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IMAX Imax

Filed: 4 Mar 21, 5:01pm
0000921582 us-gaap:PropertyPlantAndEquipmentMember 2018-01-01 2018-12-31

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-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, 2020

 

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

 

Commission file Number 001-35066

 

IMAX Corporation

(Exact name of registrant as specified in its charter)

 

Canada

98-0140269

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

2525 Speakman Drive,

Mississauga, Ontario, Canada L5K 1B1

(905) 403-6500

902 Broadway, Floor 20

New York, New York, USA 10010

(212) 821-0100

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Shares, no par value

 

IMAX

 

          The New York Stock Exchange

 

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

None

(Title of class)

 

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

 

 

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

 

Indicate by check mark whether the registrant 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 in Rule 12b-2 of the Act).  Yes      No 

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, computed by reference to the last sale price of such shares as of the close of trading on June 30, 2020 was $549.8 million.

 

As of January 31, 2021, there were 58,948,829 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, 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 this Form 10-K to the extent described therein.

 

 

 


IMAX CORPORATION

 

December 31, 2020

 

Table of Contents

 

 

 

 

 

Page

PART I

Item 1.

 

Business

 

4

Item 1A.

 

Risk Factors

 

19

Item 1B.

 

Unresolved Staff Comments

 

31

Item 2.

 

Properties

 

31

Item 3.

 

Legal Proceedings

 

31

Item 4.

 

Mine Safety Disclosures

 

31

 

 

 

 

 

PART II

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

32

Item 6.

 

Selected Financial Data

 

35

Item 7.

 

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

 

36

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

69

Item 8.

 

Financial Statements and Supplementary Data

 

71

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

149

Item 9A.

 

Controls and Procedures

 

149

Item 9B.

 

Other Information

 

150

 

 

 

 

 

PART III

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

151

Item 11.

 

Executive Compensation

 

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.

 

Principal Accounting Fees and Services

 

151

 

 

 

 

 

PART IV

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

152

Item 16.

 

Form 10-K Summary

 

155

Signatures

 

 

 

156

 

 

 

 

 

 

 

 

2


IMAX CORPORATION

EXCHANGE RATE DATA

Unless otherwise indicated, all dollar amounts in this document are expressed in United States (“U.S.”) 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. Dollars per one Canadian Dollar and are the inverse of rates quoted by the Bank of Canada for Canadian Dollars 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, 2020 was U.S. $0.7854.

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Exchange rate at end of period

 

 

0.7854

 

 

 

0.7699

 

 

 

0.7330

 

 

 

0.7971

 

 

 

0.7448

 

Average exchange rate during period

 

 

0.7455

 

 

 

0.7536

 

 

 

0.7718

 

 

 

0.7712

 

 

 

0.7558

 

High exchange rate during period

 

 

0.7863

 

 

 

0.7699

 

 

 

0.8138

 

 

 

0.8245

 

 

 

0.7972

 

Low exchange rate during period

 

 

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" 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 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 the Company and expectations regarding its 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 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, including competitive actions by other companies; the failure to respond to change and advancements in entertainment technology; risks relating to consolidation among commercial exhibitors and movie studios; risks related to new business initiatives that may be presented to and pursued by the Company; risks related to cyber-security and data privacy; risks related to the Company’s inability to protect its 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 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 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 IMAX Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, DMR®, IMAX nXos® and Films To The Fullest® are trademarks and trade names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions.

3


PART I

Item 1.  Business

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

IMAX is one of the world’s leading entertainment technology companies, specializing in technological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and specialized equipment, IMAX offers a unique end-to-end cinematic solution to create the highest-quality, most immersive motion picture and other entertainment event experiences for which the IMAX® brand has become globally known. 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.

The Company leverages its innovative technology and engineering in all aspects of its core business, which principally consists of the digital remastering of films and other presentations into the IMAX format (“IMAX DMR”) and the sale or lease of premium IMAX theater systems (“IMAX Theater Systems”).

IMAX Theater Systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s 53-year history. The Company’s customers 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 network, but sells or leases the IMAX 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 table 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 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.

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

As a result of the engineering and scientific achievements that are a hallmark of The IMAX Experience®, the Company’s exhibitor customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX 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 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 network is one of the most extensive premium networks in the world with 1,650 IMAX Theater Systems operating in 84 countries and territories, including 1,562 commercial multiplex, 12 commercial destination and 76 institutional locations as of December 31, 2020. (See the table 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 network.)

7


The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,562 commercial multiplex IMAX theaters operating as of December 31, 2020. The Company believes that the majority of its future growth will come from international markets. As of December 31, 2020, 72.8% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), an increase from 71.9% as of December 31, 2019, and approximately 86.0% of the new IMAX Theater Systems in backlog are scheduled to be installed in international markets, compared to 85.7% as of December 31, 2019. Revenues and gross box office derived from international 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.)

Greater China is the Company’s largest market, measured by revenues, with approximately 38% and 31% of overall revenues generated from its Greater China operations in the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company had 745 theaters operating in Greater China and an additional 238 new theaters (plus 13 upgrades) in backlog that are scheduled to be installed in Greater China by 2028. The Company’s backlog in Greater China represents 47.6% of its total current backlog, including upgrades. The Company’s largest single international partnership is in China with Wanda Film (“Wanda”). Wanda’s total commitment to the Company is for 361 IMAX Theater Systems in Greater China (of which 347 IMAX Theater Systems are under the parties’ joint revenue sharing arrangement). (See “Risk Factors – The Company faces risks in connection with its significant presence in China and the continued expansion of its business 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 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.)

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, and it is also a significant 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 network.

 

 

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 segment information is provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 21 of Notes to the Consolidated Financial Statements in Part II, Item 8.

IMAX DMR

The Company has developed IMAX DMR, a proprietary technology that digitally remasters Hollywood films into IMAX 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 which The IMAX Experience is known. In addition, the original soundtrack of a film to be exhibited in IMAX theaters is remastered for IMAX digital sound systems in connection with the IMAX DMR release of the film. Unlike the soundtracks played in conventional theaters, IMAX 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.

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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 movie studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting films with IMAX cameras to increase the audience’s immersion in the film and taking advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a movie screen. Avengers: Endgame, the highest-grossing film in history, released in April 2019, was shot entirely using IMAX cameras. 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, Bona Film’s The Rescue, which was released in China in December 2020, has an expanded aspect ratio that is exclusive to IMAX.

The Company remains in active negotiations with all 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 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.

IMAX Theater Systems

The Company’s primary products are its 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. As part of the arrangement to sell or lease its IMAX Theater Systems, the Company provides extensive advice on theater planning and design, and supervision of installation services.

The Company’s digital projection systems provides a premium and differentiated experience to moviegoers that is consistent with what they have come to expect from the IMAX brand, while providing exhibitor 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 IMAX Theater System, as well as the cinema and film distribution markets relevant to the geographic location of the customer.

Revenue from sale or lease of IMAX Theater Systems may be recognized at a different time from when cash is collected from the exhibitor customer. (See “Critical Accounting 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.)


