. An estimate of the present value of such variable consideration is recognized as revenue upon the transfer of control of the IMAX Theater System to the customer, subject to constraints to ensure that there is not a risk of significant revenue reversal. This estimate is based on management’s box office projections for the individual theater, which are developed using historical data for the theater and, if necessary, comparable theaters and territories.
The recognition of variable consideration involves a significant amount of judgment. Variable consideration is recognized subject to appropriate constraints to avoid a significant reversal of revenue in future periods. The Company reviews its variable consideration assets on at least a quarterly basis. ASC Topic 606, “Revenue from Contracts with Customers,” identifies several examples of situations when constraining variable consideration is appropriate:
• | The amount of consideration is highly susceptible to factors outside the entity’s influence; |
• | The uncertainty about the amount of consideration is not expected to be resolved for a long period of time; |
• | The Company’s experience (or other evidence) with similar types of contracts is limited, or that experience has limited predictive value; and |
• | The Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances |
Variable consideration related to indexed minimum payment increases is outside of the Company’s traditionalcontrol, but the movement in the rates is historically well documented and hybrid joint revenue sharing arrangementseconomic trends in inflation are easily accessible. For each contract subject to an indexed minimum payment increase, the Company estimates the most likely amount using published indices. The amount of the estimated minimum payment increase is then recorded at its present value as describedof the date of recognition using the customer’s implied borrowing rate.
Variable consideration related to the level of the customer’s box office receipts is outside of the Company’s control as it is dependent upon the commercial success of film content in note 2(m).future periods. The Company tracks numerous performance statistics for box office performance in regions worldwide and applies its understanding of these theater markets to estimate the most likely amount of variable consideration to be earned over the term of the arrangement. The Company then applies a constraint to this estimate by reducing the projection by a percentage factor for theaters or markets with no or limited historical box office experience. In cases where direct historical experience can be observed, average experience, eliminating significant outliers, is used. The resulting amount of variable consideration is then recorded at its present value as of the date of recognition using a risk-weighted discount rate.
(b) Financing Receivables
Financing receivables, consisting of net investment in sales-type leases and receivablesThe following table summarizes the activity related to variable consideration from financed sales of theater systems are as follows:contracts with customers for the year ended December 31, 2020:
|
| Variable Consideration Receivable from Contracts with customers |
| |
(In thousands of U.S. Dollars) |
|
|
|
|
Balance as of December 31, 2019 |
| $ | 40,040 |
|
Variable consideration for newly recognized sales |
|
| 5,550 |
|
Accretion to finance income |
|
| 2,133 |
|
Transferred to receivables from variable consideration assets |
|
| (5,310 | ) |
Allowance for credit losses (see Note 5) |
|
| (1,887 | ) |
Balance as of December 31, 2020 |
| $ | 40,526 |
|
As at December 31, | ||||||||
2017 | 2016 | |||||||
Gross minimum lease payments receivable | $ | 8,537 | $ | 10,466 | ||||
Unearned finance income | (1,147 | ) | (1,710 | ) | ||||
|
|
|
| |||||
Minimum lease payments receivable | 7,390 | 8,756 | ||||||
Accumulated allowance for uncollectible amounts | (155 | ) | (672 | ) | ||||
|
|
|
| |||||
Net investment in leases | 7,235 | 8,084 | ||||||
|
|
|
| |||||
Gross financed sales receivables | 162,522 | 154,301 | ||||||
Unearned finance income | (39,341 | ) | (39,766 | ) | ||||
|
|
|
| |||||
Financed sales receivables | 123,181 | 114,535 | ||||||
Accumulated allowance for uncollectible amounts | (922 | ) | (494 | ) | ||||
|
|
|
| |||||
Net financed sales receivables | 122,259 | 114,041 | ||||||
|
|
|
| |||||
Total financing receivables | $ | 129,494 | $ | 122,125 | ||||
|
|
|
| |||||
Net financed sales receivables due within one year | $ | 25,455 | $ | 21,980 | ||||
Net financed sales receivables due after one year | $ | 96,804 | $ | 92,061 |
In 2017, the financed sales receivables had a weighted average effective interest rate of 9.1% (2016 — 9.3%).
107
(c) Contingent Fees
Contingent fees that meet the Company’s revenue recognition policy, from customers under various theater system arrangements, have been reported in revenue as follows:8. Inventories
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Sales | $ | 2,613 | $ | 3,308 | $ | 2,492 | ||||||
Sales-type leases | 53 | 375 | 363 | |||||||||
Operating leases | 185 | 602 | 901 | |||||||||
|
|
|
|
|
| |||||||
Subtotal - sales, sales-type leases and operating leases | 2,851 | 4,285 | 3,756 | |||||||||
Joint revenue sharing arrangements | 70,779 | 73,976 | 82,016 | |||||||||
|
|
|
|
|
| |||||||
$ | 73,630 | $ | 78,261 | $ | 85,772 | |||||||
|
|
|
|
|
|
(d) Future Minimum Rental Payments
Future minimum rental payments receivable from operating and sales-type leases at December 31, 2017, for each of the next five years are as follows:
|
| As of December 31, |
| |||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||
Raw materials |
| $ | 30,096 |
|
| $ | 26,538 |
|
Work-in-process |
|
| 3,014 |
|
|
| 4,608 |
|
Finished goods |
|
| 6,470 |
|
|
| 11,843 |
|
|
| $ | 39,580 |
|
| $ | 42,989 |
|
Operating Leases | Sales-Type Leases | |||||||
2018 | $ | 484 | $ | 1,503 | ||||
2019 | 166 | 1,456 | ||||||
2020 | 69 | 1,331 | ||||||
2021 | 69 | 1,306 | ||||||
2022 | 70 | 899 | ||||||
Thereafter | 215 | 1,655 | ||||||
|
|
|
| |||||
Total | $ | 1,073 | $ | 8,150 | ||||
|
|
|
|
Total future minimum rental payments receivable from sales-type leases at December 31, 2017 exclude $0.4 million which represents amounts billed but not yet received.
5. Inventories
As at December 31, | ||||||||
2017 | 2016 | |||||||
Raw materials | $ | 21,206 | $ | 28,000 | ||||
Work-in-process | 2,601 | 3,818 | ||||||
Finished goods | 6,981 | 10,303 | ||||||
|
|
|
| |||||
$ | 30,788 | $ | 42,121 | |||||
|
|
|
|
At December 31, 2017,2020, inventories include finished goods inventoryof $2.1 million (December 31, 2019 — $0.7 million) for which title had passed to the customer, andbut the criteria for revenue was deferred amounted to $4.9recognition were not met as of the balance sheet date.
For the year ended December 31, 2020, the Company recognized write-downs of $3.6 million (December 31, 20162019 — $2.3$0.4 million).
Inventories at December 31, 2017 include impairments and write-downs, for excess and obsolete inventory based uponon current estimates of net realizable value considering future events and conditions of $0.5 million (December 31, 2016 — $0.5 million).value.
6.9. Film Assets
| As of December 31, |
| ||||||||||||||
As at December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Completed and released films, net of accumulated amortization of $158,155 (2016—$128,650) | $ | 3,467 | $ | 10,643 | ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||||||||||
Completed and released films, net of accumulated amortization of |
| $ | 2,678 |
|
| $ | 7,193 |
| ||||||||
$201,832 (2019 ― $192,999) |
|
|
|
|
|
|
|
| ||||||||
Films in production | 97 | 325 |
|
| 195 |
|
|
| 4,250 |
| ||||||
Films in development | 1,462 | 5,554 |
|
| 2,904 |
|
|
| 6,478 |
| ||||||
|
|
| $ | 5,777 |
|
| $ | 17,921 |
| |||||||
$ | 5,026 | $ | 16,522 | |||||||||||||
|
|
The Company expects to amortize film costs of $3.4$5.3 million for released films within three years from December 31, 20172020 (December 31, 20162019 — $4.8$11.4 million), including $2.2$4.4 million which reflects the portion of the costs of the Company’s(December 31, 2019 — $7.3 million) related to completed films that are expected to be amortized within the next year. In certain film arrangements, the Company co-produces a film with a third party with the third party retaining certain rights to the film. The amount of participation payments owed to third parties related to theseco-produced films that the Company expects to pay during 2018, which is included in accrued liabilities at December 31, 2017,2020, is $4.5$2.7 million (2016(2019 — $4.2$1.6 million). and is recorded on the Consolidated Balance Sheets within Accrued and Other Liabilities.
TheIn 2020, the Company recognized anrecorded impairment on its episodiclosses of $10.8 million (December 31, 2019 — $1.4 million) principally to write-down the carrying value of certain documentary, alternative content film assets in its new business segment, of $11.7 million for the year ended December 31, 2017,and DMR related film assets due to lower than anticipated revenue generated for the television series’ first season. The first season of the series was completeda decrease in 2017projected box office totals and as a result the episodic asset value was $nil as at December 31, 2017.related revenues based on management’s regular quarterly recoverability assessments.
108
10. Property, Plant and Equipment
|
| As of December 31, 2020 |
| ||||||||||||
|
|
|
|
|
|
| Accumulated |
|
| Net Book |
| ||||
(In thousands of U.S. Dollars) |
| Cost |
|
| Depreciation |
|
| Value |
| ||||||
Equipment leased or held for use: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater system components(1)(2)(3) |
| $ |
| 337,271 |
|
| $ |
| 158,647 |
|
| $ |
| 178,624 |
|
Camera equipment |
|
|
| 5,399 |
|
|
|
| 4,653 |
|
|
|
| 746 |
|
|
|
|
| 342,670 |
|
|
|
| 163,300 |
|
|
|
| 179,370 |
|
Assets under construction(4) |
|
|
| 5,660 |
|
|
|
| 0 |
|
|
|
| 5,660 |
|
Right-of-use assets(5) |
|
|
| 15,553 |
|
|
|
| 1,642 |
|
|
|
| 13,911 |
|
Other property, plant and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
| 8,203 |
|
|
|
| 0 |
|
|
|
| 8,203 |
|
Buildings |
|
|
| 80,875 |
|
|
|
| 25,921 |
|
|
|
| 54,954 |
|
Office and production equipment(6) |
|
|
| 40,362 |
|
|
|
| 29,156 |
|
|
|
| 11,206 |
|
Leasehold improvements |
|
|
| 8,061 |
|
|
|
| 3,968 |
|
|
|
| 4,093 |
|
|
|
|
| 137,501 |
|
|
|
| 59,045 |
|
|
|
| 78,456 |
|
|
| $ |
| 501,384 |
|
| $ |
| 223,987 |
|
| $ |
| 277,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2019 |
| ||||||||||||
|
|
|
|
|
|
| Accumulated |
|
| Net Book |
| ||||
(In thousands of U.S. Dollars) |
| Cost |
|
| Depreciation |
|
| Value |
| ||||||
Equipment leased or held for use: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater system components(1)(2)(3) |
| $ |
| 322,492 |
|
| $ |
| 133,739 |
|
| $ |
| 188,753 |
|
Camera equipment |
|
|
| 5,192 |
|
|
|
| 4,239 |
|
|
|
| 953 |
|
|
|
|
| 327,684 |
|
|
|
| 137,978 |
|
|
|
| 189,706 |
|
Assets under construction(4) |
|
|
| 14,483 |
|
|
|
| 0 |
|
|
|
| 14,483 |
|
Right-of-use assets(5) |
|
|
| 17,147 |
|
|
|
| 885 |
|
|
|
| 16,262 |
|
Other property, plant and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
| 8,203 |
|
|
|
| 0 |
|
|
|
| 8,203 |
|
Buildings |
|
|
| 80,850 |
|
|
|
| 22,931 |
|
|
|
| 57,919 |
|
Office and production equipment(6) |
|
|
| 41,673 |
|
|
|
| 25,654 |
|
|
|
| 16,019 |
|
Leasehold improvements |
|
|
| 7,614 |
|
|
|
| 3,357 |
|
|
|
| 4,257 |
|
|
|
|
| 138,340 |
|
|
|
| 51,942 |
|
|
|
| 86,398 |
|
|
| $ |
| 497,654 |
|
| $ |
| 190,805 |
|
| $ |
| 306,849 |
|
(1) | Included in theater system components are assets with costs of $7.6 million (2019 — $7.6 million) and accumulated depreciation of $6.8 million (2019 — $6.7 million) that are leased to customers under operating leases. |
(2) | Included in theater system components are assets with costs of $315.4 million (2019—$297.4 million) and accumulated depreciation of $144.7 million (2019 — $121.3 million) that are used in joint revenue sharing arrangements. |
(3) | In 2020, the Company recorded a charge of $1.8 million (2019 — $2.2 million; 2018 — $0.6 million) in Costs and Expenses Applicable to Technology Rentals principally related to the write-down of leased xenon-based digital systems which were taken out of service in connection with customer upgrades to laser-based digital systems. |
(4) | Included in assets under construction are components with costs of $5.3 million (2019 — $13.2 million) that will be utilized to construct assets to be used in joint revenue sharing arrangements. |
(5) | The right-of-use assets mainly include operating leases for office and warehouse storage space. |
(6) | Fully amortized office and production equipment is still in use by the Company. In 2020, the Company identified and wrote off $0.9 million (2019 — $4.9 million) of office and production equipment that is no longer in use and fully amortized. |
109
In 2017,2020, the Company recorded a charge of $5.3$0.2 million (December 31, 2016(2019 — $3.0$0.2 million; 2018 — $0.8 million) in costs and expenses applicable to revenues – services, after an assessment of the carrying value of certain documentary films and their estimated futurebox-office was performed.
