IMAX CORP 10-K

Item 1A. Risk Factors 18 Table of Contents Before you make an investment decision with respect to the Company’s common shares, 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 discussed in “Special Note Regarding Forward-Looking Information,” any of which could have a material adverse effect on the Company’s business, results of operations and financial condition and on the actual outcome of matters as to which forward-looking statements are made in this annual report. The following risk factors should be read in conjunction with the balance of this annual report, including the Consolidated Financial Statements and the “Notes to Consolidated Financial Statements.” The risks described below are not the only ones the Company faces. Additional risks that the Company currently 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 General political, social and economic conditions can affect the Company’s business by reducing both revenues generated from existing IMAX Systems and the demand for new IMAX 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 locations. If movie-going becomes less popular globally, the Company’s business could be adversely affected, especially if such a decline continues in Greater China, whose consumer market recovered more slowly from the COVID-19 pandemic than other markets, and where economic challenges persist. In addition, the Company’s operations could be adversely affected if consumers’ discretionary income globally or in a particular geography falls as a result of an economic downturn or recession, sustained inflationary conditions, high interest rates, supply chain issues, or otherwise. Such adverse impact on consumer’s discretionary income could result in a shift in consumer demand away from movie-going. Furthermore, sustained inflationary pressures observed globally could materially increase the cost of our goods, services and personnel, which could cause an increase in the Company’s operating costs. The majority of the Company’s revenue is directly derived from the box office results of its exhibitor customers. Accordingly, a decline in attendance at commercial IMAX locations could materially and adversely affect several sources of key revenue streams for the Company. The Company also depends on the sale, lease and installation of IMAX Systems to commercial exhibitors to generate revenue. Commercial 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, or other economic headwinds, commercial exhibitors may be less willing to invest capital in IMAX Systems. In addition, a significant portion of systems in the Company’s backlog are expected to be installed in newly-built multiplexes. An economic downturn, recession, significant increases in interest rates or other adverse economic developments could impact developers’ ability to secure financing on acceptable terms and complete the build-out of these locations, thereby negatively impacting the Company’s ability to install IMAX Systems, grow its theater network and collect its contractual revenue. The success of the IMAX network is directly related to the availability and success of the IMAX remastered films, and other films released to the IMAX network, as well as the continued purchase or lease of IMAX Systems and other support by exhibitors, 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 locations 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 format. In 2024, 118 new IMAX films were released to the Company’s global 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 films, and the Company’s continued ability to secure films, find suitable partners for joint revenue sharing arrangements and to sell IMAX Systems. The commercial success of films released to IMAX locations depends on a number of factors outside of the Company’s control, including whether the film receives critical and consumer 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 films released to the Company’s global 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 format and release them to the IMAX network. 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 language 19 Table of Contents 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 exhibitors to purchase or lease IMAX Systems, to supply box office revenue under joint revenue sharing arrangements and under its sale and sales-type lease agreements, and to supply venues in which to exhibit IMAX films. The Company is unable to predict the pace at which exhibitors will purchase or lease IMAX 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 presence or expansion, negotiate economic terms that are less favorable to the Company, 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 locations. As a result, the Company’s future revenues and cash flows could be adversely affected. The Company is undertaking brand extensions and new business initiatives, and the Company’s investments and efforts in such business evolution may not be successful. The Company is undertaking brand extensions and new business initiatives. These initiatives represent potential 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 field of in-home entertainment technology, which is an intensely competitive business and which is 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 audiences and to expand the Company’s streaming and consumer technology strategy. If any new brand extensions and business initiatives 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 assets, by the distraction of management from its core business or by damage to its brand or reputation. New initiatives could involve acquisitions or the formation of joint ventures and business alliances. For example, in September 2022, the Company acquired SSIMWAVE. Such transactions and arrangements involve significant challenges and risks, including that they may not advance the Company’s long-term business strategy, that the Company realizes an unsatisfactory return on its investments or fails to realize anticipated business synergies, that the Company has difficulty integrating or retaining new employees, systems, and technology, that the Company has disagreements with a relevant partner with respect to financing, management, and development, that the Company fails to identify or anticipate risks and liabilities of acquired companies in advance of acquisition, or that management gets distracted from the Company’s core business. Also, it may take longer than expected to realize the full benefits from these transactions and arrangements such as increased revenue or enhanced efficiencies, or the benefits may ultimately be smaller than the Company expected. The Company faces cybersecurity 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 adversely 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 cybersecurity insurance policy, the Company’s information technology systems, and the information technology systems of its current or future third-party vendors, collaborators, consultants and service providers, 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, including from emerging technologies, such as advanced forms of AI and quantum computing. 