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The following table provides information about the Company’s backlog as of December 31, 2020 and 2019:

 

 

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 IMAX Theater Systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new arrangements signed from year-to-year, which adds to backlog, and the installation and acceptance of IMAX Theater Systems and the settlement of contracts, both of which reduce backlog. Backlog typically represents the fixed contracted revenue under signed IMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated system, as well as an estimate of variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues. The value of backlog does not include revenue from theaters in which the Company has an equity interest, operating leases and long-term conditional theater commitments. Theaters under joint revenue sharing arrangements do not usually have dollar value backlog, although certain IMAX 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 IMAX Theater System installations that are listed in 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 an 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.


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The following table presents the number of IMAX Theater Systems that are open and in backlog, by configuration, as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

 

December 31, 2019

 

 

 

 

Theater

 

 

 

 

 

 

 

 

 

 

 

Theater

 

 

 

 

 

 

 

 

 

 

 

 

Network

 

 

New

 

 

Upgrade

 

 

 

Network

 

 

New

 

 

Upgrade

 

 

 

 

Base

 

 

Backlog

 

 

Backlog

 

 

 

Base

 

 

Backlog

 

 

Backlog

 

 

Flat Screen (2D)

 

 

4

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

Dome Screen (2D)

 

 

28

 

 

 

 

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

IMAX 3D Dome (3D)

 

 

1

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

IMAX 3D GT (3D)

 

 

9

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

IMAX 3D SR (3D)

 

 

5

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

IMAX Digital: Xenon (3D)

 

 

1,377

 

 

 

273

 

 

 

 

 

 

 

1,374

 

 

 

281

 

 

 

 

 

IMAX Digital: GT Laser (3D)

 

 

66

 

 

 

9

 

 

 

2

 

 

 

 

63

 

 

 

9

 

 

 

5

 

 

IMAX Digital: IMAX with Laser (3D)

 

 

160

 

 

 

148

 

 

 

95

 

 

 

 

130

 

 

 

144

 

 

 

92

 

 

Total

 

 

1,650

 

 

 

430

 

 

 

97

 

 

 

 

1,624

 

 

 

434

 

 

 

97

 

 

IMAX Flat Screen and IMAX Dome Theater Systems  

IMAX flat screen and IMAX dome systems 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 of December 31, 2020, there were 33 IMAX flat screen and IMAX dome theater systems in the IMAX network, as compared to 40 IMAX flat screen and IMAX dome theater systems as of December 31, 2019.  With the introduction of digital IMAX Theater Systems, there has been a decrease in the number of IMAX flat screen and IMAX dome theaters in the network. With the introduction of laser-based digital systems, the Company has been able to create a new Laser Dome solution for its institutional customers. As of December 31, 2020, the Company had installed six IMAX with Laser Domes, which are included in the table above.

IMAX 3D GT and IMAX 3D SR Theater Systems  

IMAX 3D theaters utilize a flat screen 3D system, which produces realistic 3D images on an IMAX screen. As of December 31, 2020, there were 14 IMAX 3D GT and IMAX 3D SR Theater Systems in operation compared to 17 IMAX 3D GT and IMAX 3D SR Theater Systems in operation as of December 31, 2019. The decrease in the number of 3D GT and 3D SR Theater Systems is largely attributable to theater closures during the year.

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 December 31, 2020, the Company had 1,377 xenon-based digital theater systems in the network and had an additional 273 xenon-based digital theater 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.)

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

The Company continues to believe that the IMAX network serves as a valuable platform to launch and distribute original content, especially during periods between peak and off-peak seasons, known as "shoulder periods".

Other

Through the Film Distribution segment, the Company licenses film content and distributes large-format documentary films, primarily for its institutional theater partners. 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 typically is entitled to receive an additional percentage of gross revenues as participation revenues. The Company released the IMAX original production, Asteroid Hunters, in October 2020.

The ownership rights to such films may be held by the film sponsors, the film investors and/or the Company. As of December 31, 2020, the Company has distribution rights with respect to 52 such films, which cover subjects such as space, wildlife, music, sports, history and natural wonders.

Through the Film Post-Production segment, the Company provides film post-production and quality control services for large-format films (whether produced by IMAX or third parties), and digital post-production services.

The Company derives a small portion of its revenues from other sources including: one owned and operated IMAX theater in Sacramento, California; a commercial arrangement with one theater resulting in the sharing of profits and losses; the provision of management services to three other theaters; renting its proprietary 2D and 3D large-format film and digital cameras to third-party production companies; and also offering production advice and technical assistance to both documentary and Hollywood filmmakers.

12


MARKETING AND CUSTOMERS

The Company markets IMAX 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.

Commercial multiplex theaters are the largest part of the IMAX network, comprising 1,562 IMAX theaters, or 94.7%, of the 1,650 IMAX theaters in the IMAX network as of December 31, 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 IMAX Theater Systems to commercial destinations such as theme parks, private home theaters, tourist destination sites, fairs and expositions. As of December 31, 2020, approximately 72.8% of all open IMAX theaters were in locations outside of the United States and Canada.

The following table provides detailed information about the IMAX network by type and geographic location as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

United States

 

 

367

 

 

 

4

 

 

 

30

 

 

 

401

 

 

 

371

 

 

 

4

 

 

 

33

 

 

 

408

 

Canada

 

 

39

 

 

 

1

 

 

 

7

 

 

 

47

 

 

 

39

 

 

 

2

 

 

 

7

 

 

 

48

 

Greater China(1)

 

 

729

 

 

 

 

 

 

16

 

 

 

745

 

 

 

702

 

 

 

 

 

 

15

 

 

 

717

 

Western Europe

 

 

115

 

 

 

4

 

 

 

8

 

 

 

127

 

 

 

115

 

 

 

4

 

 

 

10

 

 

 

129

 

Asia (excluding Greater China)

 

 

123

 

 

 

2

 

 

 

2

 

 

 

127

 

 

 

119

 

 

 

2

 

 

 

2

 

 

 

123

 

Russia & the CIS

 

 

68

 

 

 

 

 

 

 

 

 

68

 

 

 

68

 

 

 

 

 

 

 

 

 

68

 

Latin America(2)

 

 

51

 

 

 

1

 

 

 

11

 

 

 

63

 

 

 

50

 

 

 

1

 

 

 

12

 

 

 

63

 

Rest of the World

 

 

70

 

 

 

 

 

 

2

 

 

 

72

 

 

 

65

 

 

 

1

 

 

 

2

 

 

 

68

 

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.

(For information on revenue breakdown by geographic area, see Note 21 of Notes to Consolidated Financial Statements in Part II, Item 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 there” in Item 1A. The Company’s largest customer, Wanda, as of December 31, 2020, represents 35.1% (2019 ― 33.9%) of the Company’s network of theaters, 19.0% (2019 ― 25.6%) of the Company’s theater system backlog and 16.4% (2019 ― 16.5%) of its revenues.)