7.reflecting Property, Plant and Equipment
As at December 31, 2017 | ||||||||||||
Cost | Accumulated Depreciation | Net Book Value | ||||||||||
Equipment leased or held for use | ||||||||||||
Theater system components(1)(2)(3)(4) | $ | 264,259 | $ | 103,922 | $ | 160,337 | ||||||
Camera equipment | 5,757 | 3,939 | 1,818 | |||||||||
|
|
|
|
|
| |||||||
270,016 | 107,861 | 162,155 | ||||||||||
|
|
|
|
|
| |||||||
Assets under construction(5) | 23,398 | — | 23,398 | |||||||||
|
|
|
|
|
| |||||||
Other property, plant and equipment | ||||||||||||
Land | 8,203 | — | 8,203 | |||||||||
Buildings | 74,478 | 17,364 | 57,114 | |||||||||
Office and production equipment(6) | 40,442 | 22,164 | 18,278 | |||||||||
Leasehold improvements | 10,974 | 3,341 | 7,633 | |||||||||
|
|
|
|
|
| |||||||
134,097 | 42,869 | 91,228 | ||||||||||
|
|
|
|
|
| |||||||
$ | 427,511 | $ | 150,730 | $ | 276,781 | |||||||
|
|
|
|
|
| |||||||
As at December 31, 2016 | ||||||||||||
Cost | Accumulated Depreciation | Net Book Value | ||||||||||
Equipment leased or held for use | ||||||||||||
Theater system components(1)(2)(3) | $ | 224,890 | $ | 89,218 | $ | 135,672 | ||||||
Camera equipment | 5,739 | 3,732 | 2,007 | |||||||||
|
|
|
|
|
| |||||||
230,629 | 92,950 | 137,679 | ||||||||||
|
|
|
|
|
| |||||||
Assets under construction(5) | 18,315 | — | 18,315 | |||||||||
|
|
|
|
|
| |||||||
Other property, plant and equipment | ||||||||||||
Land | 8,203 | — | 8,203 | |||||||||
Buildings | 69,861 | 14,877 | 54,984 | |||||||||
Office and production equipment(6) | 41,128 | 21,935 | 19,193 | |||||||||
Leasehold improvements | 10,067 | 3,026 | 7,041 | |||||||||
|
|
|
|
|
| |||||||
129,259 | 39,838 | 89,421 | ||||||||||
|
|
|
|
|
| |||||||
$ | 378,203 | $ | 132,788 | $ | 245,415 | |||||||
|
|
|
|
|
|
The Company recognized asset impairment charges of $0.3 million (2016 — $0.2 million; 2015 — $0.4 million) against property, plant and equipment after an assessment of the carrying value of certain assets that were no longer in light of their future expected cash flows.use.
In addition, as a result of the Company’s recent restructuring activities in 2018, certain long-lived assets were deemed to be impaired as the Company’s exit from certain activities limited the future revenue associated with these assets. TheIn 2018, the Company recognized property, plant and equipment charges of $3.7 million. NoNaN such charge was recorded in the yearyears ended December 31, 20162020 and 2015.2019.
8.11. Other Assets
As at December 31, | ||||||||
2017 | 2016 | |||||||
Lease incentives provided to theaters | $ | 7,393 | �� | $ | 5,632 | |||
Commissions and other deferred selling expenses | 3,762 | 3,352 | ||||||
Other investments | 3,516 | 2,000 | ||||||
Investment in film business | 3,484 | 1,389 | ||||||
Insurance recoverable | 2,708 | 2,708 | ||||||
Investment in content | 2,911 | 522 | ||||||
Foreign currency derivatives | 1,447 | 480 | ||||||
Deferred charges on debt financing and other fees | 1,182 | 1,713 | ||||||
Prepaid taxes (note 9) | — | 14,728 | ||||||
Other | 354 | 671 | ||||||
|
|
|
| |||||
$ | 26,757 | $ | 33,195 | |||||
|
|
|
|
|
| As of December 31, |
| |||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||||
Lease incentives provided to theaters |
| $ |
| 15,651 |
|
| $ |
| 19,125 |
|
Commissions and other deferred selling expenses |
|
|
| 2,608 |
|
|
|
| 1,501 |
|
Other investments(1) |
|
|
| 1,000 |
|
|
|
| 2,500 |
|
Investment in content(2) |
|
|
| — |
|
|
|
| 955 |
|
Foreign currency derivatives |
|
|
| 1,979 |
|
|
|
| 602 |
|
Other |
|
|
| 435 |
|
|
|
| 351 |
|
|
| $ |
| 21,673 |
|
| $ |
| 25,034 |
|
9.
(1) | In 2020, the Company recorded a $1.5 million permanent impairment related to its investment in a debt security, which is recorded within Equity in (Losses) Income of Investees, Net of Tax in the Company’s Consolidated Statements of Operations. |
(2) | In 2020, the Company recorded $1.2 million (2019 —$nil) in write-downs of other assets, of which $1.0 million relates to the write-down of certain content-related assets which became impaired during the year. |
110
12. Income Taxes
(a) | (Loss) Income Before Taxes by Jurisdiction |
(a) Income (loss)(Loss) income before income taxes by tax jurisdiction are comprisedfor the years ended December 31, 2020, 2019 and 2018 consists of the following:
| Years Ended December 31, |
| |||||||||||||||||||||||||
Years Ended December 31, | |||||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
Canada | $ | (17,261 | ) | $ | 21,002 | $ | 41,099 |
| $ |
| (104,166 | ) |
| $ |
| 884 |
|
| $ |
| (14,749 | ) | |||||
United States | (11,895 | ) | 505 | 4,504 |
|
| (6,437 | ) |
|
| (234 | ) |
|
| (6,079 | ) | |||||||||||
China | 50,410 | 41,224 | 45,818 |
|
| (8,253 | ) |
|
| 51,809 |
|
|
| 50,446 |
| ||||||||||||
Ireland | 3,632 | (9,768 | ) | (10,581 | ) |
|
| (7,473 | ) |
|
| 17,630 |
|
|
| 8,071 |
| ||||||||||
Other | 5,125 | 4,890 | 6,238 |
|
|
| (2,795 | ) |
|
|
| 5,247 |
|
|
|
| 5,916 |
| |||||||||
|
|
|
| $ |
| (129,124 | ) |
| $ |
| 75,336 |
|
| $ |
| 43,605 |
| ||||||||||
$ | 30,011 | $ | 57,853 | $ | 87,078 | ||||||||||||||||||||||
|
|
|
(b) | Income Tax (Expense) Benefit |
(b) The provisionIncome tax (expense) benefit for income taxes related to income (loss) before income taxes is comprisedthe years ended December 31, 2020, 2019 and 2018 consists of the following:
| Years Ended December 31, |
| |||||||||||||||||||||||||
Years Ended December 31, | |||||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||
Current: | |||||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
Income tax (expense) benefit - current: |
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Canada | $ | (6,898 | ) | $ | (1,396 | ) | $ | (10,862 | ) |
| $ |
| 555 |
|
| $ |
| 2,369 |
|
| $ |
| (4,893 | ) | |||
United States | 267 | 1,756 | 985 |
|
|
| 488 |
|
|
| 595 |
|
|
| 1,300 |
| |||||||||||
China | (12,724 | ) | (10,131 | ) | (10,591 | ) |
|
|
| (1,980 | ) |
|
| (11,789 | ) |
|
| (11,259 | ) | ||||||||
Ireland | (735 | ) | (405 | ) | — |
|
|
| (1,462 | ) |
|
| (762 | ) |
|
| (1,095 | ) | |||||||||
Other | (717 | ) | (1,093 | ) | (920 | ) |
|
|
| (487 | ) |
|
|
| (419 | ) |
|
|
| (494 | ) | ||||||
|
|
| |||||||||||||||||||||||||
(20,807 | ) | (11,269 | ) | (21,388 | ) | ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||
Deferred:(1) | |||||||||||||||||||||||||||
Canada | 8,748 | (3,583 | ) | (518 | ) | ||||||||||||||||||||||
Sub-total |
|
|
| (2,886 | ) |
|
|
| (10,006 | ) |
|
|
| (16,441 | ) | ||||||||||||
Income tax (expense) benefit - deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Canada(1) |
|
|
| (10,801 | ) |
|
| (3,913 | ) |
|
| 5,993 |
| ||||||||||||||
United States | (7,109 | ) | (4,359 | ) | 147 |
|
|
| 867 |
|
|
| (949 | ) |
|
| 2,386 |
| |||||||||
China | 1,405 | 776 | (83 | ) | |||||||||||||||||||||||
China(2) |
|
|
| (15,756 | ) |
|
| (18 | ) |
|
| (6 | ) | ||||||||||||||
Ireland | 1,085 | 2,352 | 1,840 |
|
|
| 2,161 |
|
|
| (1,923 | ) |
|
| (1,423 | ) | |||||||||||
Other | (112 | ) | (129 | ) | (50 | ) |
|
|
| (89 | ) |
|
|
| 41 |
|
|
|
| (27 | ) | ||||||
|
|
| |||||||||||||||||||||||||
4,017 | (4,943 | ) | 1,336 | ||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||
$ | (16,790 | ) | $ | (16,212 | ) | $ | (20,052 | ) | |||||||||||||||||||
|
|
| |||||||||||||||||||||||||
Sub-total |
|
|
| (23,618 | ) |
|
|
| (6,762 | ) |
|
|
| 6,923 |
| ||||||||||||
Total(3) |
| $ |
| (26,504 | ) |
| $ |
| (16,768 | ) |
| $ |
| (9,518 | ) |
(1) | For the year ended December 31, |
(2) | In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, the Company recognized a deferred tax liability of $19.1 million for the year for the estimated applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings. |
(3) | For the year ended December 31, 2020, Income Tax (Expense) Benefit includes deferred taxes related to amounts |
111
(c) The provision forReconciliation of Income Tax Expense to Statutory Rates
For the years ended December 31, 2020, 2019 and 2018, income taxes from continuing operationstax expense differs from the amount that would have resulted by applying the combined Canadian federal and provincial statutory income tax rates to earnings due to the following:following factors:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Income tax provision at combined statutory rates | $ | (7,954 | ) | $ | (15,330 | ) | $ | (23,081 | ) | |||
Adjustments resulting from: | ||||||||||||
Stock based compensation | (295 | ) | (565 | ) | 2,387 | |||||||
Othernon-deductible/non-includable items | (717 | ) | (1,254 | ) | (439 | ) | ||||||
Decrease (increase) in valuation allowance relating to current year temporary differences | — | 129 | (16 | ) | ||||||||
Changes to tax reserves | (1,435 | ) | 1,628 | (453 | ) | |||||||
U.S. federal and state taxes | (373 | ) | (767 | ) | (27 | ) | ||||||
Withholding taxes | (1,217 | ) | (786 | ) | (716 | ) | ||||||
Income tax at different rates in foreign and other provincial jurisdictions | 4,147 | 50 | 961 | |||||||||
Investment and other tax credits(non-refundable) | 1,570 | 2,190 | 1,597 | |||||||||
Changes to deferred tax assets and liabilities resulting from audit and other tax return adjustments | (532 | ) | (1,612 | ) | (242 | ) | ||||||
Windfall tax (shortfall) benefit | (591 | ) | 57 | — | ||||||||
Impact of changes due to U.S. tax reform | (9,323 | ) | — | — | ||||||||
Other | (70 | ) | 48 | (23 | ) | |||||||
|
|
|
|
|
| |||||||
Provision for income taxes, as reported | $ | (16,790 | ) | $ | (16,212 | ) | $ | (20,052 | ) | |||
|
|
|
|
|
|
|
| Years Ended December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Income tax benefit (expense) at combined statutory rates |
| $ |
| 34,218 |
|
| $ |
| (19,964 | ) |
| $ |
| (11,555 | ) |
Adjustments resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCI share of partnership losses |
|
|
| (1,229 | ) |
|
|
| (397 | ) |
|
|
| (614 | ) |
Other non-deductible/non-includable items |
|
|
| (2,243 | ) |
|
|
| 198 |
|
|
|
| 447 |
|
Increase in valuation allowance |
|
|
| (28,589 | ) |
|
|
| 0 |
|
|
|
| 0 |
|
Changes to tax reserves |
|
|
| (2,699 | ) |
|
|
| 1,418 |
|
|
|
| (204 | ) |
U.S. federal and state taxes |
|
|
| (250 | ) |
|
|
| (300 | ) |
|
|
| 30 |
|
Withholding taxes |
|
|
| (20,943 | ) |
|
|
| (1,071 | ) |
|
|
| (1,418 | ) |
Income tax at different rates in foreign and other provincial jurisdictions |
|
|
| (2,607 | ) |
|
|
| 5,019 |
|
|
|
| 3,477 |
|
Investment and other tax credits (non-refundable) |
|
|
| 643 |
|
|
|
| 701 |
|
|
|
| 783 |
|
Changes to deferred tax assets and liabilities resulting from audit and other tax return adjustments |
|
|
| (1,219 | ) |
|
|
| (1,998 | ) |
|
|
| 768 |
|
Reduction in tax benefits resulting from the vesting of share-based compensation |
|
|
| (1,237 | ) |
|
|
| (374 | ) |
|
|
| (1,232 | ) |
Impact of changes in enhanced tax rates and other legislation |
|
|
| (349 | ) |
|
|
| 0 |
|
|
|
| 0 |
|
Income tax expense |
| $ |
| (26,504 | ) |
| $ |
| (16,768 | ) |
| $ |
| (9,518 | ) |
(d) The net deferredCompany recorded income tax asset is comprisedexpense of $26.5 million for the year-ended December 31, 2020. The effective tax rate for the year of (20.5)% differs from the Canadian statutory combined Federal and Provincial rate of 26.2% primarily due to the recording of a valuation allowance against its deferred tax assets, withholding taxes associated with the reversal of the indefinite reinvestment assertion for certain foreign subsidiaries, permanent book to tax differences, jurisdictional tax rate differences, and management’s estimates of contingent liabilities related to the resolution of various tax examinations.