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. 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. In addition, the Company’s sensitive, proprietary, or confidential information could be leaked, disclosed, or revealed as a result of or in connection with the Company’s employees’ or third-party vendors’ use of generative AI technologies. 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 and provides information security training and compliance program to its employees on an annual basis, 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 20 Table of Contents become more sophisticated. Any such attack or unauthorized access could result in a disruption of the Company’s operations, the theft, unauthorized use or publication of confidential or proprietary information of the Company or its 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. Refer to Part 1C, “Cybersecurity” for additional information. 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 but not limited to the General Data Protection Regulation and the California Privacy Rights 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 laws and 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. 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 GBO generated by the Company’s exhibitor customers and its revenues are generated from customers located outside the United States and Canada. Approximately 58%, 64%, and 62% of the Company’s revenues were derived outside of the United States and Canada in 2024, 2023, and 2022, respectively. As of December 31, 2024, approximately 84% of IMAX Systems in backlog were scheduled to be installed in international markets. The Company’s network spanned 90 different countries as of December 31, 2024, 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 tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions, and other trade barriers, including but not limited to tariffs planned, implemented or threatened by the new U.S. administration and retaliatory responses thereto; • new restrictions on access to markets, both for IMAX 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 network can present; • fluctuations in the value of various foreign currencies versus the U.S. Dollar, potential currency devaluations, and imposition of foreign exchange controls in foreign jurisdictions; • 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; • 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 IMAX Systems, including as a result of material disruptions or delays in the Company’s supply chains, or collect full payment on installations thereof; • 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); 21 Table of Contents • poor recognition of intellectual property rights; • difficulties in enforcing contractual rights; • economic conditions in foreign markets, including inflation; • public health concerns, including pandemics or epidemics, and regulations in response thereto, which could adversely affect the Company’s and its customers’ operations; • 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, which could result in adverse consequences for the Company’s interests in different regions of the world. Additionally, global geopolitical tensions, such as the conflicts between Russia and Ukraine and in the Middle East, and actions that governments take in response may adversely impact the Company’s ability to operate in such regions and/or result in global or regional economic downturns. For example, in response to the ongoing conflict between Russia and Ukraine, Canada, the United States, and other countries in which the Company operates have imposed broad sanctions and other restrictive actions against governmental and other entities in Russia, which in turn have and may continue to have an adverse impact on the Company’s business and results of operations in affected regions. In addition, in the wake of the Russia-Ukraine conflict and resulting sanctions, major movie studios suspended the theatrical release of films in Russia and financial institutions halted transactions with Russian entities. The Company has notified its exhibitor clients in Russia that such sanctions and actions constitute a force majeure event under their system agreements, resulting in the suspension of the Company’s obligations thereunder. Given the uncertainty as to the scope, intensity, duration and outcome of geopolitical conflicts, it is difficult to predict the full extent of the adverse impact of geopolitical conflicts on the Company’s business and results of operations. Additionally, given the global nature of the Company’s operations, any protracted conflict or the broader macroeconomic impact of geopolitical conflicts and sanctions imposed in response thereto, have had and could continue to have an adverse impact on the Company’s business, results of operations, financial condition, and future performance (the Company has 11 systems in its backlog from Russia, the Confederation of Independent States (“CIS”) and Ukraine, and none from Israel) and may also magnify the impact of other risks described herein, including the risk of cybersecurity attacks, which may impact information technology systems unrelated to the conflict, or jeopardize critical infrastructure in jurisdictions where the Company operates. 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 conduct business 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. As of December 31, 2024, the Company had 809 IMAX Systems operating in Greater China with an additional 237 systems in backlog, which represent 54% of the Company’s current backlog. Of the IMAX Systems currently scheduled to be installed in Greater China, 78% 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 a continued slow recovery from the COVID-19 pandemic, 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. The market’s slow recovery from the pandemic has caused some exhibitors in Mainland China, including several of the Company’s exhibitor partners, to experience financial difficulties which, in certain cases, has resulted in delays in meeting payment and IMAX System installation obligations to the Company. There are no guarantees that such financial difficulties will not continue, or that partner delays or failures to meet contractual obligations will not occur in the future, adversely impacting the Company’s future revenues and cash flows. 