INDUSTRY OVERVIEW

Competition

The out-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 similar quality or attributes to an IMAX Theater System. The Company believes that all of these alternative formats deliver images and experiences that are inferior to The IMAX Experience.  

13


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 faces in-home competition from a number of alternative motion picture distribution channels such as subscription streaming services, transactional video-on-demand (both rentals and sales), 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, the return on investment of an IMAX 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 number of whom desire to film their movies with IMAX cameras) the quality of the sound system components included with an IMAX 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, with 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. In recent years, the industry has continued to consolidate, as evidenced by Cineworld Group’s 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 IMAX 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. As larger commercial chains such as AMC have purchased smaller chains, those smaller chains have in turn become part of the IMAX network. For instance, following AMC’s acquisition of Odeon and Nordic, the Company and AMC entered into an agreement for 25 new IMAX Theater Systems across the Odeon and Nordic network. 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, as well as consolidation in the movie studio industry, may present risks to the Company. (See “Risk 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 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.

14


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 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 for The IMAX Experience 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. 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. This 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. In 2018, the Company rolled-out IMAX with Laser, the Company’s next generation laser-based projection system, which is targeted primarily for screens in commercial multiplexes. With most of the laser development completed, the related research and development spending has declined in recent years.

The Company plans to continue research and development activity in the future in other areas considered important to its continued commercial success, including further improving the reliability of and costs associated with its projectors; enhancing its image quality; expanding the applicability of its digital technology in both theater and home entertainment; developing IMAX Theater Systems’ capabilities, including through its Connected Theaters initiative; and improving its proprietary DMR process. The Company expects its research and development efforts to center around innovation projects and DMR enhancements in 2021.

As of December 31, 2020, 45 of the Company’s employees were connected with research and development projects, compared to 52 employees as of December 31, 2019.

MANUFACTURING AND SERVICE

Projector Component Manufacturing

The Company assembles the projector of IMAX Theater Systems at its facility 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 and sub-assemblies is subcontracted to a group of carefully pre-qualified third-party suppliers. Manufacture and supply contracts are signed for the delivery of the component on an order-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 and sub-assemblies, completes the final assembly and then subjects the projector to comprehensive testing individually and as a system prior to shipment. 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%.

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 and sub-assemblies, completes the final assembly and then subjects the sound system to comprehensive testing as a 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. 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 IMAX Theater Systems.

To support the IMAX network, the Company has personnel stationed in major markets throughout the world who provide periodic and emergency maintenance and extended warranty services on existing IMAX Theater Systems. The Company provides various levels of maintenance and warranty services, which are priced accordingly. Under full-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 provides pre-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 monoscope (2D) source, a process for digitally re-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 and laser projection technology. The Company has 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 of December 31, 2020, the Company holds 110 patents, has 15 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 2021 and 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 In IMAX®, The IMAX Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, DMR®, IMAX nXos® and Films To The Fullest®. These trademarks are widely protected by registration or common law throughout the world.

HUMAN CAPITAL

The Company is 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, 2020, the Company had 622 full-time employees, of whom 142 employees were based outside of North America.

Total Rewards

The Company continues to have 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.

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As the Company continues to evolve as an organization, it continues to modernize its total rewards programs to deliver and drive a better employee experience 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 employees are present in day-to-day office work, building renovation, manufacturing, logistics, training, testing, research and development, and during the designing, installation and service of the Company’s theaters around the world. Every employee at each IMAX location, workplace, business unit and department is responsible for participating in workplace safety planning activities and managers are responsible for employee health and safety program implementation for their business function. This effort is supported by a cross-functional Heath and Safety team dedicated to employee health and safety and business continuity.


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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 on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 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”). 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 at 212-821-0100. No information included on the Company's website shall be deemed included or otherwise incorporated into this Form 10-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 which could have a material adverse effect on the Company’s business, results of operations, financial condition and 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 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 that the Company deems immaterial or that are currently unknown to the Company may also impair its business or operations.

RISKS RELATED TO THE COMPANY’S BUSINESS AND OPERATIONS

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 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. 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 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.

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 due to a decline in the box office related revenues from its 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 risks associated with payments under existing agreements with the Company. The ability of such partners to make payments cannot be guaranteed and is subject to changing economic circumstances. Such theater closures and other challenges in the theatrical industry may force some of the Company’s exhibitor partners into bankruptcy proceedings.  In such cases, local laws governing restructurings would apply, and there can be no guarantees of the Company’s success in obtaining 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 may be adversely affected.

Given the dynamic nature of the circumstances, while the Company has been negatively impacted as of the 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 results of operations in future reporting periods. The extent and duration of such impact on the Company 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 exhibitor 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 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. 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 COVID-19 pandemic and public health measures implemented to contain it may also have the effect of heightening many of the other risks described in this Form 10-K, including, but not limited to, risks relating to harm to our key personnel, diverting management’s resources and time to addressing the impacts of COVID-19, which may negatively affect the Company’s ability to implement its business plan and pursue certain opportunities, potential impairments, the effectiveness of our internal control of financial reporting, cybersecurity and data privacy risks due to employees working from home, and risks of increased indebtedness due to the full draw down of the Credit 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 associated protective measures persist, the more severe the extent of the adverse impact of the pandemic on the Company is likely to be.

General political, social and economic conditions can affect the Company’s business by reducing both revenues 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, 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 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 network is the availability and strategic selection of films for IMAX theaters and the 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-party filmmakers and studios, including both Hollywood and local language features converted into the Company’s large format using IMAX DMR technology. In 2020, 31 IMAX DMR films were released by studios to the worldwide IMAX network. There is no guarantee that filmmakers and studios will continue to release films to the IMAX network, or that the films selected for release to the IMAX network will be commercially successful. The Company is directly impacted by the commercial success and box office results of the films released to the IMAX network through its joint revenue sharing arrangements, as well as through the percentage of the 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. 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 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, 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, to supply 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 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.

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 adversely affect its ability to effectively pursue its business strategy.

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 original content and in-home entertainment technology, both of which are intensely 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 a 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.

25


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 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 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 projection system components expire between 2021 and 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’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 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 past, and are likely to affect its operating results and cash flow in the future, include, among other 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.

Most of the Company’s operating 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 lease-type agreements for IMAX Theater Systems typically provide for three major sources of cash 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 sales-type leases, the revenue recorded is generally equal to the sum of initial fees and 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 deferred revenue.

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 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 with which it has signed contracts may not accept delivery of IMAX Theater Systems that are included in the Company’s backlog. An economic downturn may exacerbate the risk of customers not accepting delivery of IMAX Theater Systems, especially in places such as Greater China that represent a large portion of the Company’s backlog. Any reduction in backlog 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 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 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 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.

29


The Company may be subject to further impairment losses on its film 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 a title-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 may be subject to impairment losses on its 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 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 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 “Critical Accounting Policies and Estimates” in Item 7.)

RISKS RELATED TO THE COMPANY’S COMMON STOCK

The Company’s stock price has historically been volatile and declines in market price, including as a result of 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.

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 obtain or enforce against them or the Company judgments of United States courts predicated solely upon 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.