Comparatively, the Company recorded income tax expense of $16.8 million for the year-ended December 31, 2019. The effective tax rate for the year of 22.3% was lower than the Canadian statutory combined Federal and Provincial rate of 26.2% primarily due to income earned in Greater China and Ireland at lower effective rates. The effective tax rate for the year ended December 31, 2019 was consistent with the effective tax rate for the year ended December 31, 2018 of 21.8%.
(d) | Deferred Tax Assets and Deferred Tax Liability |
As of December 31, 2020 and 2019, the Company’s deferred tax assets and deferred tax liability consists of the following:
| As of December 31, |
| ||||||||||||||||
As at December 31, | ||||||||||||||||||
2017 | 2016 | |||||||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||||||||||||
Net operating loss carryforwards | $ | 3,306 | $ | 2,893 |
| $ |
| 17,120 |
|
| $ |
| 888 |
| ||||
Investment tax credit and other tax credit carryforwards | 161 | — |
|
| 1,344 |
|
|
| 3,650 |
| ||||||||
Write-downs of other assets | 1,219 | 759 |
|
| 1,219 |
|
|
| 1,220 |
| ||||||||
Excess of tax accounting basis in property, plant and equipment, inventories and other assets | 9,380 | — |
|
| 9,692 |
|
|
| 6,257 |
| ||||||||
Accrued pension liability | 6,406 | 6,571 |
|
| 6,942 |
|
|
| 6,393 |
| ||||||||
Accrued stock-based compensation | 3,004 | 12,352 | ||||||||||||||||
Accrued share-based compensation |
|
| 7,350 |
|
|
| 5,360 |
| ||||||||||
Income recognition on net investment in leases |
|
| (2,018 | ) |
|
| (4,283 | ) | ||||||||||
Other accrued reserves | 9,615 | 3,754 |
|
|
| 5,120 |
|
|
| 4,617 |
| |||||||
|
| |||||||||||||||||
Total deferred income tax assets | 33,091 | 26,329 |
|
|
| 46,769 |
|
|
| 24,102 |
| |||||||
Income recognition on net investment in leases | (2,186 | ) | (3,985 | ) | ||||||||||||||
Excess accounting over tax basis in property, plant and equipment, inventories and other assets | — | (1,368 | ) | |||||||||||||||
|
| |||||||||||||||||
30,905 | 20,976 | |||||||||||||||||
Valuation allowance | (197 | ) | (197 | ) |
|
| (28,786 | ) |
|
|
| (197 | ) | |||||
|
| |||||||||||||||||
Net deferred income tax asset | $ | 30,708 | $ | 20,779 | ||||||||||||||
|
| |||||||||||||||||
Deferred income tax asset net of valuation allowance |
|
| 17,983 |
|
|
|
| 23,905 |
| |||||||||
Deferred tax liability(1) |
|
|
| (19,134 | ) |
|
|
| — |
| ||||||||
Net deferred tax asset |
| $ |
| (1,151 | ) |
| $ |
| 23,905 |
|
112
(1) | In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, the Company recognized a deferred tax liability of $19.1 million for the year for the estimated applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings. |
The gross deferred tax assets include a liability of $0.6 million (December 31, 2019 — $0.4 millionmillion) relating to the remaining tax effect resulting from the Company’s defined benefit pension plan, the related actuarial gains and losses, and unrealized net gains and losses on cash flow hedging instruments recorded in accumulated other comprehensive income.
The Company elected to early adopt ASU2016-16 related to income taxes during the first quarter of 2017. The impact from the adoption was reflected in the Company’s consolidated financial statements on a modified retrospective basis resulting in an increase to Accumulated deficit of $8.3 million, a decrease to Other assets of $14.8 million, an increase to Deferred taxes of $7.9 million and an increase to Accrued and other liabilities of $1.4 million.
The Company recorded income tax expense of $16.8 million for the year-ended December 31, 2017. The effective tax rate for the year of 55.9% was significantly higher than the statutory rate due to the impact of the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017 by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%, and imposing other limitations and changes that limit or eliminate various deductions, including interest expense, performance based compensation for certain executives, and other deductions requiring there-measurement of deferred tax assets and liabilities. U.S. GAAP requires that the impact of changes to tax legislation be recognized in the period in which the law was enacted.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act when a company does not have all the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. While the Company is able to make reasonable estimates of the impact of the reduction in corporate rate and other changes in the legislation the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions the Company may take.
The effect of there-measurement on deferred taxes is reflected entirely in the period that includes the enactment date and is allocated directly to income tax expense. As of December 31, 2017, the Company can determine a reasonable estimate of the effects of tax reform and is recording that estimate as a provisional amount. The provisionalre-measurement of the deferred tax assets and liabilities resulted in a $9.3 million discrete tax provision which increased the effective tax rate by 31.1% for the year. The provisionalre-measurement amount may change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities.
The Tax Act also includes a number of other changes including: (a) the imposition of aone-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), (b) a 100% dividends received deduction on dividends from foreign affiliates, (c) a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be global intangible low taxed income or “GILTI”, (d) creation of the base erosion anti-abuse tax, or “BEAT”, (e) provision for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign derived intangible income or “FDII”) and, (f) 100% expensing of qualifying fixed assets acquired after September 27, 2017.
Given that the Company is a Canadian based multinational with subsidiary operations in the US and other foreign jurisdictions a number of these changes are not anticipated to impact the Company. The Company does not expect to be subject to the BEAT, Transition Tax or GILTI given its current legal and tax structures. The Company will be eligible to expense qualifying fixed assets acquired after September 27, 2017, and will be impacted by the additional limitations imposed on the deductibility of executive compensation, and does not expect to be adversely impacted by the limitations placed on the deductibility of interest expense. The impact of the Tax Act may differ from this estimate, during theone-year measurement period due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act.
As a result, no U.S. income taxes have been provided for any undistributed foreign earnings, or any additional outside basis differences inherent in these foreign entities, as the Company is a Canadian corporation and these amounts continue to be indefinitely reinvested in foreign operations which are owned directly or indirectly.
The Company has not provided Canadian taxes on cumulative earnings ofnon-Canadian affiliates and associated companies that have been reinvested indefinitely. Taxes are provided for earnings ofnon-Canadian affiliates and associated companies when the Company determines that such earnings are no longer indefinitely reinvested.Comprehensive Loss.
(e)Net Operating Loss Carryforwards
Estimated U.S. and Canadian net operating loss carryforwards of $19.0$72.2 million can be used to reduce taxable income through 2040 and $23.1$22.7 million of loss carryforwards in Ireland can be carried forward indefinitely to reduce taxable income. Additional net operating loss carryforwards of $0.6 million in Canada and Japan can be carried forward through to 2029.indefinitely. Investment tax credits and other tax credits can be carried forward to reduce income taxes payable through to 2038.2040.
(f) | Change on Indefinitely Reinvested Assertion |
Taxes are provided for earnings of non-Canadian affiliates and associated companies when the Company determines that such earnings are no longer indefinitely reinvested.
(f) Valuation allowance
The provisionIn the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, the Company recognized a deferred tax liability of $19.1 million for income taxes in the year ended December 31, 2017 does not include an adjustment tofor the valuation allowance (2016 — $0.1 million recovery) in continuing operations. Duringestimated applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the year ended December 31, 2017, afterrepatriation of any such earnings.
(g) | Valuation Allowance |
The Company assessed the realization of deferred income tax assets considering all available evidence, both positive (including recent and historical profits, projected future profitability, backlog, carryforward periodsnegative. On the basis of this evaluation, income tax expense for and utilization of net operating loss carryovers and tax credits, discretionary deductions and other factors) and negative (including cumulative losses in past years and other factors), it was concluded that the existingyear ended December 31, 2020 includes a $28.6 million valuation allowance against(2019 — $nil) to reduce the Company’svalue of deferred tax assets in certain jurisdictions. The valuation allowance was appropriate (2016 — $0.1recorded in the jurisdictions where management could not reliably establish that it was more likely than not that the deferred tax assets would be realized, primarily due uncertainty around the long term impact of the COVID-19 global pandemic. The $28.8 million decrease). The $0.2 million (2016(2019 — $0.2 million) balance in the valuation allowance as atof December 31, 20172020 is primarily attributable to certain U.S. state net operating loss carryovers and investment tax credits that may expire unutilized.
(g) Uncertain tax positions
The valuation allowance recorded in 2020 is expected to reverse when the Company determines it is more likely than not that the deferred tax assets in these jurisdictions will be realized. Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied.
113
(h) | Uncertain Tax Positions |
For the year ended, December 31, 2020, the Company recorded a net increase of $3.3$2.7 million related to reserves for income taxes,taxes. As of which $1.9 million was recorded directly to retained earnings. As at December 31, 20172020 and December 31, 2016,2019, the Company had total unrecognized tax benefitsreserves (including interest and penalties) of $15.9$17.4 million and $12.6$14.7 million, respectively, for deductibility of stock based compensation, international withholding taxes and other items. Approximately $15.9 million of the unrecognizedvarious uncertain tax benefits could impact the Company’s effective tax rate if recognized.positions. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company’sCompany's accrued position.liability. Accordingly, additional provisions on federal, provincial, state and foreigntax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
AThe following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefitsreserves (excluding interest and penalties) for the years ended December 31, is as follows:2020, 2019 and 2018:
| Years Ended December 31, |
| |||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
Balance at beginning of the year | $ | 12,593 | $ | 14,221 | $ | 1,972 |
| $ |
| 14,718 |
|
| $ |
| 16,136 |
|
| $ |
| 15,927 |
| ||||||
Additions based on tax positions related to the current year | 3,639 | 314 | 12,694 |
|
| 2,301 |
|
|
| 812 |
|
|
| 4,329 |
| ||||||||||||
Reductions for tax positions of prior years | (195 | ) | (500 | ) | — |
|
| — |
|
|
| (2,230 | ) |
|
| (170 | ) | ||||||||||
Reductions resulting from lapse of applicable statute of limitations and administrative practices | (110 | ) | (1,442 | ) | (445 | ) |
|
|
| (2,943 | ) |
|
|
| — |
|
|
|
| (3,950 | ) | ||||||
|
|
| |||||||||||||||||||||||||
Balance at the end of the year | $ | 15,927 | $ | 12,593 | $ | 14,221 |
| $ |
| 14,076 |
|
| $ |
| 14,718 |
|
| $ |
| 16,136 |
| ||||||
|
|
|
Consistent with its historical financial reporting, theThe Company has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of the interest expenseInterest Expense in its consolidated statementsConsolidated Statements of operationsOperations rather than income tax expense.Income Tax Expense. The Company expensed less than $0.1$3.3 million in potential interest and penalties associated with its provision for uncertain tax positions for the years ended December 31, 2017 (20162020 (2019 — $0.2 million; 2018 — less than $0.1 million recovery; 2015 — less than $0.1 million recovery)million).
The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s majorCompany's taxing jurisdictions include Canada, the province of Ontario, the United States (including multiple states), Ireland and China.
The Company’s 2011Company's 2016 through 20162020 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and the 20062016 through 20162020 tax years remain subject to examination by the appropriate governmental agencies for Canadian federal tax purposes. There are otheron-going audits in various other jurisdictions that are not material to the financial statements.Consolidated Financial Statements.
Cash held outside of North America as at December 31, 2017 was $119.4 million (December 31, 2016 — $117.4 million), of which $32.6 million was held in the People’s Republic of China (“PRC”) (December 31, 2016 — $31.5 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 $6.9 million.