22 Table of Contents The Company does not believe that it is currently required to obtain any permission or approval from the China Securities Regulatory Commission, the Cyberspace Administration of China or any other regulatory authority in the People’s Republic of China (“PRC”) for its operations, but there can be no assurance that such permissions or approvals would not be required in the future and, if required, that they would be granted in a timely manner, on acceptable terms, or at all. Furthermore, PRC regulators, including the Cyberspace Administration of China, the Ministry of Industry and Information Technology, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection. Regulatory requirements concerning data protection and cybersecurity, as well as other requirements concerning operations of foreign businesses, in the PRC are evolving, and their enactment timetable, interpretation and implementation involve significant uncertainties. To the extent any additional PRC laws and regulations become applicable to the Company, it may be subject to increased risks and uncertainties associated with the legal system in the PRC, including with respect to the enforcement of laws and the possibility of changes of rules and regulations with little or no advance notice. 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 Company’s business 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 Hollywood IMAX films in China or that the timing, number or performance 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. Political tensions and/or trade wars between China and the United States or Canada could exacerbate any or all of these risks, and 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 in Mainland China. The Company may experience adverse effects due to exchange rate fluctuations. A substantial portion of the Company’s revenues is denominated in U.S. Dollars, while a substantial portion of its expenses is denominated in Canadian Dollars. The Company also generates revenues in Chinese Renminbi, Euros and Japanese Yen. While the Company periodically enters into forward contracts to hedge a portion of 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 with its customers, which ultimately affect the ability to negotiate cost-effective arrangements and, therefore, the Company’s results of operations. In addition, because IMAX films generate box office revenue in 90 different countries, unfavorable exchange rates between applicable local currencies and the U.S. Dollar could affect the GBO generated by exhibitors and the Company’s reported revenues, further impacting the Company’s results of operations. RISK RELATED TO THE COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 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 and 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. Since 2016, the commercial exhibition industry has undergone significant consolidation, including AMC’s acquisition of Carmike Cinemas and Odeon, which includes Nordic and Cineworld’s acquisition of Regal. Exhibitor concentration has resulted in certain exhibitor chains constituting a material portion of the Company’s network and revenue. For instance, Wanda is the Company’s largest exhibitor customer, representing approximately 9% of the Company’s total revenues in 2024. As of December 31, 2024, through the Company’s partnership with Wanda, there were 384 IMAX Systems operational in Greater China and Wanda represented approximately 21% of the global network and 12% of the Company’s global backlog. The share of the Company’s revenue that is generated by Wanda is expected to continue to grow as the number of IMAX Systems in backlog with Wanda are opened. No assurance can be given that significant customers such as Wanda will continue to purchase IMAX 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 Wanda 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 23 Table of Contents 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 films. Hollywood studios have also experienced consolidation, as evidenced by Disney’s acquisition of certain studio assets from Twenty First Century Fox in 2019 and the expected acquisition of Paramount by Skydance. Studio consolidation could result in individual studios comprising a greater percentage of the Company’s film slate and overall IMAX Film Remastering revenue, and could expose the Company to the same risks described above in connection with exhibitor consolidation. Failure to respond adequately or in a timely fashion to changes and advancements in technology could negatively affect the Company’s business. In order to keep pace with changes and advancements in technology and in order to continue to provide an experience that is premium to and differentiated from conventional entertainment experiences, the Company has made, and expects to continue to make, significant investments in technology in the form of research and development and the acquisition of third-party intellectual property and/or proprietary technology. A significant portion of the Company’s research and development efforts have been focused on the IMAX Laser Systems and film cameras. The Company intends to continue research and development to further evolve its end-to-end technology. Within the Company’s Streaming and Consumer Technology business, there is ongoing research and development in perceptual metrics including novel measurement and optimization techniques. 