30


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 Note 14 of Notes to Consolidated Financial Statements in Part II, Item 8).

The Company believes that its existing facilities and equipment are in good operating condition and are suitable for the conduct of its business.

See Note 16 of Notes to Consolidated Financial Statements in Part II, Item 8.

Item 4.  Mine Safety Disclosures

Not applicable.

31


PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The Company’s common shares are traded on the NYSE under the symbol “IMAX”.

As of January 31, 2021, the Company had approximately 223 registered holders of record of its 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 14 of Notes to Consolidated Financial Statements in Part II, Item 8 and “Liquidity and Capital Resources” in Part II, Item 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 of December 31, 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))

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by security holders

 

 

6,819,644

 

 

$

 

19.23

 

 

 

7,436,333

 

Equity compensation plans not approved by security

   holders

 

nil

 

 

 

nil

 

 

nil

 

Total

 

 

6,819,644

 

 

$

 

19.23

 

 

 

7,436,333

 

 

32


Performance Graph

The following graph compares the total cumulative shareholder return for $100 invested on December 31, 2013 (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., and Zynga Inc.

 

Issuer Purchases of Equity Securities

In 2017, the Company’s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common stock 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. During 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.

 

33


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 repurchase 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 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 purchased during the year ended December 31, 2020, under both the Company and IMAX China’s repurchase plans, does not include any shares purchased 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, 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 address 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 to non-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 a non-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 of non-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 the Income 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.

34


This summary is based on the current provisions of the Income 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.

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 the Canada - U.S. Income Tax Convention (1980), as amended (the “Canada - U.S. Income Tax Treaty”), the withholding tax rate is 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 the Income 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 the Income Tax Act (Canada), the common shares may be deemed to be taxable Canadian property. Under the 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

Reserved.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW  

IMAX is one of the world’s leading entertainment technology companies, specializing in technological innovations powering the presentation of some of today’s most immersive entertainment experiences. Through its proprietary software, theater architecture, patented intellectual property and specialized equipment, IMAX offers a unique end-to-end cinematic solution to create the highest quality, most immersive motion picture 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.

The Company leverages its innovative technology and engineering in all aspects of its core business, which principally consists of the digital remastering of films and other presentations into the IMAX format (“IMAX DMR”) and the sale or lease of premium IMAX theater systems (“IMAX Theater Systems”).

IMAX Theater Systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s 53-year history. The Company’s customers 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 network, but sells or leases the IMAX 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 table below under “IMAX Network and Backlog” for additional information on the composition of the IMAX 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 the on-screen action, creating a more intense, immersive and exciting experience than a traditional theater.

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As a result of the engineering and scientific achievements that are a hallmark of The IMAX Experience®, the Company’s exhibitor customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX 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 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 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.

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.  

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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

For the purposes of MD&A the Company has organized its reportable segments 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 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 IMAX Technology Network category earns revenue based on contingent box office receipts and includes the IMAX DMR segment and contingent rent from the Joint Revenue Sharing Arrangement (“JRSA”) segment, as described in more detail below.

IMAX DMR

The Company has developed IMAX DMR, a proprietary technology that digitally remasters Hollywood films into IMAX formats. 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 and distributing it through the IMAX network. In recent years, the percentage of gross box office receipts earned in IMAX DMR arrangements has averaged approximately 12.5%, except for within Greater China, where the Company receives a lower percentage of net box office receipts for certain Hollywood films.

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IMAX DMR digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. In addition, the original soundtrack of a film to be exhibited in IMAX theaters is remastered for IMAX digital sound systems in connection with the IMAX DMR release of the film. Unlike the soundtracks played in conventional theaters, IMAX 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.

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 movie studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting films with IMAX cameras to increase the audience’s immersion in the film and taking advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a movie screen. Avengers: Endgame, the highest-grossing film in history, released in April 2019, was shot entirely using IMAX cameras. 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, Bona Film’s The Rescue, which was released in China in December 2020, has an expanded aspect ratio that is exclusive to IMAX.

The Company believes that growth in international box office remains an important driver of growth for the Company. To support continued growth in international markets, the Company has sought to bolster its international film strategy, supplementing the Company’s film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets, particularly in China. During 2019, 18 local language IMAX DMR films were released to the IMAX network, including 14 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 South Korea. The Company expects to announce additional local language IMAX DMR films to be released to the IMAX network in 2021.

The Company remains in active negotiations with all 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 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 JRSA segment provides IMAX Theater Systems to exhibitors through joint revenue sharing arrangements. Under the traditional form of these arrangements, IMAX provides the IMAX projection and sound system under a long-term lease in which the Company assumes the majority of the equipment 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 fee or annual minimum payments. Rental payments from the customer are required throughout the term of the arrangement and are due either monthly or quarterly. The Company retains title to the IMAX Theater System equipment components throughout the lease term, and the equipment is returned to the Company at the conclusion of the arrangement.  

Under certain other joint revenue sharing arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX Theater System in an amount that is typically half of what the Company would receive from a typical sale transaction. As with a traditional joint revenue sharing arrangement, the customer also pays the Company a percentage of contingent box office receipts over the term of the arrangement, although this percentage is typically half that of a traditional joint revenue sharing arrangement. For hybrid joint revenue sharing arrangements that take the form of a lease, the contingent rent is reported within the IMAX Technology Network, while the fixed upfront payment is recorded as revenue within IMAX Technology Sales and Maintenance, as discussed below. For hybrid joint revenue sharing arrangements that take the form of a sale, see the discussion below under IMAX Technology Sales and Maintenance.  

Under most joint revenue sharing arrangements (both traditional and hybrid), the initial non-cancellable term 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 for non-payment or other defaults by the customer. The contracts are non-cancellable by the customer unless the Company fails to perform its obligations.

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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 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 of December 31, 2020, the Company had 890 theaters in operation under joint revenue sharing arrangements, a 2.3% increase as compared to the 870 theaters in operation under joint revenue sharing arrangements as of December 31, 2019. The Company also had contracts in backlog for 342 theaters under joint revenue sharing arrangements as of December 31, 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 principally from the sale 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. These activities are described in more detail below under each of their respective segments.

IMAX Systems

The IMAX Systems segment provides IMAX Theater Systems to exhibitors through sale arrangements or 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 initial fees and ongoing consideration (which can include fixed annual minimum payments and contingent fees in excess of the minimum payments), as well as maintenance and extended warranty 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 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. Finance income is recognized over the term of a financed sale or sales-type lease arrangement. 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 period when the sale is recognized and is adjusted in future periods based on actual results and changes in estimates. Such variable consideration is only recognized on sales transactions to the extent the Company believes there is not a risk of significant revenue reversal.

In sale arrangements, title to the IMAX Theater System equipment generally transfers to the customer. However, in certain instances, the Company retains title or a security interest in the equipment until the customer has made all payments required by the agreement or until certain shipment events for the equipment have occurred. In a sales-type lease arrangement, title to the IMAX Theater System equipment remains with the Company. The Company has the right to remove the equipment for non-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-quarter and year-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 IMAX Theater Systems, the nature of the arrangement and other factors specific to individual contracts.