(h) Income Tax Effect
(i) | Income tax effect on Other Comprehensive (Loss) Income |
The income tax benefit (expense) benefit related to the following items included in other comprehensive income (loss)Other Comprehensive (Loss) Income are:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Unrecognized actuarial gain or loss on defined benefit plan | $ | (307 | ) | $ | (41 | ) | $ | (47 | ) | |||
Unrecognized actuarial gain or loss on postretirement benefit plans | 13 | (48 | ) | (21 | ) | |||||||
Amortization of actuarial gain or loss on postretirement benefit plan | — | (18 | ) | (35 | ) | |||||||
Unrealized change in cash flow hedging instruments | 107 | (271 | ) | 1,543 | ||||||||
Realized change in cash flow hedging instruments upon settlement | (559 | ) | (802 | ) | (844 | ) | ||||||
Foreign currency translation adjustments | — | — | (85 | ) | ||||||||
|
|
|
|
|
| |||||||
$ | (746 | ) | $ | (1,180 | ) | $ | 511 | |||||
|
|
|
|
|
|
|
| Years Ended December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Unrealized defined benefit plan actuarial loss (gain) |
| $ |
| 276 |
|
| $ |
| (42 | ) |
| $ |
| (379 | ) |
Unrealized postretirement benefit plans actuarial loss (gain) |
|
|
| 92 |
|
|
|
| 0 |
|
|
|
| (23 | ) |
Prior service cost arising during the period |
|
|
| 0 |
|
|
|
| 145 |
|
|
|
| 0 |
|
Amortization of prior service cost |
|
|
| (23 | ) |
|
|
| (26 | ) |
|
|
| 0 |
|
Unrealized change in cash flow hedging instruments |
|
|
| (132 | ) |
|
|
| (145 | ) |
|
|
| 581 |
|
Realized change in cash flow hedging instruments upon settlement |
|
|
| (158 | ) |
|
|
| (310 | ) |
|
|
| 107 |
|
|
| $ |
| 55 |
|
| $ |
| (378 | ) |
| $ |
| 286 |
|
114
10.13. Other Intangible Assets
| As of December 31, 2020 |
| |||||||||||||||||||||||||
As at December 31, 2017 |
|
|
|
| Accumulated |
|
| Net Book |
| ||||||||||||||||||
Accumulated | Net Book | ||||||||||||||||||||||||||
Cost | Amortization | Value | |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Cost |
|
| Amortization |
|
| Value |
| ||||||||||||||||||
Patents and trademarks | $ | 12,184 | $ | 7,710 | $ | 4,474 |
| $ |
| 12,714 |
|
| $ |
| 8,878 |
|
| $ |
| 3,836 |
| ||||||
Licenses and intellectual property | 21,471 | 7,800 | 13,671 |
|
| 26,168 |
|
|
| 12,182 |
|
|
| 13,986 |
| ||||||||||||
Internal use software |
|
| 25,009 |
|
|
| 17,568 |
|
|
| 7,441 |
| |||||||||||||||
Other | 19,529 | 6,463 | 13,066 |
|
|
| 1,445 |
|
|
|
| 463 |
|
|
|
| 982 |
| |||||||||
|
|
|
| $ |
| 65,336 |
|
| $ |
| 39,091 |
|
| $ |
| 26,245 |
| ||||||||||
$ | 53,184 | $ | 21,973 | $ | 31,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
| As of December 31, 2019 |
| ||||||||||||||||||||||
|
|
|
| Accumulated |
|
| Net Book |
| |||||||||||||||||||
As at December 31, 2016 | |||||||||||||||||||||||||||
Accumulated | Net Book | ||||||||||||||||||||||||||
Cost | Amortization | Value | |||||||||||||||||||||||||
(In thousands of U.S. Dollars) |
| Cost |
|
| Amortization |
|
| Value |
| ||||||||||||||||||
Patents and trademarks | $ | 11,395 | $ | 7,046 | $ | 4,349 |
| $ |
| 12,779 |
|
| $ |
| 8,587 |
|
| $ |
| 4,192 |
| ||||||
Licenses and intellectual property | 22,490 | 7,620 | 14,870 |
|
| 26,168 |
|
|
| 10,747 |
|
|
| 15,421 |
| ||||||||||||
Internal use software |
|
| 23,791 |
|
|
| 13,239 |
|
|
| 10,552 |
| |||||||||||||||
Other | 15,352 | 4,155 | 11,197 |
|
|
| 576 |
|
|
|
| 394 |
|
|
|
| 182 |
| |||||||||
|
|
|
| $ |
| 63,314 |
|
| $ |
| 32,967 |
|
| $ |
| 30,347 |
| ||||||||||
$ | 49,237 | $ | 18,821 | $ | 30,416 | ||||||||||||||||||||||
|
|
|
Other intangible assets of $19.5 million are comprised mainly of the Company’s investment in an enterprise resource planning system.
Fully amortized other intangible assets are still in use by the Company. In 2017,2020, the Company identified and wrote off $0.1$0.2 million (2016 — $0.2(2019 ─ $0.1 million) of patents and trademarks that are no longer in use.
During 2017,2020, the Company acquired $5.2$2.8 million in other intangible assets. The net book valueassets, mainly related to the development of theseinternal use software, as well as additions in patents and trademark and other intangible assets was $4.6 million as at December 31, 2017.assets. The weighted average amortization period for these additions is 4.96.6 years. The net book value of the other intangible assets acquired in 2020 was $2.6 million as of December 31, 2020.
During 2017,2020, the Company incurred costs of $0.4 million to renew or extend the term of acquired patents and trademarks which were recorded in selling, general and administrative expenses (2016 — $0.2(2019 ─ $0.4 million).
The estimated amortization expense for each of the next five years endedfollowing the December 31, are2020 balance sheet date is as follows:
2018 | $ | 4,649 | ||
2019 | 4,649 | |||
2020 | 4,649 | |||
2021 | 4,649 | |||
2022 | 4,649 |
(In thousands of U.S. Dollars) |
|
|
|
|
|
2021 |
| $ |
| 6,616 |
|
2022 |
|
|
| 6,616 |
|
2023 |
|
|
| 5,676 |
|
2024 |
|
|
| 2,090 |
|
2025 |
|
|
| 1,975 |
|
11.14. Credit Facility and Playa Vista LoanOther Financing Arrangements
As of December 31, 2020 and 2019, Bank Indebtedness includes the following:
|
| December 31, |
|
| December 31, |
| ||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
| ||
Credit Facility |
| $ | 300,000 |
|
| $ | 20,000 |
|
Working Capital Facility |
| $ | 7,643 |
|
|
| — |
|
Unamortized debt issuance costs |
|
| (1,967 | ) |
|
| (1,771 | ) |
|
| $ | 305,676 |
|
| $ | 18,229 |
|
115
Credit Agreement
The Company maintainshas a senior secured credit facility (the “Credit Facility”) with a maximum borrowing capacity of $200.0 million and a scheduled maturity of March 3, 2020. The Credit Facility is collateralized by a first priority security interest in substantially all ofagreement, the present and future assets of the Company and the Guarantors. Certain of the Company’s subsidiaries serve as guarantors (the “Guarantors”) of the Company’s obligations under the Credit Facility.
The terms of the Credit Facility are set forth in the FourthFifth Amended and Restated Credit Agreement, (as amended, the “Credit Agreement”), dated March 3, 2015, among the Company, the Guarantors, the lenders named therein,with Wells Fargo Bank, National Association (“Wells Fargo”), as agent, and issuing lender (Wells Fargo, together witha syndicate of lenders party thereto (the “Credit Agreement”). The Company’s obligations under the lenders named therein, the “Lenders”Credit Agreement are guaranteed by certain of its subsidiaries (the “Guarantors”) and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner andare secured by first-priority security interests in various collateral and security documents entered into bysubstantially all the assets of the Company and the Guarantors. The Credit Facility provided by the Credit Agreement matures on June 28, 2023.
The Credit Agreement has a revolving borrowing capacity of $300.0 million, and contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to $440.0 million or greater, subject to certain conditions, depending on the mix of revolving and term loans comprising the incremental facility.
In the first quarter of 2020, in response to uncertainties associated with the outbreak of the COVID-19 global pandemic and its impact on the Company’s business, the Company drew down $280.0 million in available borrowing capacity under the Credit Facility, resulting in total outstanding borrowings of $300.0 million.
The Credit Agreement contains a covenant that requires the Company 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, 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 customary representations, warranties and event of default provisions.
On June 10, 2020, the Company entered into the First Amendment to the Credit Agreement (the “Amendment”), which, among other things, (i) suspends the Senior Secured Net Leverage Ratio covenant through the first quarter of 2021, (ii) re-establishes the Senior Secured Net Leverage Ratio covenant thereafter, provided that for subsequent quarters that such covenant is tested, as applicable, the Company will be permitted to use its quarterly EBITDA (as defined in the Credit Agreement) from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020, (iii) adds a $75.0 million minimum liquidity covenant measured at the end of each calendar month and (iv) restricts the Company’s ability to make certain restricted payments, dispositions and investments, create or assume liens and incur debt that would otherwise have been permitted by the Credit Agreement. The modifications to the negative covenants, the minimum liquidity covenant and modifications to certain other provisions in the Credit Agreement pursuant to the Amendment were effective from the date of the Amendment until the earlier of the delivery of the compliance certificate for the fourth quarter of 2021 and the date on which the Company, in its sole discretion, elects to calculate its compliance with the Senior Secured Net Leverage Ratio by using either its actual EBITDA or annualized EBITDA (the “Designated Period”).
As of December 31, 2020, the Company was in compliance with all of its requirements at December 31, 2017.under the Credit Agreement, as amended. The Company’s continued compliance with the requirements of the Credit Agreement will depend on the Company’s ability to generate sufficient EBITDA to ensure compliance with the Senior Secured Net Leverage Ratio covenant throughout the next twelve months, which is dependent on the timing of when theaters in the IMAX network resume normal operations. The risk of breaching this covenant within the next twelve months increases significantly as the ongoing COVID-19 pandemic continues to adversely impact the Company’s ability to generate EBITDA. A violation of this covenant would represent an event of default under the terms of the Credit Agreement, allowing lenders to declare the principal and interest on all outstanding Credit Facility indebtedness due or payable immediately. If a breach of the Senior Secured Net Leverage Ratio covenant were to occur, however, management believes the Company would be able to either reduce a sufficient portion of the drawn amount on the Credit Facility with existing cash balances to achieve compliance, obtain additional sources of liquidity prior to the time when the repayment of its outstanding Credit Facility indebtedness would be required, or negotiate a further amendment with its lenders to the Credit Agreement to provide further covenant relief.
Total amounts drawn and availableBorrowings under the Credit Facility 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); provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the applicable margin for LIBOR borrowings will be 2.50% per annum and the applicable margin for U.S. base rate borrowings will be 1.75% per annum. The effective interest rate for the year ended December 31, 2017 and 2016 were $nil and $200.02020 was 2.38% (2019 — 3.43%).
116
In addition, the Credit Facility has standby fees ranging from 0.25% to 0.38% per annum, based on the Company’s Total Leverage Ratio with respect to the unused portion of the Credit Facility; provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the standby fee will be 0.50% per annum.
The Company incurred fees of approximately $1.1 million respectively.in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.
As atof December 31, 20172020 and 2016,2019, the Company did not0t have any letters of credit and advance payment guarantees outstanding under the Credit Facility.
Playa Vista FinancingWorking Capital Facility
In 2014,On July 24, 2020, IMAX PV Development Inc.(Shanghai) Multimedia Technology Co., Ltd. (“PV Borrower”IMAX Shanghai”) a wholly-owned subsidiary of the Company, entered into a loan agreement with Wells Fargo to principally fund the costs of development and construction, one of the Company’s new West Coast headquarters, locatedmajority-owned subsidiaries in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.6 million) to fund ongoing working capital requirements (the “Working Capital Facility”). The facility expires in July 2021. As of December 31, 2020, there was 49.9 million Renminbi ($7.6 million) in borrowings outstanding, 140.1 million Renminbi ($21.5 million) available for future borrowings and 10.0 million Renminbi ($1.5 million) available for letters of guarantees under the Playa Vista neighborhood of Los Angeles, California (the “Playa Vista Loan”).
The Playa Vista Loan was fully drawn at $30.0 million and bore interest at a variable interest rate per annum equal to 2.0% above the30-day LIBOR rate. PV Borrower was required to make monthly payments of combined principal and interest over a10-year term with a lump sum payment at the end of year 10. The Playa Vista Loan is being amortized over 15 years. The Playa Vista Loan will be fully due and payable on October 19, 2025 (the “Maturity Date”), and may be prepaid at any time without premium, but with all accrued interest and other applicable payments.
The Playa Vista Loan is secured by a deed of trust from PV Borrower in favor of Wells Fargo and other documents evidencing and securing the loan, granting a first lien on and security interest in the Playa Vista property and the Playa Vista project, including all improvements to be constructed thereon. The company has also guaranteed Playa Vista Loan.
The Loan Documents contain affirmative, negative and financial covenants (including compliance with the financial covenants of the Company’s outstanding Credit Facility), agreements, representations, warranties, borrowing conditions, and events of default customary for development projects such as the Playa Vista Project.
Bank indebtedness includes the following:
As at December 31, | ||||||||
2017 | 2016 | |||||||
Playa Vista Loan | 25,667 | 27,667 | ||||||
Deferred charges on debt financing | (310 | ) | (351 | ) | ||||
|
|
|
| |||||
$ | 25,357 | $ | 27,316 | |||||
|
|
|
|
TotalWorking Capital Facility. There were no amounts drawn under the Playa Vista LoanWorking Capital facility at December 31, 2017 was $25.7 million (December 31, 2016 — $27.7 million) at an2019. The amounts available for borrowing under the Working Capital Facility are not subject to a standby fee. The effective interest rate of 3.14%, respectively (Decemberfor the year ended December 31, 20162020 was 4.31% (2019 — 2.52%, respectively)nil).
In accordance with the Playa Vista Loan Documents, the Company is obligated to make principal payments on the loan as follows:
2018 | $ | 2,000 | ||
2019 | 2,000 | |||
2020 | 2,000 | |||
2021 | 2,000 | |||
2022 | 2,000 | |||
Thereafter | 15,667 | |||
|
| |||
$ | 25,667 | |||
|
|
Wells Fargo Foreign Exchange Facility
Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. There is noThe net settlement riskgain on its foreign currency forward contracts was $2.0 million at December 31, 2017,2020, as the fair value of the forward contracts exceeded the notional value of the forward contracts.(December 31, 2019 — $0.5 million). As atof December 31, 2017,2020, the Company has $35.2$31.9 million in notional value of such arrangements outstanding.outstanding (December 31, 2019 — $36.1 million).