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. Artificial intelligence technologies and their uses are currently undergoing rapid change. If the Company fails to enhance its current AI products and develop new products in response to changes in technology or industry standards, or the Company fails to bring product enhancements or new product developments to market quickly enough, the Company’s AI-enabled products could rapidly become less competitive or obsolete. The introduction of new, competing products and technologies could harm the Company’s business. The entertainment industry is very competitive. The Company faces competition both in the form of technological advances in in- home entertainment, as well as those within out-of-home entertainment, including the theater-going experience. For example, according to research conducted by Omdia, there were approximately 39,000 conventional-sized screens in North American commercial multiplexes in 2023. In addition, 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 System. The Company competes with entertainment and media companies with new technologies and/or substantially greater capital resources to develop and support them. The Company may be unable to continue to produce theater systems or provide experiences which are premium to, or differentiated from, other theater systems or entertainment experiences, respectively. Furthermore, many of the Company’s commercial exhibitor customers are reliant on the availability of retail shopping malls at physical locations, which compete with other forms of retailing such as online retail websites, and may be adversely affected by the changes in the retail shopping landscape and consumer purchasing patterns. In return, the Company may be adversely affected by the challenges faced by its exhibitor customers. As noted above, the Company faces in-home competition from a number of alternative motion picture distribution channels such as home video, streaming services, video-on-demand, internet, and broadcast and cable television. The average exclusive theatrical release window for Hollywood titles has decreased over the years, and there can be no assurance that this release window, which is determined by the movie studios, will not shrink further which could have an adverse impact on the Company’s business and results of operations. In addition, as a result of the COVID-19 pandemic and related movie theater closures, in 2020 and 2021, a number of films were released directly or concurrently to streaming services the same day as to theaters. Most major film studios have since recommitted to exclusive theatrical releases for blockbuster movies. However, there can be no assurance that direct or concurrent release to streaming services will not resume or increase in the future, intensifying in-home competition. Several streaming services release original films directly to subscribers, bypassing theatrical distribution. 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 tickets and the box office performance of IMAX films may decline. The declining box office performance of IMAX films could materially and adversely harm the Company’s business and prospects. 24 Table of Contents 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 Systems including digital and film technology, video quality assessment and image enhancement. 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 the future growth of the Company is anticipated to come from foreign jurisdictions. The Company may develop proprietary technology or knowledge, including AI-generated works, that are not entitled to intellectual property protection. 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, laser illumination technology, and other inventions relating to imaging technology and video quality assessment. 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 expire between 2025 and 2041. If the Company’s patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded the Company’s products and services could be impaired, which could negatively affect its competitive position. In addition, competitors and other third parties may be able to circumvent or design around the Company’s patents and may develop and obtain patent protection for more effective technologies. If these developments were to occur, it could have an adverse effect on the Company’s sales or market position. 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. If the Company chooses to go to court to stop a third party from infringing its intellectual property, that third party may ask the court to rule that the Company’s intellectual property rights are invalid and/or should not be enforced against that third party. The Company relies upon trade secrets and other confidential and proprietary know how to develop and maintain the Company’s competitive position. While it is the Company’s policy to enter into agreements imposing nondisclosure and confidentiality obligations upon its employees and third parties to protect the Company’s intellectual property, these obligations may be breached, may not provide meaningful protection for the Company’s trade secrets or proprietary know-how, or adequate remedies may not be available in the event of an unauthorized access, use or disclosure of the Company’s trade secrets and know-how. Furthermore, despite the existence of such nondisclosure and confidentiality agreements, or other contractual restrictions, the Company may not be able to prevent the unauthorized disclosure or use of its confidential proprietary information or trade secrets by consultants, vendors and employees. In addition, others could obtain knowledge of the Company’s trade secrets through independent development or other legal means. The IMAX brand stands for the highest quality and most immersive entertainment experiences. Protecting the IMAX brand is a critical element in maintaining the Company’s relationships with studios and its exhibitor clients and building and maintaining brand loyalty and recognition. 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. In addition, if any of the Company’s registered or unregistered trademarks, trade names or service marks is challenged, infringed, circumvented, declared generic or determined to be infringing on other marks, it could have an adverse effect on the Company’s sales or market position. The Company may be subject to claims of infringement of third-party intellectual property rights that are costly to defend, result in the diversion of management’s time and efforts, require the payment of damages, limit the Company’s ability to use particular technologies in the future or prevent the Company from marketing its existing or future products and services. The Company’s commercial success will depend in part on not infringing, misappropriating, or violating the intellectual property rights of others. A third party could assert a claim against the Company for alleged infringement of its patent, copyright, trademark, or other intellectual property rights, including in relation to technologies that are important to the Company’s business. The Company 25 Table of Contents may not be aware of whether its products or services do or will infringe existing or future patents or the intellectual property rights of others. In addition, there can be no assurance that one or more of the Company’s competitors who have developed competing technologies or the Company’s other competitors will not be granted patents