Joint Revenue Sharing Arrangements – Fixed Fees

Under certain joint revenue sharing arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX Theater System in an amount that is typically half of what the Company would receive from a typical sale transaction. For 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 payment is reported within IMAX Technology Sales and Maintenance.

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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 Business

The Other Theater Business segment principally includes after-market sales of IMAX projection system parts and 3D glasses.

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, 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 way.

Connected Theaters

 

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

The Company continues to believe that the IMAX network serves as a valuable platform to launch and distribute original content, especially during periods between peak and off-peak seasons, known as "shoulder periods".

Film Distribution and Post-Production

Through the Film Distribution segment, the Company licenses film content and distributes large-format films, primarily for its institutional theater partners. 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 typically is entitled to receive an additional percentage of gross revenues as participation revenues. The Company released the IMAX original production, Asteroid Hunters, in October 2020.

The Film Post-Production segment provides film post-production and quality control services for large-format films (whether produced by IMAX or third parties), and digital post-production services.

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IMAX NETWORK AND BACKLOG

IMAX Network

The following table provides detailed information about the IMAX network by type and geographic location as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

 

Commercial

Multiplex

 

 

Commercial

Destination

 

 

Institutional

 

 

Total

 

United States

 

 

367

 

 

 

4

 

 

 

30

 

 

 

401

 

 

 

371

 

 

 

4

 

 

 

33

 

 

 

408

 

Canada

 

 

39

 

 

 

1

 

 

 

7

 

 

 

47

 

 

 

39

 

 

 

2

 

 

 

7

 

 

 

48

 

Greater China(1)

 

 

729

 

 

 

 

 

 

16

 

 

 

745

 

 

 

702

 

 

 

 

 

 

15

 

 

 

717

 

Western Europe

 

 

115

 

 

 

4

 

 

 

8

 

 

 

127

 

 

 

115

 

 

 

4

 

 

 

10

 

 

 

129

 

Asia (excluding Greater China)

 

 

123

 

 

 

2

 

 

 

2

 

 

 

127

 

 

 

119

 

 

 

2

 

 

 

2

 

 

 

123

 

Russia & the CIS

 

 

68

 

 

 

 

 

 

 

 

 

68

 

 

 

68

 

 

 

 

 

 

 

 

 

68

 

Latin America(2)

 

 

51

 

 

 

1

 

 

 

11

 

 

 

63

 

 

 

50

 

 

 

1

 

 

 

12

 

 

 

63

 

Rest of the World

 

 

70

 

 

 

 

 

 

2

 

 

 

72

 

 

 

65

 

 

 

1

 

 

 

2

 

 

 

68

 

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 network could grow to approximately 3,318 IMAX theaters worldwide from the 1,562 operating as of December 31, 2020. The Company believes that the majority of its future growth will come from international markets. As of December 31, 2020, 72.8% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), an increase from 71.9% as of December 31, 2019. Revenues and gross box office derived from international 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 Factors – The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects” in Part I, Item 1A.

Greater China is the Company’s largest market, measured by revenues, with approximately 38% and 31% of overall revenues generated from its China operations in the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company had 745 theaters operating in Greater China with an additional 251 theaters in backlog that are scheduled to be installed by 2028. The Company’s backlog in Greater China represents 47.6% of its total current backlog, including upgrades. The Company’s largest single international partnership is in China with Wanda Film (“Wanda”). Wanda’s total commitment to the Company is for 361 IMAX Theater Systems in Greater China (of which 347 IMAX Theater Systems are under the parties’ joint revenue sharing arrangement).

(See “Risk Factors – The 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 Part I, Item 1A.)

(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.)

43


The following tables provide detailed information about the Commercial Multiplex theaters in operation within the IMAX network by arrangement type and geographic location as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

 

Commercial Multiplex Theaters in IMAX Network

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Sale / Sales-

type Lease

 

 

Total

 

Domestic Total (United States & Canada)

 

 

276

 

 

 

5

 

 

 

125

 

 

 

406

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

376

 

 

 

106

 

 

 

247

 

 

 

729

 

Asia (excluding Greater China)

 

 

33

 

 

 

2

 

 

 

88

 

 

 

123

 

Western Europe

 

 

48

 

 

 

27

 

 

 

40

 

 

 

115

 

Russia & the CIS

 

 

 

 

 

 

 

 

68

 

 

 

68

 

Latin America

 

 

1

 

 

 

 

 

 

50

 

 

 

51

 

Rest of the World

 

 

16

 

 

 

 

 

 

54

 

 

 

70

 

International Total

 

 

474

 

 

 

135

 

 

 

547

 

 

 

1,156

 

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 of December 31, 2020, 276 (2019 ― 277) of the 750 (2019 ― 731) theaters under traditional joint revenue sharing arrangements in operation, or 36.8% (2019 ― 37.9%) were located in the United States or Canada, with the remaining 474 (2019 ― 454) or 63.2% (2019 ― 62.1%) of theaters under traditional joint revenue sharing arrangements located in international markets.


44


Backlog

The following table provides detailed information about the Company’s backlog as of December 31, 2020 and 2019:

 

 

 

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 IMAX Theater Systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new arrangements signed from year-to-year, which adds to backlog and the installation and acceptance of IMAX Theater Systems and the settlement of contracts, both of which reduce backlog. Backlog typically represents the fixed contracted revenue under signed IMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated system, as well as an estimate of variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues. The value of backlog does not include revenue from theaters in which the Company has an equity interest, operating leases and long-term conditional theater commitments. Theaters under joint revenue sharing arrangements do not usually have dollar value backlog, although certain IMAX 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 IMAX Theater System installations that are listed in 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 an 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 tables provide detailed information about the Company’s backlog by arrangement type and geographic location as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

 

 

IMAX Theater System Backlog

 

 

 

 

Traditional

JRSA

 

 

Hybrid

JRSA

 

 

Sale / Lease

 

 

Total

 

 

Domestic Total (United States & Canada)

 

 

122

 

 

 

3

 

 

 

8

 

 

 

133

 

 

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

 

50

 

 

 

114

 

 

 

87

 

 

 

251

 

 

Asia (excluding Greater China)

 

 

5

 

 

 

15

 

 

 

30

 

 

 

50

 

 

Western Europe

 

 

12

 

 

 

13

 

 

 

5

 

 

 

30

 

 

Russia & the CIS

 

 

 

 

 

1

 

 

 

15

 

 

 

16

 

 

Latin America

 

 

3

 

 

 

 

 

 

7

 

 

 

10

 

 

Rest of the World

 

 

3

 

 

 

1

 

 

 

33

 

 

 

37

 

 

International Total

 

 

73

 

 

 

144

 

 

 

177

 

 

 

394

 

 

Worldwide Total

 

 

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 74.8% of IMAX Theater System arrangements in backlog as of December 31, 2020 are scheduled to be installed in international markets (2019 ― 73.6%).

(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.)