Bank of MontrealNBC Facility
As at December 31, 2017 and 2016,On October 28, 2019, the Company had availableentered into a $10.0$5.0 million facility with the National Bank of MontrealCanada (the “NBC Facility”) fully insured by Export Development Canada 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”).credit. The Company did not0t have any letters of credit and advance payment guarantees outstanding as atof December 31, 2017 (December 31, 2016 — $0.1 million)2020 and 2019 under the Bank of MontrealNBC Facility.
12.15. Commitments
In the ordinary course of its business, the Company enters into contractual agreements with third parties that includenon-cancelable 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. The following table presents a summary of the Company’s contractual obligations and commitments as atof December 31, 2017:2020:
Payments Due by Fiscal Year | ||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
Obligations | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||||||||||||
Purchase obligations | $ | 38,055 | $ | 38,055 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Pension obligations | 20,076 | — | — | 20,076 | — | — | — | |||||||||||||||||||||
Operating lease obligations | 24,933 | 6,226 | 3,462 | 1,545 | 1,364 | 1,397 | 10,939 | |||||||||||||||||||||
Playa Vista Loan | 25,667 | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 | 15,667 | |||||||||||||||||||||
Postretirement benefits obligations | 4,569 | 746 | 613 | 480 | 488 | 420 | 1,822 | |||||||||||||||||||||
Other financial commitments | 10,677 | 6,677 | 4,000 | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
$ | 123,977 | $ | 53,704 | $ | 10,075 | $ | 24,101 | $ | 3,852 | $ | 3,817 | $ | 28,428 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
The Company’s lease commitments consist of rent and equipment under operating leases. The Company accounts for any incentives provided over the term of the lease. The following table summarizes information about the Company’s total rental expenses under operating leases:
|
| Payments Due by Fiscal Year |
| ||||||||||||||||||||||||||||||||
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
(In thousands of U.S. Dollars) |
| Obligations |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| Thereafter |
| ||||||||||||||
Purchase obligations(1) |
| $ |
| 35,348 |
|
| $ |
| 35,247 |
|
| $ |
| 81 |
|
| $ |
| 2 |
|
| $ |
| 0 |
|
| $ |
| 0 |
|
| $ |
| 18 |
|
Pension obligations(2) |
|
|
| 20,298 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 20,298 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 0 |
|
Operating lease obligations(3) |
|
|
| 21,493 |
|
|
|
| 3,715 |
|
|
|
| 2,932 |
|
|
|
| 2,258 |
|
|
|
| 2,191 |
|
|
|
| 2,067 |
|
|
|
| 8,330 |
|
Credit Facility(4) |
|
|
| 300,000 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 300,000 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 0 |
|
Working Capital Facility(5) |
|
|
| 7,643 |
|
|
|
| 7,643 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 0 |
|
|
|
| 0 |
|
Postretirement benefits obligations(2) |
|
|
| 3,299 |
|
|
|
| 126 |
|
|
|
| 128 |
|
|
|
| 137 |
|
|
|
| 137 |
|
|
|
| 136 |
|
|
|
| 2,635 |
|
|
| $ |
| 388,081 |
|
| $ |
| 46,731 |
|
| $ |
| 3,141 |
|
| $ |
| 322,695 |
|
| $ |
| 2,328 |
|
| $ |
| 2,203 |
|
| $ |
| 10,983 |
|
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Total rent expense | $ | 5,685 | $ | 5,106 | $ | 4,766 |
(1) | Represents total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered, but yet to be invoiced. |
Recorded in the accrued liabilities balance as at December 31, 2017 is $4.1 million (December 31, 2016 — $1.6 million) related to accrued rent and lease inducements being recognized as an offset to rent expense over the term of the respective leases.117
(2) | The Company has an unfunded defined benefit pension plan covering its Chief Executive Officer, as well as a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. (See Note 23.) |
Purchase Obligations
(3) | The Company’s operating lease arrangements principally involve office and warehouse space. (See Note 6.) |
Purchase obligations primarily consist of the Company’s commitments made under long-term supplier contracts.
(4) | The Company has a Credit Agreement with Wells Fargo Bank, National Association, as agent, and a syndicate of lenders party thereto. The Credit Facility provided by the Credit Agreement matures on June 28, 2023. The Company is not required to make any minimum principal payments on its Credit Facility. (See Note 14.) |
Pension and Postretirement Benefits Obligations
The Company has an unfunded defined benefit pension plan, covering certain individuals and a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. See note 20 for further information.
Playa Vista Loan
The Company is required to make monthly payments of combined principal and interest over a10-year term with a lump sum payment at the end of year 10. The Playa Vista Loan will be fully due and payable on October 19, 2025. See note 11 for further information.
Other Financial Commitments
Other financial commitments include the Company’s total minimum commitment toward the development, production, post-production and marketing, related to certain film and new content initiatives.
Letters of Credit and Advance Payment Guarantees
As at December 31, 2017 the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2016 — $nil), under the Credit Facility. As at December 31, 2017 the Company did not have any letters of credit and advance payment guarantees outstanding as compared to $0.1 million as at December 31, 2016, under the Bank of Montreal Facility.
(5) | IMAX Shanghai, one of the Company’s majority-owned subsidiaries in China, has an unsecured revolving facility to fund ongoing working capital requirements. The facility expires in July 2021. (See Note 14.) |
The Company compensates its sales force with both fixed and variable compensation. Commissions on the sale or lease of the Company’s theater systemsIMAX Theater Systems are payable in graduated amounts from the time of collection of the customer’s first payment to the Company up to the collection of the customer’s last initial payment. At December 31, 2017, $2.32020, $1.6 million (December 31, 2016 —$2.02019 — $0.6 million) of commissions have been accrued and will be payable in future periods.
13.16. 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 withManagement is required to assess the Contingencies Topiclikelihood of the FASB ASC, theany adverse judgments or outcomes related to these legal contingencies, as well as potential ranges of probable or reasonably possible losses. The Company will makerecord 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 fordetermination of the amount of any such matters. The Company reviews these provisions in conjunction with any related provisions on assets related to the claimsliability recorded or disclosed is reviewed at least quarterly and adjusts these provisions to reflectbased on a careful analysis of each individual exposure with, in some cases, the impactsassistance of outside legal counsel, taking into account the impact of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case. Should developments in anyThe amount of liabilities recorded or disclosed for these matters outlined below cause acontingencies may change in the Company’s determination asfuture due to an unfavorable outcome and resultchanges in management’s judgments resulting from new developments or changes in settlement strategy. Any resulting adjustment to 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, theyliabilities recorded by the Company could have a material adverse effect on the Company’sits results of operations, cash flows, and financial position in the period or periods in which such a changechanges in determination, settlement or judgment occurs.occur. The Company believes it has adequate provisions for any such matters.
The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred.
(a)On May 15, 2006, the Company initiated arbitration against Three-Dimensional Media Group, Ltd. (“3DMG”) before the International Centre for Dispute Resolution in New York (the “ICDR”), alleging breaches of the license and consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying any breaches and asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the ICDR unanimously denied 3DMG’s Motion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. The proceeding was suspended on May 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The proceeding was further suspended on October 11, 2010 pending resolution ofre-examination proceedings involving one of 3DMG’s patents. Following a status conference on April 27, 2016, before the ICDR, the ICDR granted 3DMG leave to amend its answer and counterclaims, and subsequently lifted the stay in this matter. In its amended counterclaims, 3DMG seekssought damages for alleged unpaid royalties, damages and other fees under the license and consulting agreements, and the Panel hasarbitration panel of ICDR also permitted 3DMG to advance new damage theories. The ICDR held the first phase of a final hearing duringin July and October 2017, the week of July 10, 2017, and the final hearing occurred during the week of October 16, 2017. The parties submitted final, post-hearing briefs in December 2017, and the Panel has scheduledICDR held closing oral arguments forin March 2018. TheOn July 11, 2018, the ICDR issued a Partial Final Award that found for 3DMG on certain claims and for the Company believes thaton other claims. As part of the Partial Final Award, the ICDR awarded damages in favor of 3DMG in the amount of loss suffered$8.8 million, which is inclusive of approximately $1.8 million in connection with the amended counterclaims would not havepre-award interest. In August 2018, 3DMG filed a material impact on the financial position or resultsmotion seeking modification and correction of operationsportions of the Company, although no assurance can be given with respectaward, and also filed an application to recover its attorney fees and expenses. On November 1, 2018, the ultimate outcomeICDR issued a Final Award that denied in its entirety 3DMG’s motion for modification and correction of the arbitration.award. The minimum amountICDR also granted in part 3DMG’s request for attorney fees and expenses, in the range has been used to measureamount of $5.2 million. A charge of $11.7 million was recorded in the amount to be accrued for this loss contingencyyear ended December 31, 2018, and classified within Legal Judgment and Arbitration Awards in accordance with FASB ASC Topic 450.Consolidated Statements of Operations.
118
(b)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 byE-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 judgementjudgment and dismissedE-City’s petition. On March 29, 2017, the Company filed an Execution Application in the Bombay High Court seeking to enforce the ICC award againstE-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 requiringE-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.
(c) In March 2013, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, received notice from the Shanghai office of the General Administration of Customs (“Customs Authority”) that it had been selected for a customs audit (the “Audit”). In the course of the Audit, the Customs Authority discovered the underpayment by IMAX Shanghai of the freight and insurance portion of the customs duties and taxes applicable to the importation of certain IMAX theater systems during the period from October 2011 through March 2013. Though IMAX Shanghai’s importation agent accepted responsibility for the error giving rise to the underpayment, the matter was transferred first to the Anti-Smuggling Bureau (the “ASB”) of the Customs Authority and then to the Third Division of Shanghai People’s Procuratorate for further review. During the year ended December 31, 2017, at the request of the ASB, IMAX Shanghai paid approximately $0.15 million to the ASB to satisfy the amount owing as a result of the underpayment. Given that the amount of the underpayment exceeds RMB 200,000 (the applicable ASB threshold), the Company has been advised that the matter may be treated as a criminal rather than as an administrative matter. During
the year ended December 31, 2017, IMAX Shanghai recorded an estimate of $0.3 million in respect of fines that it believes are likely to result from the matter. IMAX Shanghai has been advised that the range of potential penalties is between three and five times the underpayment depending on whether the matter is assessed as criminal or administrative; however, the actual amount of any fines or other penalties remains unknown and the Company cautions that these actual fines or other penalties maybe be greater or less than the amount accrued or the expected range.
(d) 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. At this time,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 is unablefiled an objection to determinethat recommendation. The Company’s petition to vacate the amounts that it may owe pursuantarbitration award was denied by the District Judge on January 10, 2020. The Company filed an appeal of this decision on February 7, 2020 with the Eleventh Circuit Court of Appeals, but such appeal was dismissed on May 29, 2020. On December 3, 2020, the District Judge entered a Final Judgment against the Company in the total amount of $11.3 million as damages under the Award. As of December 31, 2020, the Company’s Consolidated Balance Sheets include a liability within Accrued and Other Liabilities of $11.3 million related to the Award,Final Judgment, consisting principally of $7.2 million related to amounts previously collected from or owed to Giencourt principally in respect of theater systems that were not delivered and $4.1 million recorded in the timingConsolidated Statements of any such payments,Operations within Legal Judgment and thereforeArbitration Awards in respect of the remaining amounts owed under the Final Judgment. The $4.1 million recorded in the Consolidated Statements of Operations within Legal Judgment and Arbitration Awards includes $3.2 million recorded in the fourth quarter of 2020 as a result of the Final Judgment. On January 4, 2021 the Company filed an appeal of this judgment with the Eleventh Circuit Court of Appeals. In addition to the above, the Company has initiated a claim against Giencourt in the Ontario Superior Court seeking damages from Giencourt with respect to contractual claims under various terminated agreements between the parties. These proceedings are in preliminary stages, and no assurances can be given with respect to the ultimate outcome of the matter.matter, but any amounts, if awarded to the Company under these proceedings, may reduce the Company’s overall financial obligations to Giencourt.
(e) (d)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.
(f) (e)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 aA guarantee to beis 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.
119
Financial Guarantees
TheCertain subsidiaries of the Company hashave provided no significant financial guarantees to third parties.parties under the Credit Agreement.
Product Warranties
The Company’s accrual for product warranties, thatwhich was recorded as part of accruedwithin Accrued and other liabilitiesOther Liabilities in the consolidated balance sheetsConsolidated Balance Sheets is $0.1 million and less than $0.1 million and $0.2 million as atof December 31, 20172020 and 2016,2019, respectively.
Director/Officer Indemnifications
The Company’s GeneralBy-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 amountamounts 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. NoNaN amount has been accrued in the consolidated balance sheetConsolidated Balance Sheets as atof December 31, 20172020 and December 31, 20162019 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 systemIMAX Theater System lease and sale agreements and the supervision of installation or servicing of the theater systems;IMAX 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 ornon-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 systemIMAX Theater 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 not0t made any significant payments under such indemnifications and no amounts have been accrued in the consolidated financial statementsConsolidated Financial Statements with respect to the contingent aspect of these indemnities.
14.17. Capital Stock
(a) Authorized
Common Shares
(a) | Authorized Common Shares |
The authorized capital of the Company consists of an unlimited number of common shares. The following is a summary of the rights, privileges, restrictions, and conditions of the common shares.
The holders of common shares are entitled to receive dividends, if as and when declared by the directors of the Company, subject to the rights of the holders of any other class of shares of the Company entitled to receive dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common share held at all meetings of the shareholders.