for their technology and allege that the Company has infringed. Any claims that the Company’s business infringes the intellectual property rights of others, regardless of the merit or resolution of such claims, could entail significant costs in responding to, defending, and resolving such claims. An adverse determination in any intellectual property claim could require the Company to pay damages and/or stop using its technologies, trademarks, copyrighted works, and other material found to be in violation of another party’s rights and could prevent the Company from licensing its technologies to others unless the Company enters into royalty or licensing arrangements with the prevailing party or are able to redesign its products and services to avoid infringement. Such a license may not be available on reasonable terms, if at all, and there can be no assurance that the Company would be able to redesign its services in a way that would not infringe the intellectual property rights of others. Any payments the Company is required to make and any injunction the Company is required to comply with as a result of any infringement could harm its reputation and financial results. 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 System installations and GBO performance of IMAX films 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 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 network; • the demand for, and acceptance of, the Company’s products and services; • the recognition of revenue of sale and sales-type leases; • the classification of leases as sales-type versus operating; • the volume of orders received and that can be filled in the period; • the level of its sales backlog; • the signing of film distribution agreements; • the financial performance of IMAX Systems 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 success thereof; 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 Film Remastering revenue, which would harm operating results for a particular period. The Company’s systems revenue can vary significantly from its cash flows under IMAX System sales or lease agreements. The Company’s systems revenue can vary significantly from the associated cash flows. The Company often provides financing to customers for IMAX Systems on a long-term basis through long-term sale or lease arrangements. The terms of leases or financing 26 Table of Contents receivables are typically 10 to 12 years. The sale and sales-type lease agreements for IMAX 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 System; • ongoing fees, which are paid monthly after the IMAX System has been opened to the public 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 annually or quarterly. Initial fees generally make up the vast majority of cash received under IMAX System sales or sales-type lease agreements. For sale 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, and where applicable fixed minimum ongoing payments. Revenue recorded for sales arrangements may 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 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 collectability 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. As of December 31, 2024, the Company’s backlog included 440 IMAX Systems, consisting of 164 IMAX Systems under sales or lease arrangements and 276 IMAX Systems under joint revenue sharing arrangements. The Company lists signed contracts for IMAX 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 binding IMAX System sale or lease agreements scheduled to be installed in the future. Backlog value includes initial fees along with the estimated present value of contractual ongoing fees due over the term, but excludes any variable consideration estimates and amounts allocated to maintenance and extended warranty revenues. Notwithstanding their legal obligations, some of the Company’s exhibition customers with which it has signed contracts may be delinquent in their contractual payments and/or not accept delivery of IMAX Systems that are included in the Company’s backlog. An economic or industry downturn may exacerbate exhibition customer liquidity constraints and the risk of customers not accepting delivery of IMAX Systems. Construction projects linked to malls are particularly susceptible to economic downturns and delays. Customers sometimes request that the Company agree to modify their obligations concerning systems in backlog, which the Company has agreed to do in the past under certain circumstances, and may agree to do in the future. Customer-requested delays in the installation of IMAX Systems in backlog remain a recurring and unpredictable part of the Company’s business. China’s slow recovery from the COVID-19 pandemic has caused several of the Company’s exhibition partners operating in China to delay payment or theater system installation obligations to the Company. Any reduction or change in backlog could adversely affect the Company’s future revenues and cash flows. The Company’s inability to enter into renewals of new sales and lease agreements on favorable terms or at all would adversely affect its cash flows and operating results. Approximately 9% of the Company’s sales and lease agreements are due to expire in the next 12 months. If these agreements are not renewed, or if the Company is unable to enter into new leases agreements comparable to those currently in effect in a timely manner, then the Company’s systems revenue could be adversely affected. 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 27 Table of Contents impaired. The Company’s contractual ability to audit IMAX locations 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 IMAX System agreements. The Company is dependent in part on the viability of its exhibitors for collections under long-term leases, sales financing agreements, and joint revenue sharing arrangements. Exhibitors or other operators may experience financial difficulties that could cause them to be unable to fulfill their contractual payment obligations to the Company. As a result, the Company’s future revenues and cash flows could be adversely affected. The Company has been and may continue to be subject to 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 Film Remastering 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 will include the amortization of the Company’s film assets and may be significantly affected by periodic adjustments in amortization rates. The Company has been and may continue to 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 IMAX System contracts, technological developments, signings in negotiation and