46


Signings and Installations

The following tables provide detailed information about IMAX Theater System signings and 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.)

 


47


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in 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 the date of the 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 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 described in Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8.  

Revenue Recognition

The application of U.S. GAAP related to the measurement and recognition of revenue requires management to make judgments and estimates. In addition, revenue contracts with nonstandard terms and conditions may require significant interpretation to determine the appropriate accounting.

On January 1, 2018, the Company adopted 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 were 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 Company’s exhibitor partners, film distribution arrangements with remaining terms, and aftermarket sales orders that have been received but for which control of the product has not yet transferred to the customer are all also considered open contracts.

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 the exception of those where title of the IMAX Theater System transfers to the customer, known as hybrid sales, are not in scope of 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 each of the performance obligations in an IMAX Theater System arrangement to determine which are considered distinct, either individually or in a group, for accounting purposes and which of the deliverables represent separate units of accounting based on the applicable accounting guidance in ASC Topic 606, “Revenue from Contracts with Customers,” ASC Topic 842, “Leases,” and ASC Topic 460, “Guarantees”.

The Company’s “System Obligation” consists of the following: (i) an IMAX Theater System, which includes the projector, sound system, screen system and, if applicable, a 3D glasses cleaning machine; (ii) services associated with the IMAX Theater System, including theater design support, the supervision of installation services, and projectionist training; and (iii) a license to use the IMAX brand to market the theater. The System Obligation, as a group, is a distinct 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, 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 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.

48


The transaction price in an IMAX Theater System arrangement 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.

The 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 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. 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.

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 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.

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.

49


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 Company 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 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. (See Note 5 of Notes to Consolidated Financial Statements in Part II, Item 8.)

The ability of the Company to collect its accounts receivable, financing receivable and 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 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.

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 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 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. Management’s judgments with respect to the collectibility 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.  

50


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 disruption in their normal business operations during the pandemic. Accordingly, for the year ended December 31, 2020, the Company increased its provision for current expected credit losses by $18.6 million, reflecting a reduction in the credit 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 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.

(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic”. See Note 5 of Notes to Consolidated Financial Statements in Part II, Item 8.)

Inventories

The Company records write-downs for excess and obsolete inventory based upon management’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, growth prospects within the customers’ ultimate marketplace and anticipated market acceptance of the Company’s current and pending theater systems.

Asset Impairments

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired in a business combination. Goodwill is not 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 which the reporting unit's carrying value, including goodwill, exceeds 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.

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 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.

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 eventual 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 expectation that it is more likely than not that the long-lived asset will be sold significantly before the end of its useful life, a significant 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 being used.

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In the fourth quarter of 2020, the Company 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.

Film Assets

The recoverability of the Company’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 resulting from the exploitation of a film indicate that the carrying value of the film asset is not recoverable, the film asset is written down to its fair value.

For the year ended December 31, 2020, the Company recorded $10.8 million in impairment losses 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 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.

Share-Based Compensation

The Company issues share-based compensation to eligible employees, directors, and consultants under the IMAX Corporate 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 below. On June 3, 2020, the Company’s shareholders approved the IMAX LTIP at the Company’s Annual and Special Meeting. The IMAX LTIP is the Company’s governing document and awards to employees, directors, and consultants under this plan may consist of stock options, 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 measures 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 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 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.

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 the Company’s stock options.)

Restricted Share Units

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.

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.

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.

Deferred Income Tax Assets

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 Company’s Consolidated Statements of Operations 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.

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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.

Uncertain Tax Positions

The Company is subject to ongoing 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 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 result in the Company owing additional taxes above what was originally recognized in its financial statements.

Tax reserves for uncertain tax positions are adjusted by the Company to reflect management’s 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. Some of these adjustments require significant judgment in estimating the timing and amount of the additional tax 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 their impact on the Company’s financial statements.

 


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RESULTS OF OPERATIONS

The Company’s business and future prospects are evaluated by Richard L. Gelfond, its Chief Executive Officer (“CEO”), using a variety of factors and financial and operational metrics including: (i) the signing, installation and financial performance of theater system arrangements, particularly joint revenue sharing arrangements and those involving laser-based projection systems; (ii) film performance and the securing of new film projects, particularly IMAX DMR films; (iii) the continuing ability to invest in and improve the Company’s technology to enhance the differentiation of The IMAX Experience versus other cinematic experiences; (iv) revenues and 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 is the Company’s Chief Operating Decision Maker (“CODM”), as such term is defined under U.S. GAAP. The CODM, along with other members of management, assess segment performance based on segment revenues and gross margins. Selling, general and administrative expenses, research and development costs, the amortization of intangible assets, provisions for (recoveries of) current expected credit losses, certain write-downs, interest income, interest expense and income tax (expense) benefit are not allocated to the Company’s segments.

The Company’s reportable segments are 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 under “Sources of Revenue.” This categorization is consistent with how the CODM reviews the financial performance of the Company and makes strategic decisions regarding resource allocation and investments to meet long-term business goals. Management believes that a discussion and analysis based on the four categories listed above is significantly more relevant and useful to readers, as the Company’s Consolidated Statements of Operations captions combine results from several segments.

The discussion of the Company’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.


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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 common 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 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 presents the Company’s revenue and gross margin (margin loss) by 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

 

 

(1)

Includes initial upfront payments and the present value of fixed minimum payments from sale and sales-type lease arrangements of IMAX Theater Systems, and the present value of estimated variable consideration from sales of IMAX Theater Systems. To a lesser extent, also includes finance income associated with these revenue streams.

(2)

Principally includes after-market sales of IMAX projection system parts and 3D glasses.

 

*

See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount.

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Revenues and Gross Margin

Due to the COVID-19 global pandemic, substantially all of the theaters in the IMAX network were closed for a significant portion of 2020. In the third 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, 2020, 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.

As a result of the factors discussed in the previous paragraph, the Company’s consolidated results of operations and segment results for the year ended December 31, 2020 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 COVID-19 Pandemic” above for a more detailed discussion of the impacts of the pandemic on the Company’s business.)

IMAX Technology Network

IMAX Technology Network results are influenced by the level of commercial success and box office performance of the films released to the network, as well as other factors including the timing of the films released, the length of the theatrical distribution window, the take rates under the Company’s DMR and joint revenue sharing arrangements and the level of marketing spend associated with the films released in the year. Other factors impacting IMAX Technology Network results include fluctuations in the value of foreign currencies versus the U.S. Dollar.

For the year ended December 31, 2020, IMAX Technology Network revenues and gross margin decreased by $151.3 million (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, 2020, IMAX DMR revenues and gross margin decreased by $92.5 million (77%) and $64.9 million (83%), respectively, when compared to the prior year. These decreases are due to a $849.3 million (77%) reduction in GBO generated by IMAX DMR films, from $1,108.5 million to $259.2 million, due to the COVID-19 pandemic. For the year ended December 31, 2020, 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 year to year, particularly with respect to marketing expenses. For the year ended December 31, 2020, 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 during the current year, from $560.3 million to $131.0 million, due to the COVID-19 pandemic. As of December 31, 2020, 890 theaters were operating under joint revenue sharing arrangements, as compared to 870 theaters as of December 31, 2019, an increase of 2%. However, as discussed above, a portion of the theaters in the IMAX network remain closed as of December 31, 2020 due to the COVID-19 pandemic.