(b) Changes during the Year120
(b) | Changes During the Year |
During the year,years ended December 31, 2020, 2019 and 2018, the Company settled common shares pursuant to the exercise of stock options for cash proceeds and the vesting of RSUs. The settlement ofRSUs with its common shares can beshares. These settlements were either settled through newly issued common shares from treasury or through the purchase of common shares in the open market by the IMAX Long-Term Incentive Plan trustee. The following table summarizes the settlement of stock option and RSU transactions during the year:transactions:
| Years Ended December 31, |
| |||||||||||||||||||||||||
Years Ended December 31, | |||||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||
(Cash proceeds in thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Issued from treasury | 405,229 | 347,814 | 1,659,643 |
|
|
| — |
|
|
|
| 19,088 |
|
|
|
| 12,750 |
| |||||||||
Plan trustee purchases | 263,112 | 170,204 | 102,032 |
|
|
| — |
|
|
|
| 67,840 |
|
|
|
| — |
| |||||||||
|
|
| |||||||||||||||||||||||||
Total stock options exercised | 668,341 | 518,018 | 1,761,675 |
|
|
| — |
|
|
|
| 86,928 |
|
|
|
| 12,750 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash proceeds on stock option exercises | $ | 14,652 | $ | 11,431 | $ | 35,609 | |||||||||||||||||||||
Cash proceeds from stock option exercises |
| $ |
| — |
|
| $ |
| 1,752 |
|
| $ |
| 218 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Issued from treasury | 7,127 | 54,159 | 25,551 |
|
|
| 42,982 |
|
|
|
| — |
|
|
|
| — |
| |||||||||
Plan trustee purchases | 422,022 | 394,423 | 167,469 |
|
| 386,297 |
|
|
| 404,719 |
|
|
| 462,137 |
| ||||||||||||
Shares withheld for tax withholdings | 27,630 | 18,336 | 14,351 |
|
|
| 24,714 |
|
|
|
| 29,577 |
|
|
|
| 72,056 |
| |||||||||
|
|
| |||||||||||||||||||||||||
Total RSUs vested | 456,779 | 466,918 | 207,371 |
|
|
| 453,993 |
|
|
|
| 434,296 |
|
|
|
| 534,193 |
| |||||||||
|
|
|
(c) Stock-Based Compensation
(c) | Share-Based Compensation |
The Company issues stock-basedshare-based compensation to eligible employees, directors, and consultants under the IMAX Corporation Amended and Restated Long-Term Incentive Plan (the “IMAX LTIP”)LTIP and the China Long-Term Incentive Plan (the “China LTIP”)LTIP, as summarized below.
The On June 3, 2020, the Company’s shareholders approved the IMAX LTIP isat its Annual and Special Meeting.
Awards under the Company’s governing document and awards to employees, directors, and consultants under this planIMAX LTIP may consist of stock options, RSUs, PSUs and other awards. Stock options are no longer granted under the Company’s previous approved Stock Option Plan (“SOP”).
A separate stock option plan,For the China LTIP, was adopted by a subsidiary of the Company in October 2012.
Compensationyear ended December 31, 2020, compensation costs recorded in the consolidated statementsConsolidated Statements of operationsOperations for the Company’s stock-basedshare-based compensation plans were $23.0$21.5 million (2016(2019 — $30.5$22.8 million; 2015 — $21.92018 —$22.6 million). The following reflects the stock-basedshare-based compensation expense recorded to the respective financial statement line items:
| Years Ended December 31, |
| |||||||||||||||||
2017 | |||||||||||||||||||
(In thousands of U.S. Dollars) |
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |||||||
Cost and expenses applicable to revenues | $ | 1,704 |
| $ |
| 691 |
|
| $ |
| 1,709 |
|
| $ |
| 1,657 |
| ||
Selling, general and administrative expenses | 20,393 |
|
|
| 20,652 |
|
|
|
| 20,750 |
|
|
|
| 20,102 |
| |||
Research and development | 556 |
|
|
| 150 |
|
|
|
| 371 |
|
|
|
| 452 |
| |||
Executive transition costs |
|
|
| — |
|
|
|
| — |
|
|
|
| 320 |
| ||||
Exit costs, restructuring charges and associated impairments | 357 |
|
|
| — |
|
|
|
| — |
|
|
|
| 54 |
| |||
|
| $ |
| 21,493 |
|
| $ |
| 22,830 |
|
| $ |
| 22,585 |
| ||||
$ | 23,010 | ||||||||||||||||||
|
As atFor the year ended December 31, 2017,2020, there was a decrease in share-based compensation expenses allocated to Costs and Expenses Applicable to Revenues and Research and Development, when compared to 2019, due to the lower level of revenue generating and research activities during the COVID-19 global pandemic.
As of December 31, 2020, the Company has reserved a total of 10,781,93615,486,807 (December 31, 20162019 — 12,012,572)8,944,999) common shares for future issuance under the SOP and IMAX LTIP. Of thethis amount, 4,892,962 common shares are reserved for issuance, therethe future exercise of stock options (December 31, 2019 — 5,732,209), 361,844 common shares are reserved for the future vesting of PSUs (December 31, 2019 — nil), and 1,564,838 common shares are reserved for the future vesting of RSUs (December 31, 2019 — 1,065,347). At December 31, 2020 stock options in respect of 5,082,1004,311,761 (December 31, 20162019 — 5,190,542) common shares and RSUs in respect of 995,329 (December 31, 2016 — 1,124,180) common shares outstanding at December 31, 2017. At December 31, 2017 options in respect of 3,913,088 (December 31, 2016 —4,001,078)4,801,272) common shares were vested and exercisable.
121
Stock Option Plan
The Company’s policy is to issue new common shares from treasury or shares purchased in the open market to satisfy stock options which are exercised.
The Company utilizes a Binomial Model to determine the fair value of stock-based payment awards.stock option awards on the grant date. The fair value determined by the Binomial Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards,award, and actual and projected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises are expected to occur on average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model best provides a fair measure of the fair value of the Company’s employee stock options.
All stock option awards of stock options are madegranted at the fair market value of the Company’s common shares on the date of grant. The fair market value of a common share on a given date meansis based on the higher of the closing price of a common share on either: (i) the grant date (oror (ii) the most recent trading date if the grant date is not a trading date)date on the New York Stock Exchange (“NYSE”) or such national exchange as may be designated by the Company’s Board of Directors (the “Fair Market Value”).Directors. The stock options vest within 54 years and expire 10 years or less from the date granted.of grant. The SOP and IMAX LTIP provide for double-trigger accelerated vesting in the event of a change in control, as defined in each plan.
The Company recorded the following expenses related to stock option grants issued to employees and directors inunder the IMAX LTIP and SOP plans.
Stock option expense Years Ended December 31, 2017 2016 2015 $ 4,462 $ 12,795 $ 10,710
|
| Years Ended December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Stock option expense |
| $ |
| 1,847 |
|
| $ |
| 8,329 |
|
| $ |
| 5,950 |
|
An income tax benefit is recorded in the consolidated statement of operations of $1.0 million for the 2017 stock option expenses and $3.8 million for
For the year ended December 31, 2016, respectively.2020, the Company’s Consolidated Statements of Operations includes an income tax benefit of $0.1 million related to stock option expense (2019 —$1.9 million; 2018 —$1.2 million).
Total stock-basedAs of December 31, 2020, 2019 and 2018, unrecognized share-based compensation expense related tonon-vested employee stock options not yet recognized at December 31, 2017 areis as follows:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Expense related tonon-vested employee stock options not yet recognized | $ | 7,441 | $ | 5,894 | $ | 12,575 |
|
| As of December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Expense related to non-vested employee stock options |
| $ |
| 2,029 |
|
| $ |
| 4,073 |
|
| $ |
| 8,482 |
|
The weighted average period over which the awards are
As of December 31, 2020, 2019 and 2018, unrecognized share-based compensation expense related to non-vested employee stock options is expected to be recognized are as follows:over the following weighted-average periods:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Weighted average period awards are expected to be recognized (in years) | 2.3 | 2.3 | 1.7 |
|
| As of December 31, |
| ||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Weighted average period (in years) |
|
|
| 1.8 |
|
|
|
| 2.7 |
|
|
|
| 1.9 |
|
TheFor the years ended December 31, 2020, 2019 and 2018, the weighted average fair value of all stock options granted to employees and directors at the measurement date and the assumptions used to estimate the average fair value of the stock optionoptions are as follow:follows:
2017 | 2016 | 2015 | ||||||||||
Weighted average fair value per share | $ | 8.31 | $ | 8.16 | $ | 8.07 | ||||||
Average risk-free interest rate | 2.34 | % | 1.67 | % | 1.97 | % | ||||||
Expected option life (in years) | 4.71 - 5.83 | 4.44 - 5.24 | 3.55 - 5.76 | |||||||||
Expected volatility | 30 | % | 30 | % | 30 | % | ||||||
Dividend yield | 0 | % | 0 | % | 0 | % |
Stock options toNon-Employees
There were no common share options issued tonon-employees in 2017, 2016 or 2015. The following table summarizes certain information about the outstanding stock options related tonon-employees:
|
|
| Years Ended December 31, |
| |||||||
|
|
| 2020 |
|
| 2019 |
|
|
| 2018 |
|
Weighted average fair value per share |
|
| N/A |
| $ | 6.65 |
|
| $ | 6.74 |
|
Average risk-free interest rate |
|
| N/A |
|
| 2.64% |
|
|
| 2.67% |
|
Expected option life (in years) |
|
| N/A |
|
| 6.73 - 10.00 |
|
|
| 5.06 - 7.00 |
|
Expected volatility |
|
| N/A |
|
| 31% |
|
|
| 30% |
|
Dividend yield |
|
| N/A |
|
| 0% |
|
|
| 0% |
|
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Weighted average exercise price per share of outstanding stock options | $ | — | $ | 29.64 | $ | 26.79 | ||||||
Number of outstanding stock options | — | 17,000 | 38,750 | |||||||||
Weighted average exercise price per share of exercisable stock options | $ | — | $ | 30.10 | $ | 26.34 | ||||||
Number of exercisable stock options | — | 15,200 | 21,525 | |||||||||
Aggregate intrinsic value of vested stock options | $ | — | $ | 123 | $ | 198 |
In 2017, the Company recorded a charge of less than $0.1 million (2016 — less than $0.1 million; 2015 — $0.1 million) to selling, general and administrative expenses related to thenon-employee stock options. There were no accrued liabilities related tonon-employee stock options as at December 31, 2017 (December 31, 2016 — less than $0.1 million).122
China Long-Term Incentive Plan (“China LTIP”)
The China LTIP was adopted by IMAX China Holding, Inc. (“IMAX China”), a subsidiary of the Company, in October 2012. Each stock option (“China Option”), RSU or cash settled share-based payment (“CSSBP”) issued under the China LTIP represents an opportunity to participate economically in the future growth and value creation of IMAX China. Prior to the initial public offering of IMAX China on October 8, 2015 (the “IMAX China IPO”), the China Options and CSSBPs issued by IMAX China operated in tandem with options granted to certain employees of IMAX China under the Company’s SOP and the IMAX LTIP (“Tandem Options”).
During 2015, no Tandem Options were granted in conjunction with China Options or CSSBPs. Immediately prior to the IMAX China IPO, there were 186,446 outstanding and unvested Tandem Options issued under the Company’s SOP and IMAX LTIP with a weighted average exercise price of $23.70 per share. The Tandem Options had a maximum contractual life of 7 years. The total fair value of the Tandem Options granted with respect to the China LTIP was $1.9 million. The Company was recognizing this expense over a5-year period.
Pursuant to their terms, upon the occurrence of a qualified initial public offering, the 186,446 Tandem Options issued would forfeit immediately and the related charge would be reversed. As a result of the IMAX China IPO on October 8, 2015, the 186,446 Tandem Options with an average price of $23.70 per share were forfeited immediately. The Company recorded a recovery of $0.6 million in 2015 (2014 — $0.3 million expense) related to the forfeiture of Tandem Options issued under the Company’s SOP and IMAX LTIP.
The Company subsequently recognized an immediate charge related to the vesting of China Options and certain CSSBPs for China employees. The total fair value of the China Options and CSSBP awards granted with respect to the China LTIP was $3.9 million and $2.1 million, respectively. During the fourth quarter of 2015, a charge of $2.1 million and $1.4 million was recorded relating to the China Options and CSSBPs, respectively. The remaining charge was recognized over the related requisite period. The CSSBPs represent the right to receive cash payments in an amount equal to a certain percentage of the excess of the total equity value of IMAX China based on the per share price in the IMAX China IPO over the strike price of the CSSBPs. The CSSBPs were issued in conjunction with the China LTIP, with similar terms and conditions as the China Options. The CSSBP awards are accounted as liability awards, however the fair value of the liability is fixed at the time of the initial public offering. During 2017, the remaining balance of the CSSBPs vested and were settled in cash for $0.6 million (2016 — $0.5 million).