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In addition to the level of revenues, JRSA margin is also influenced by the level of costs associated with such arrangements, such 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, 2020, 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, 2020, JRSA gross margin includes certain advertising, marketing and commission costs of $1.4 million, as compared to $3.3 million in the prior year.

IMAX Technology Sales and Maintenance

The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a year, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation. The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control.

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 following 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.

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The average revenue per IMAX Theater System under sales and sales-type lease arrangements varies depending upon the number of IMAX Theater System commitments with a single respective exhibitor, an exhibitor’s location and various other factors. The average revenue per full (i.e., not hybrid) IMAX Theater System under sales and sales-type lease arrangements was $1.2 million for the year ended December 31, 2020, as compared to $1.3 million in the prior 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, 2020, IMAX Systems revenue and gross margin decreased by $53.3 million (50%) and $33.4 million (57%), respectively, when compared to the year ended December 31, 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.

IMAX Maintenance

For the year ended December 31, 2020, IMAX Maintenance revenue and gross margin decreased by $31.2 million (59%) and $19.9 million (87%), respectively, as maintenance revenue was not recognized during the periods of time when theaters were closed due to the 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.

Film Distribution and Post-Production

For the year ended December 31, 2020, Film Distribution and Post-Production revenue and gross margin decreased by $3.5 million (29%) and $8.9 million, respectively, when compared to the 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, 2020, Selling, General and Administrative Expenses decreased by $15.0 million (12%), when compared to the year ended December 31, 2019. For the year ended December 31, 2020, Selling, General, and Administrative Expenses, excluding the impact of share-based compensation of $20.7 million, were $87.8 million, as compared to $102.7 million in 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 the 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 other employees and deferring all non-essential capital expenditures to minimum levels.

59


Research and Development

A significant portion of the Company’s research and development efforts over the past several years have been focused on IMAX with Laser, the Company’s 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.

For the year ended December 31, 2020, Research and Development expenses increased by $0.4 million (8%), when compared to the prior year, primarily due to costs associated with the 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, certifying more IMAX cameras, enhancing the Company’s image quality, expanding the applicability of the Company’s digital technology in both theater and home entertainment and improvements to the DMR process.

In addition, the Company has been, and intends to continue, using time and resources during the business slowdown caused by the COVID-19 global pandemic to work on leveraging and developing technologies and systems to help bring additional interactivity to its theater network, better manage certain of the Company’s internal workflows and better organize and codify certain of the Company’s data.  During previous adverse events and downturns in the cinema business, the Company fostered many of the innovations that helped enable its global growth in recent years, including the development of its proprietary DMR process and the creation of its joint-revenue sharing business model.

Credit Loss Expense

For the year ended December 31, 2020, the Company recorded a provision for current expected credit losses of $18.6 million reflecting a reduction in the credit quality of its theater and studio related receivable balances, which management believes is primarily related to the COVID-19 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. For the year ended December 31, 2019, credit loss expense was $2.4 million. (See Notes 2 and 5 of Notes to Consolidated Financial Statements in Part II, Item 8.)

Asset 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 Arbitration Awards

For 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 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 an unrealized loss of $0.5 million in the 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, 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 $7.0 million in 2020, as compared to $2.8 million in the 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 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. 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 resulted in higher interest expense in current year versus prior year period. (See Note 14 of Notes to Consolidated Financial Statements in Part II, Item 8.)

Included in interest expense is the amortization of deferred finance costs in the amount of $0.9 million and $0.5 million in 2020 and 2019, respectively. The Company incurred fees of approximately $1.1 million in 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.

The 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 with these historical earnings, which will become payable upon the repatriation of any such earnings.

As 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 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 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.

63


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 2020 as 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, 2020 (2019 — $66.0 million) which includes $6.7 million (2019 — $40.5 million) invested in equipment to be used in the Company’s joint revenue sharing arrangements with exhibitors. In addition, the Company acquired $1.9 million (2019 — $2.9 million) of intangible assets, principally related to the purchase of internal use software, and purchased $0.7 million in property, plant and equipment (2019 — $7.4 million). Furthermore, in the year ended December 31, 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China purchased equity securities in Maoyan for $15.2 million. No investments of equity securities occurred in 2020.

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 $16.9 million in 2020 as compared to $74.3 million in 2019.

Financing Activities

Net cash provided by financing activities totaled $240.6 million for the year ended December 31, 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 $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 share 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 principally due to the net repayment of $20.0 million in Credit Facility borrowings, $19.2 million for the repurchase of common shares under the IMAX China share repurchase program, $14.4 million paid to purchase 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 share repurchase program, partially offset by $2.4 million common shares issued for stock options exercised and $1.1 million received for the issuance of subsidiary shares to non-controlling interests.

CONTRACTUAL OBLIGATIONS

Payments to be made by the Company under contractual obligations as of December 31, 2020 are as follows:

 

 

 

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 Postretirement Obligations

The Company has an unfunded defined benefit pension plan, the SERP, covering the Company’s CEO, Mr. Gelfond. 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 1, 2019, the term of Mr. Gelfond’s employment was extended through December 31, 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 total benefit payable to Mr. Gelfond under the 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 of December 31, 2020, the Company’s Consolidated Balance Sheet includes an unfunded benefit obligation of $1.9 million within Accrued and Other Liabilities related to this plan (December 31, 2019 — $1.6 million).

In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s former Co-CEO and current Chairman of its Board of Directors, upon retirement. As of December 31, 2020, the Company’s Consolidated Balance Sheet includes an unfunded benefit obligation of $0.7 million within Accrued and Other Liabilities related to this plan (December 31, 2019 — $0.7 million).

The Company maintained a non-qualified deferred compensation benefit plan (the “Retirement Plan”) covering the former CEO of IMAX Entertainment and Senior Executive Vice President of the Company. Under the terms of the Retirement Plan, the benefits were due to vest in full if the executive incurred a separation from service from the Company (as defined therein). In the fourth quarter of 2018, the executive incurred a separation from service from the Company, and as such, the Retirement Plan benefits became fully vested as of December 31, 2018 and the accelerated costs were recognized and reflected in Executive Transition Costs in the Consolidated Statements of Operations.

As of December 31, 2020, the benefit obligation related to the Retirement Plan was $3.7 million (December 31, 2019 — $3.6 million) and 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 benefits expected to be paid in the future with the accretion of interest recognized in the Consolidated Statements of Operations within Retirement Benefits Non-Service Expenses.

The Retirement Plan is funded by an investment in company-owned life insurance (“COLI”), which is recorded at its fair value on the Company’s Consolidated Balance Sheets within Prepaid Expenses. As of December 31, 2020, fair value of the COLI asset was $3.2 million (December 31, 2019 — $3.2 million). Gains and losses resulting from changes in the cash surrender value of the COLI asset are recognized in the Consolidated Statements of Operations within Gain (Loss) In Fair Value of Investments.