In connection with the IMAX China IPO and in accordance with the China LTIP, IMAX China adopted apost-IPO share option plan and apost-IPO restricted stock unit plan. Pursuant to these plans, IMAX China has issued additional China Options and China LTIP Restricted Share Units (“China RSUs”).Stock Option Summary
The following table summarizes the expense related to China Options, China RSUs, CSSBPs and any accrued liability related to CSSBPs:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Expense | ||||||||||||
China Options | $ | 1,034 | $ | 971 | $ | 2,136 | ||||||
China RSUs | 1,124 | 518 | — | |||||||||
CSSBPs | 353 | 429 | 1,357 | |||||||||
CSSBPs liability | $ | — | $ | 289 | $ | 395 |
Stock Option Summary
The following table summarizes certain information in respect of option activity under the SOP and IMAX LTIP:LTIP for the years ended December 31, 2020, 2019 and 2018:
Weighted Average Exercise |
|
|
|
|
|
|
|
| Weighted Average Exercise |
| |||||||||||||||||||||||||||||||||||||||||
Number of Shares | Price Per Share |
| Number of Shares |
|
|
| Price Per Share |
| |||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||||||||||
Options outstanding, beginning of year | 5,190,542 | 4,805,244 | 5,925,660 | $ | 28.35 | $ | 27.03 | $ | 24.24 |
|
| 5,732,209 |
|
|
| 5,465,046 |
|
|
| 5,082,100 |
|
| $ |
| 26.82 |
|
| $ |
| 27.63 |
|
| $ |
| 29.31 |
| |||||||||||||||
Granted | 854,764 | 984,452 | 873,929 | 30.07 | 31.49 | 31.59 |
|
| — |
|
|
| 1,016,882 |
|
|
| 1,082,123 |
|
|
| — |
|
|
| 20.66 |
|
|
| 21.95 |
| |||||||||||||||||||||
Exercised | (668,341 | ) | (518,018 | ) | (1,761,675 | ) | 21.92 | 22.07 | 20.21 |
|
| — |
|
|
| (86,928 | ) |
|
| (12,750 | ) |
|
| — |
|
|
| 20.16 |
|
|
| 17.08 |
| ||||||||||||||||||
Forfeited | (108,551 | ) | (66,903 | ) | (232,670 | ) | 32.42 | 29.28 | 24.60 |
|
| (34,678 | ) |
|
| (336,493 | ) |
|
| (69,332 | ) |
|
| 22.49 |
|
|
| 23.63 |
|
|
| 29.99 |
| ||||||||||||||||||
Expired | (89,958 | ) | — | — | 32.29 | — | — |
|
| (786,086 | ) |
|
| (299,134 | ) |
|
| (507,977 | ) |
|
| 27.07 |
|
|
| 25.82 |
|
|
| 31.69 |
| ||||||||||||||||||||
Cancelled | (96,356 | ) | (14,233 | ) | — | 29.28 | 24.82 | — |
|
| (18,483 | ) |
|
| (27,164 | ) |
|
| (109,118 | ) |
|
| 27.97 |
|
|
| 31.13 |
|
|
| 30.44 |
| |||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Options outstanding, end of year | 5,082,100 | 5,190,542 | 4,805,244 | 29.31 | 28.35 | 27.03 |
|
| 4,892,962 |
|
|
| 5,732,209 |
|
|
| 5,465,046 |
|
|
| 26.81 |
|
|
| 26.82 |
|
|
| 27.63 |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Options exercisable, end of year | 3,913,088 | 4,001,078 | 2,800,723 | 28.96 | 27.79 | 25.83 |
|
| 4,311,761 |
|
|
| 4,801,272 |
|
|
| 3,990,970 |
|
|
| 27.30 |
|
|
| 27.40 |
|
|
| 28.48 |
| |||||||||||||||||||||
|
|
|
As atof December 31, 2017, 5,082,1002020, 4,892,962 options outstanding included both fully vested and unvested options with a weighted average exercise price of $29.31,$26.81, an aggregate intrinsic value of $0.5 million and weighted average remaining contractual life of 4.7 years. As at December 31, 2017, options that are exercisable have an intrinsic value of $0.3 million$nil and a weighted average remaining contractual life of 4.34.1 years. As of December 31, 2020, options that are exercisable have an aggregate intrinsic value of $nil and a weighted average remaining contractual life of 4.1 years. The intrinsic value of options exercised in 20172020 was $6.8 million (2016$nil as no options were exercised (2019 — $5.4$0.2 million; 20152018 — $29.8$0.1 million).
Restricted Share Units
RSUs have been granted to employees consultants and directors under the IMAX LTIP. Each RSU represents a contingent right to receive one1 common share and is the economic equivalent of one1 common share. The grant date fair value of each RSU is equal to the share price of the Company’s stock at the grant date. TheFor the years ended December 31, 2020, 2019 and 2018, the Company recorded the following expenses related to RSU grantsRSUs issued to employees and directors in the plan:IMAX LTIP:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
RSU expenses | $ | 16,033 | $ | 15,809 | $ | 8,197 |
|
| Years Ended December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
RSU expenses |
| $ |
| 13,761 |
|
| $ |
| 12,394 |
|
| $ |
| 15,189 |
|
The Company’s actual tax benefits realized for the tax deductions related to the vesting of RSUs was $3.6$0.3 million for the year ended December 31, 2017 (20162020 (2019 — $4.6$1.6 million; 20152018 — $1.4 million).
The Company’s accrued liability for RSUs, deemed as granted, was $2.1 million as of December 31, 2020 (December 31, 2019 — $0.4 million).
The Company did not issue any RSU grants to advisors or strategic partners of the Company for the year ended December 31, 2017. The Company did not record any expense for the years ended December 31, 2017 and 2016. An expense of less than $0.1 million was recorded in 2015 related to RSU grants issued to certain advisors and strategic partners of the Company.
Total stock-basedshare-based compensation expense related tonon-vested RSUs not yet recognized and the weighted average period over which the awards are expected to be recognized are as follow:follows:
Years Ended December 31, |
| Years Ended December 31, |
| ||||||||||||||||||||||||
2017 | 2016 | 2015 |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||
Expense related tonon-vested RSUs not yet recognized | $ | 22,440 | $ | 29,050 | $ | 24,399 |
| $ |
| 17,343 |
|
| $ |
| 23,548 |
|
| $ |
| 18,597 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average period awards are expected to be recognized (in years) | 2.1 | 2.4 | 3.0 |
|
|
| 1.9 |
|
|
|
| 2.7 |
|
|
|
| 2.2 |
|
123
The following table summarizes certain informationthe activity in respect of RSU activityRSUs issued under the IMAX LTIP:LTIP for the years ended December 31, 2020, 2019 and 2018:
Number of Awards | Weighted Average Grant Date Fair Value Per Share |
| Number of Awards |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| 2020 |
|
| 2019 |
|
| 2018 |
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |||||||||||||||||||||||||
RSUs outstanding, beginning of year | 1,124,180 | 973,637 | 595,834 | $ | 33.01 | $ | 32.27 | $ | 27.13 |
|
| 1,065,347 |
|
|
| 1,033,871 |
|
|
| 995,329 |
|
| $ |
| 23.17 |
|
| $ |
| 25.70 |
|
| $ |
| 32.68 |
| |||||||||||||||
Granted | 463,010 | 664,278 | 605,349 | 30.47 | 32.29 | 36.04 |
|
| 1,050,385 |
|
|
| 687,475 |
|
|
| 659,282 |
|
|
|
| 15.35 |
|
|
| 22.30 |
|
|
| 20.99 |
| ||||||||||||||||||||
Vested and settled | (456,779 | ) | (466,918 | ) | (207,371 | ) | 31.66 | 30.63 | 28.81 |
|
| (453,993 | ) |
|
| (434,296 | ) |
|
| (534,193 | ) |
|
|
| 22.71 |
|
|
| 27.54 |
|
|
| 32.33 |
| |||||||||||||||||
Forfeited | (135,082 | ) | (46,817 | ) | (20,175 | ) | 32.03 | 31.16 | 29.27 |
|
| (96,901 | ) |
|
| (221,703 | ) |
|
| (86,547 | ) |
|
|
| 18.81 |
|
|
| 23.68 |
|
|
| 29.19 |
| |||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
RSUs outstanding, end of year | 995,329 | 1,124,180 | 973,637 | 32.68 | 33.01 | 32.27 |
|
| 1,564,838 |
|
|
| 1,065,347 |
|
|
| 1,033,871 |
|
|
|
| 18.33 |
|
|
| 23.17 |
|
|
| 25.70 |
| ||||||||||||||||||||
|
|
|
Historically, RSUs granted under the IMAX LTIP have vested between immediately and fourthree years from the grant date. In connection with the second amendment and restatement of the IMAX LTIP at the Company’s annual and special meeting of the shareholders on June 6, 2016,3, 2020, the IMAX LTIP plan was amended to impose aretained the minimumone-year vesting period on future RSU grants, with acarve-out for 300,000 RSUsan aggregate of no more than 5% of the total number of common shares authorized for issuance under the plan that may vest on a shorter schedule. Vesting of the RSUs is subject to continued employment or service with the Company. The following table summarizes the number of RSUs issued from thecarve-out balance:
| |||||
| |||||
|
| ||||
| |||||
Issued during | |||||
|
| (81,636 | ) | ||
Outstanding, December 31, | |||||
|
| 278,364 |
Restricted Share Units to Non-Employees
There were 0 RSU awards granted to non-employees in 2020 (2019 ― 12,580; 2018 ― nil). The Company recorded an expense of $0.1 million for the year ended December 31, 2020 (2019 ― $0.1 million; 2018 ― $nil) related to RSU grants issued to advisors and strategic partners of the Company in 2019.
Performance Stock Units Summary
In the first quarter of 2020, the Company expanded its share-based compensation program to include PSUs. The Company grants two types of PSU awards, one which vests based on a combination of employee service and the achievement of certain EBITDA-based targets and one which vests based on a combination of employee service and the achievement of certain stock-price targets. These awards vest over a three-year performance period. The grant date fair value of PSUs with EBITDA-based targets is equal to the closing price on the date of grant or the average closing price of the Company’s common stock for five days prior to the date of grant. The grant date fair value of PSUs with stock-price targets is determined on the grant date using a Monte Carlo simulation, which is a valuation model that takes into account the likelihood of achieving the stock-price targets embedded in the award (“Monte Carlo Model”). The compensation expense attributable to each type of PSU is recognized on a straight-line basis over the requisite service period. At the conclusion of the three-year performance period, the number of PSUs that ultimately vest can range from 0% to a maximum vesting opportunity of 175% of the initial award, depending upon actual performance versus the established EBITDA and stock-price targets.
The fair value determined by the Monte Carlo Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, market conditions as of the grant date, the Company’s expected stock price volatility over the term of the awards, and other relevant data. The compensation expense is fixed on the date of grant based on the dollar value granted.
The amount and timing of compensation expense recognized for PSUs with EBITDA-based targets is dependent upon management's assessment of the likelihood and timing of achieving these targets. If, as a result of management’s assessment, it is projected that a greater number of PSUs will vest than previously anticipated, a life-to-date adjustment to increase compensation expense is recorded in the period such determination is made. Conversely, if, as a result of management’s assessment, it is projected that a lower number of PSUs will vest than previously anticipated, a life-to-date adjustment to decrease compensation expense is recorded in the period such determination is made. For the year ended December 31, 2020, the Company recognized expense of $2.6 million related to outstanding PSUs, which includes adjustments reflecting management’s estimate of the number of PSUs with EBITDA-based targets expected to vest.
124
The Company’s actual tax benefits realized for the tax deductions related to the vesting of PSUs was $nil for the year ended December 31, 2020 (2019 and 2018 ― $nil).
As of December 31, 2020, total unrecognized share-based compensation expense related to unvested PSUs and the weighted average period over which the expense is expected to be recognized is $6.0 million and 2.1 years, respectively.
The following table summarizes the activity in respect of PSUs issued under the IMAX LTIP:
|
| Number of Awards |
|
| Weighted Average Grant Date Fair Value Per Share | |||||
|
| 2020 |
|
|
| 2020 |
|
| ||
Granted |
|
| 370,265 |
|
| $ |
| 15.66 |
|
|
Forfeited |
|
| (8,421 | ) |
|
|
| 14.84 |
|
|
PSUs outstanding, end of year |
|
| 361,844 |
|
|
|
| 15.68 |
|
|
As of December 31, 2020, the maximum number of shares of common stock that may be issued with respect to PSUs outstanding is 633,227, assuming full achievement of the EBITDA and stock-price targets.
China Long-Term Incentive Plan
Each stock option (“China Option”), RSU or PSU issued under the China LTIP represents an opportunity to participate economically in the future growth and value creation of IMAX China.
In connection with the IMAX China IPO and in accordance with the China LTIP, IMAX China adopted a post-IPO share option plan and a post-IPO restricted stock unit plan. Pursuant to these plans, IMAX China has issued additional China Options, China LTIP Performance Stock Units (“China PSUs”) and China LTIP Restricted Share Units (“China RSUs”).
For the years ended December 31, 2020, 2019 and 2018, share-based compensation expense related to China Options, China RSUs and China PSUs was as follows:
|
| Years Ended December 31, |
| ||||||||||||
(In thousands of U.S. Dollars) |
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Options |
| $ |
| 875 |
|
| $ |
| 320 |
|
| $ |
| 217 |
|
China RSUs |
|
|
| 2,093 |
|
|
|
| — |
|
|
|
| — |
|
China PSUs |
|
|
| 208 |
|
|
|
| 1,664 |
|
|
|
| 1,229 |
|
Total |
| $ |
| 3,176 |
|
| $ |
| 1,984 |
|
| $ |
| 1,446 |
|
In 2020, IMAX China modified the terms of certain fully vested stock options to extend their contractual life by two years and recorded an associated expense of $0.7 million.
Issuer Purchases of Equity Securities
In 2017, the Company repurchased 1,736,150 (2016 — 3,849,222) common shares at an average price of $26.57 per share (2016 — $30.25 per share). The repurchases in 2017 exhausted the remaining allowance of $46.1 million under the previously announced $200 million share repurchase program. The average carrying value of the stock retired was deducted from common stock and the remaining excess over the average carrying value of stock was charged to accumulated deficit. Since the inception of this program, the Company has repurchased 6,697,406 common shares at an average price of $29.86 per share.