OFF-BALANCE SHEET ARRANGEMENTS

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

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

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

 

Net Loss

 

 

Per Share

 

 

Net Income

 

 

Per Share

 

Net (loss) income attributable to common shareholders

 

$

(143,775

)

 

$

(2.43

)

 

$

46,866

 

 

$

0.76

 

Adjustments(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

20,558

 

 

 

0.35

 

 

 

22,236

 

 

 

0.36

 

COVID-19 government relief benefits(2)

 

 

(7,115

)

 

 

(0.12

)

 

 

 

 

 

 

Legal judgment and arbitration awards

 

 

4,105

 

 

 

0.07

 

 

 

 

 

 

 

Exit costs, restructuring charges and associated impairments

 

 

 

 

 

 

 

 

850

 

 

 

0.01

 

Loss in fair value of investments

 

 

1,450

 

 

 

0.02

 

 

 

333

 

 

 

0.01

 

Tax impact on items listed above(3)

 

 

(630

)

 

 

(0.01

)

 

 

(5,500

)

 

 

(0.09

)

Income taxes resulting from management's decision to no longer indefinitely reinvest the historical earnings of certain foreign subsidiaries

 

 

13,344

 

 

 

0.23

 

 

 

 

 

 

 

Adjusted net (loss) income(1)

 

$

(112,063

)

 

$

(1.89

)

 

$

64,785

 

 

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

 

59,237

 

 

 

 

 

 

 

61,489

 

 

 

(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.

67


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)

 

 

Attributable to

 

 

 

 

 

 

 

 

Non-controlling

 

 

Less: Attributable to

 

 

 

 

 

 

 

Interests and

 

 

Non-controlling

 

 

Attributable to

 

 

Common Shareholders

 

 

Interests

 

 

Common Shareholders

 

(In thousands of U.S. Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported net loss

$

 

(157,486

)

 

$

 

(13,711

)

 

$

 

(143,775

)

Add (subtract):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, the Canadian Dollar and the Chinese Yuan Renminbi. The Company does not use financial instruments for trading or other speculative purposes.

Foreign Exchange Rate Risk

A majority of the Company’s revenue is denominated in U.S. Dollars while a significant portion of its costs and expenses is denominated in Canadian Dollars. A portion of the Company’s net U.S. Dollar cash flows is converted to Canadian Dollars to fund Canadian Dollar expenses through the spot market. In addition, IMAX films generate box office in 84 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S. Dollar could have an impact on the Company’s reported gross box office and revenues. The Company has incoming cash flows from its revenue generating theaters and ongoing operating expenses in China through its majority-owned subsidiary IMAX (Shanghai) Multimedia Technology Co., Ltd. In Japan, the Company has ongoing Yen-denominated operating expenses related to its Japanese operations. Net Renminbi and Japanese Yen cash flows are converted to U.S. Dollars through the spot market. The Company also has cash receipts under leases denominated in Renminbi, Japanese Yen, Euros and Canadian Dollars.

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

Certain of the Company’s subsidiaries held approximately 500.3 million Renminbi ($76.7 million) in cash and cash equivalents as of December 31, 2020 (December 31, 2019 — 471.6 million Renminbi or $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 Administration of Foreign Exchange to complete. Any developments relating to the Chinese economy and any actions taken by the Chinese government are beyond the control of the Company; however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements.

For the year ended December 31, 2020, the Company recorded a foreign exchange net gain of $0.8 million as compared to a foreign exchange net loss of $(0.9) million in 2019, associated with the translation of foreign currency denominated monetary assets and liabilities.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. The forward contracts have settlement dates throughout 2021. Foreign currency derivatives are recognized and measured in the Company’s Consolidated Balance Sheets at fair value. Changes in the fair value (gains or losses) are recognized in the Consolidated Statements of Operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. Certain of these foreign currency forward contracts held by the Company as of December 31, 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 Income and reclassified to the Consolidated Statements of Operations 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 Statements of Operations.

69


The notional value of foreign currency cash flow hedging instruments that qualify for hedge accounting at December 31, 2020 was $26.4 million (December 31, 2019 — $36.1 million). A gain of $0.6 million was recorded to Other Comprehensive Income with respect to change in fair value of these contracts in 2020 (2019 — a gain of $0.6 million). A loss of $0.6 million was reclassified from Accumulated Other Comprehensive Income to Selling, General and Administrative Expenses, Inventories and Property, Plant and Equipment in 2020 (2019 — loss of $1.2 million). A gain of $0.3 million resulting from the change in fair value on forward contracts not meeting the requirements for hedge accounting was recorded to Selling, General and 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, 2020, the Company’s Financing Receivables and working capital items denominated in Canadian Dollars, Renminbi, Japanese Yen, Euros and other foreign currencies translated into U.S. Dollars was $133.5 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2020, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $13.3 million. A significant portion of the Company’s Selling, General, and Administrative Expenses is denominated in Canadian Dollars. Assuming a 1% change appreciation or depreciation in foreign currency exchange rates at December 31, 2020, the potential change in the amount of Selling, General, and Administrative Expenses would be $0.1 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 of December 31, 2020, the Company had drawn down $300.0 million on its Credit Facility (December 31, 2019 — $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 56.3% and 8.1% of its total liabilities at December 31, 2020 and 2019, respectively. If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by $0.4 million and interest income from cash would increase by $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, 2020.

On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. Loans 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). The Credit Facility also allows for the selection of a replacement rate in the event of the discontinuation of LIBOR, subject to the approval of the administrative agent. The Company expects that the Credit Facility will transition to the Secured Overnight Financing Rate (“SOFR”) as the replacement rate. Given the Company’s current level of indebtedness and based on the historic differences between LIBOR and SOFR, the Company does not expect that the future discontinuation of LIBOR will have a material impact on future interest expense.

 

70


Item 8.  Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

************

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, 2020 and 2019, and the related consolidated statements of operations, comprehensive (loss) income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2020, including the related notes and the financial statement schedule listed in the accompanying index for each of the three years in the period ended December 31, 2020 (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal 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 financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

 

Change in Accounting Principle

 

As discussed in notes 3, 4, 5 and 6 to the consolidated financial statements, the Company changed the manner in which it accounts for its allowance for current expected credit losses in 2020, the manner in which it accounts for leases in 2019 and the manner in 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 of this Annual Report on Form 10-K. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’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 Company 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 Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A 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 company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the 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

March 4, 2021

We have served as the Company'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 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

 

 

(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, except per share amounts)

 

 

 

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)

 

 

 

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)

 

 

 

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' EQUITY

(In thousands of U.S. Dollars except share amounts)

 

 

 

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

 

 

(See the accompanying notes, which are an integral part of these Consolidated Financial Statements)

 

81


IMAX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.  Description of the Business

IMAX Corporation, together with its consolidated subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies, specializing in technological innovations powering the presentation of some of today’s most immersive entertainment exp