On June 12, 2017, the Company announced that itsCompany’s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common stock. The share purchase program expireswhich would have expired on June 30, 2020. In June 2020, the Board of Directors approved a 12-month extension of this program which will now expire on June 30, 2021. 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. There were noIn 2020, the Company repurchased 2,484,123 (2019 ― 134,384) common shares at an average price of $14.72 per share repurchases of shares under the new share repurchase program in 2017.(2019 ― $19.76 per share), excluding commissions.
The total number of shares purchased during the yearyears ended December 31, 20172020 and 20162019 does not include any200,000 and 615,000 common shares, purchased in the administration of employee share-based compensation plans, (which amounted to 825,692 (2016 – 630,720) common shares, at an average price of $30.23 (2016 – $31.52)$15.43 and $22.49 per share).share, respectively.
As atof December 31, 2017,2020, the IMAX LTIP trustee held 206,651723 shares purchased for $5.1less than $0.1 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 stockCapital Stock on the consolidated balance sheet.
ReconciliationsIn 2018, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to buy back shares of IMAX China in an amount not to exceed 10% of the numeratortotal number of issued shares of IMAX China as of 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 of June 6, 2019 (35,605,560 shares). The share purchase program expired on the date of the 2020 Annual General Meeting of IMAX China on June 11, 2020. During the 2020 Annual General Meeting, shareholders approved the repurchase of shares of IMAX China not to exceed 10% of the total number of issued shares as of June 11, 2020 (34,848,398 shares). This program will be valid until the 2021 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 2020, IMAX China repurchased 906,400 (2019 ― 8,051,500) common shares at an average price of HKD $13.13 per share (U.S. $1.69 per share) (2019 ― HKD $18.63 per share; U.S. $2.38 per share).
(d)Basic and Diluted Weighted Average Shares Outstanding
The following table reconciles the denominator of the basic and dilutedper-share computations are comprised of the following: weighted average share computations:
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net income attributable to common shareholders | $ | 2,344 | $ | 28,788 | $ | 55,844 | ||||||
Less: Accretion charges associated with redeemable common stock | — | — | (769 | ) | ||||||||
|
|
|
|
|
| |||||||
Net income applicable to common shareholders | $ | 2,344 | $ | 28,788 | $ | 55,075 | ||||||
|
|
|
|
|
| |||||||
Weighted average number of common shares (000’s): | ||||||||||||
Issued and outstanding, beginning of period | 66,160 | 69,673 | 68,988 | |||||||||
Weighted average number of shares (repurchased) issued during the period, net | (780 | ) | (2,098 | ) | 538 | |||||||
|
|
|
|
|
| |||||||
Weighted average number of shares used in computing basic earnings per share | 65,380 | 67,575 | 69,526 | |||||||||
Assumed exercise of stock options and RSUs, net of shares assumed repurchased | 160 | 688 | 1,532 | |||||||||
|
|
|
|
|
| |||||||
Weighted average number of shares used in computing diluted earnings per share | 65,540 | 68,263 | 71,058 | |||||||||
|
|
|
|
|
|
|
| Years Ended December 31, |
| ||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Weighted average number of common shares (000's): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding, beginning of period |
|
|
| 61,176 |
|
|
|
| 61,434 |
|
|
|
| 64,696 |
|
Weighted average number of shares repurchased, net of shares issued during the period |
|
|
| (1,939 | ) |
|
|
| (124 | ) |
|
|
| (1,621 | ) |
Weighted average number of shares used in computing basic income per share |
|
|
| 59,237 |
|
|
|
| 61,310 |
|
|
|
| 63,075 |
|
Assumed exercise of stock options, and vesting of RSUs and PSUs, net of shares assumed repurchased, if dilutive |
|
|
| — |
|
|
|
| 179 |
|
|
|
| 132 |
|
Weighted average number of shares used in computing diluted income per share |
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| 59,237 |
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| 61,489 |
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| 63,207 |
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The calculation of diluted earnings per share exclude 4,993,014 (2016 — 2,814,907)6,999,667 (2019 and 2018 ― 5,809,468 and 5,666,976, respectively) shares that are issuable upon the vesting of 1,564,838 RSUs (2019 and 2018 ― 77,259 and 277,543, respectively), the vesting of 541,867 PSUs (2019 and 2018 ― nil), and the exercise of 579,808 (2016 — 377,048) RSUs4,892,962 stock options (2019 and 4,413,206 (2016 — 2,437,859) stock options2018 ― 5,732,209 and 5,389,433, respectively) for the years ended December 31, 20172020, 2019 and 2016,2018, as the impact of these exerciseseffect would be antidilutive.anti-dilutive.
15.18. Consolidated Statements of Operations Supplemental Information
(a) | Selling Expenses |
(a) Other Revenues
The Company enters into theater system arrangements with customers that typically contain customer payment obligationsSales commissions and other selling expenses paid prior to the scheduled installationrecognition of the theater systems. Duringrelated revenue are deferred and recognized in the periodConsolidated Statements of time between signing andOperations upon the recognition of the related theater system installation, certain customersrevenue. For the year ended December 31, 2020, the sales commissions costs recognized within Costs and Expenses Applicable to Revenues – Technology Sales was $1.3 million (2019 — $2.0 million; 2018 — $1.9 million). Direct advertising and marketing costs for each theater are expensed as incurred. For the year are unableended December 31, 2020, the total of all such costs recognized within Costs and Expenses Applicable to or elect notRevenues – Technology Sales was $1.1 million (2019 — $1.1 million; 2018 — $1.0 million).
Sales commissions related to proceed with the theater system installationjoint revenue sharing arrangements accounted for a number of reasons, including business considerations, or the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the customer and/or the Company may terminate the arrangement by default or by entering into a consensual buyout. In these situations, the parties are released from their future obligations under the arrangement, and the initial payments that the customer previously made to the Company are typically not refunded andas operating leases are recognized as Other Revenues. In addition, the Company enters into agreements with customersCosts and Expenses Applicable to terminate their obligations for additional theater system configurations, which wereRevenues – Technology Rentals in the Company’s backlog. Other revenues from settlementmonth they are earned by the salesperson, which is typically the month of installation. For the year ended December 31, 2020, sales commissions related to such joint revenue sharing arrangements were $nil, $1.3totaled $0.9 million (2019 — $0.4 million; 2018 — $0.9 million). Direct advertising and $0.1marketing costs for each theater are expensed as incurred. For the year ended December 31, 2020, the total of such costs recognized within Costs and Expenses Applicable to Revenues – Technology Rentals was $0.5 million in 2017, 2016(2019 — $3.0 million; 2018 — $2.1 million).
Film exploitation costs, including advertising and 2015, respectively.
(b) Foreign Exchange
Included in selling, general and administrativemarketing expenses, totaled $4.3 million for the year ended December 31, 20172020 (2019 — $22.9 million; 2018 — $21.2 million), and are expensed as incurred within Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services.
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(b) | Foreign Exchange |
Included in Selling, General and Administrative Expenses for the year ended December 31, 2020 is $1.0 million for a net foreigngain of $0.8 million resulting from changes in exchange gainrates related to the translation of foreign currency denominated monetary assets and liabilities as compared to a net loss of $0.9 million and a net loss of $2.4$1.7 million for the yearyears ended December 31, 20162019 and 2015,2018, respectively. See note 19(d)Note 22(c) for additional information.
(c) | Collaborative Arrangements |
(c) Collaborative Arrangements
Joint Revenue Sharing Arrangements
In aThe Company provides IMAX Theater Systems to customers through joint revenue sharing arrangement,arrangements. Under the traditional form of these arrangements, in exchange for providing the IMAX Theater System under a long-term lease, the Company receivesearns rent based on a portionpercentage of a theater’sbox-office and concession revenues,contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a smallfixed upfront fee or initial payment, in exchangeannual minimum payments. Under certain other joint revenue sharing arrangements, knowns as hybrid arrangements, the customer is responsible for placing a theater system atmaking fixed upfront payments prior to the theater operator’s venue. delivery and installation of the IMAX Theater System. 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 typicallynon-cancellable for 10 years or longer with renewal provisions. Title to equipmentthe IMAX Theater System under a joint revenue sharing arrangementsarrangement 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 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 an extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the theater systems
IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered backIMAX Theater System is returned to the Company.
TheAs of December 31, 2020, the Company has signed traditional and hybrid joint revenue sharing agreements with 4743 exhibitors (2016(2019 — 48)39) for a total of 1,084 theater systems (20161,232 IMAX Theater Systems (2019 — 995)1,223), of which 747890 theaters (2016(2019 — 640)870) were operatingoperational and included in the network as at December 31, 2017.of that date. The terms of the Company’s joint revenue sharingthese arrangements are similar in nature, rights, and obligations. The accounting policy for the Company’s joint revenue sharing arrangements is disclosed in note 2(m)Note 3(n).
AmountsRevenues attributable to transactions arising between the Company and its customers under joint revenue sharing arrangements are included in Equipment and Productrecorded within Revenues – Technology Sales and Rentals revenue and forRevenues – Technology Rentals. For the year ended December 31, 2017 amounted to $80.62020 such revenues totals $19.9 million (2016(2019 — $91.4$92.0 million; 2015 —$99.12018 — $86.6 million). (See Note 20(a) for a disaggregated presentation of the Company’s revenues.)
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 digitalre-mastering and then recoup this cost fromreceives a percentage of thebox-office box office receipts offrom a third party who owns the copyright to a film in exchange for converting the film whichinto IMAX DMR format and distributing it through the IMAX network. In recent years, the percentage of gross box office receipts earned in recent yearsIMAX DMR arrangements has averaged approximately 12.5% outside of, except for within Greater China, andwhere the Company receives a lower percentage of net box office receipts for certain films within Greater China. The Company does not typically hold distribution rights or the copyright to theseHollywood films.
In 2017,2020, the majority of IMAX DMR revenue was earned from the exhibition of 6035 IMAX DMR films (2016(2019 — 51)72) and the re-release of classic titles throughout the IMAX theater network. The accounting policy for the Company’s IMAX DMR arrangements is disclosed in note 2(m)Note 3(n).
AmountsRevenues attributable to transactions arising between the Company and its customers under IMAX DMR arrangements are included in Services revenuesrecorded within Revenues – Image Enhancement and forMaintenance Services. For the year ended December 31, 2017 amounted to $108.92020 such revenues totaled $28.3 million (2016(2019 —$106.4120.8 million; 2015 —$107.12018 — $110.8 million). (See Note 20(a) for a disaggregated presentation of the Company’s revenues.)
Co-Produced Film Arrangements
In certain film arrangements, the Companyco-produces a film with a third party whereby the third party retains the copyright and rights to the film except thatfilm. In some cases, the Company obtains exclusive theatrical distribution rights to the film. Under these arrangements, both parties contribute funding to the Company’s wholly-owned companypartly-owned subsidiary for the production and distribution of the film or content and for associated exploitation costs. Clauses in the film arrangements generally provide for the third party to take over the production of the film if the cost of the production exceeds its approved budget or if it appears as though the film will not be delivered on a timely basis.
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As atof December 31, 2017,2020, the Company has two significant1 co-produced arrangements arrangement which primarily represents the VIE total assets balance of $7.5$1.5 million and liabilities balance of $7.2$0.2 million and three3 otherco-produced film arrangements, the terms of which are similar. The accounting policies relating toco-produced film arrangements are disclosed in notes 2(a)Notes 3(a) and 2(m)3(n).
In 2017, amounts totaling $1.22020, an expense of $2.0 million (2016(2019 — $1.4expense of $0.6 million; 20152018 — $1.5recovery of $0.5 million) attributable to transactions between the Company and other parties involved in the production of the films have been included in costCost and expenses applicableExpenses Applicable to revenues-services.Revenues – Image Enhancement and Maintenance Services.
In 2016, the Company entered into an arrangement toco-produce television episodic content. Funding was provided to the third party and the third party retains the copyright and rights to the content. The Company obtained exclusive theatrical distribution rights to the first two episodes and a percentage share to all television revenue.
As at December 31, 2017, the Company is participatingparticipated in one1 significantco-produced television arrangement. This arrangement iswas not a VIE.
For the year ended December 31, 2017,2020, revenues of $20.4$0.3 million (2019 — $0.4 million; 2018 — $0.3 million) and costsCosts and expenses applicableExpenses Applicable to revenuesRevenues of $33.4 million,$nil (2019 — less than $0.1 million; 2018 — $0.3 million) attributable to this collaborative arrangement have beenwere recorded inwithin Revenue – Image Enhancement and Maintenance Services and Costs and expenses applicableExpenses Applicable to revenuesRevenues – Services, respectively. Included therein are net revenues attributable to transactions between the CompanyImage Enhancement and other parties involved in the production of the episodic content of $20.1 million.
16. Receivable Provisions, Net of Recoveries
The following table reflects the Company’s receivable provisions net of recoveries recorded in the consolidated statements of operations:Maintenance Services.
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Accounts receivable provisions, net of recoveries | $ | 1,967 | $ | 1,029 | $ | 677 | ||||||
Financing receivable provisions, net of recoveries | 680 | (75 | ) | 75 | ||||||||
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Receivable provisions, net of recoveries | $ | 2,647 | $ | 954 | $ | 752 | ||||||
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17.19. Consolidated Statements of Cash Flows Supplemental Information
128 (d)
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