anticipated market acceptance of the Company’s current and pending IMAX Systems. RISKS RELATED TO THE COMPANY’S COMMON SHARES The market price for the Company’s common shares has historically been volatile and declines in market price, 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 shares, 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 the Company’s 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 United States 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 United States 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 United States 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 United States federal securities laws. RISKS RELATED TO THE COMPANY’S INDEBTEDNESS The Company’s debt agreements contain 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; 28 Table of Contents • 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 • merge, consolidate, amalgamate, or sell all or substantially all of its assets to another person. In addition, certain provisions in the Company’s 0.500% Convertible Senior Notes due 2026 (the “Convertible Notes”) and the related indenture could make a third-party attempt to acquire the Company more difficult or expensive, discouraging a third party from acquiring the Company or removing incumbent management, which holders of the Company’s common shares may view as favorable. These restrictive covenants impose operating and financial restrictions on the Company that limit its ability to engage in acts that may be in the Company’s long-term best interests. The Company’s indebtedness and liabilities could limit the cash flow available for its operations, and expose the Company to risks that could adversely affect its business, financial condition, and results of operations. As of December 31, 2024, the Company had approximately $387.0 million of consolidated indebtedness and liabilities. The Company may also incur additional indebtedness to meet future financing needs. The Company’s indebtedness could have significant negative consequences for its security holders and its business, results of operations and financial condition by, among other things: • increasing its vulnerability to adverse economic and industry conditions; • limiting its ability to obtain additional financing; • requiring the dedication of a substantial portion of its cash flow from operations to service its indebtedness, which will reduce the amount of cash available for other purposes; • limiting its flexibility to plan for, or react to, changes in its business; • diluting the interests of its shareholders as a result of issuing common shares upon conversion of the Convertible Notes; • holders of the Convertible Notes may, subject to certain conditions, require the Company to repurchase their Convertible Notes following a fundamental change; and • placing the Company at a possible competitive disadvantage with competitors that are less leveraged than the Company or have better access to capital. The Company’s business may not generate sufficient funds, and the Company may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under its indebtedness, and the Company’s cash needs may increase in the future. In addition, the Credit Agreement contains, and any future indebtedness that the Company incurs may contain, financial and other restrictive covenants that limit its ability to operate, raise capital or make payments under its other indebtedness. If the Company fails to comply with these covenants and that of other debt agreements or to make payments under its indebtedness when due, then the Company would be in default under that indebtedness, which could, in turn, result in that and the Company’s other indebtedness becoming immediately payable in full. A description of the Company’s outstanding indebtedness is provided in Note 13 to “Consolidated Financial Statements” in Part II, Item 8. 29 Table of Contents GENERAL RISK FACTORS The loss of one or more of the Company’s key personnel, or its failure to attract and retain its employee population, could adversely affect its business. The Company’s operations and prospects depend in large part on the performance and continued service of its senior management team. The competition for experienced senior management in the Company’s industry is intense, and the Company may not find qualified replacements for any of these individuals if their services are no longer available on the same terms or at all. 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. In addition, the Company may experience challenges with respect to employee retention given the current competitive labor market. A number of external factors beyond the Company’s control, including its industry’s highly competitive market for skilled workers and leaders, cost inflation, development of non-compete laws, and workforce participation rates, may negatively affect the Company’s ability to retain and attract qualified employees. If the Company experiences high attrition rates in its employee population, the results of our operations may be adversely affected. 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 share 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. More information is provided in “Critical Accounting Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Regulatory and market responses to climate change concerns may negatively impact our business and increase our operating costs. Growing public concern about climate change and enhanced governmental attention to climate matters has resulted in expanding mandatory and voluntary reporting, diligence, and disclosure on topics such as climate change impacts, carbon emissions, water usage, waste management, and risk oversight and has expanded and may continue to expand the nature, scope, and complexity of matters that the Company is required to control, assess, and report. Furthermore, regulatory efforts to combat climate change could result in increases in the cost of raw materials, taxes, transportation and utilities for the Company’s suppliers and vendors which would result in higher operating costs for the Company and potentially impact the availability of components used in the IMAX Systems. These and other rapidly changing laws, regulations, policies, interpretations, and expectations and shift in consumer sentiment may increase the cost of the Company’s compliance, divert management attention, alter the environment in which it does business, and expose the Company to potentially significant fines or other penalties if it is unable to comply with such laws, regulations or policies, any of which could have a material adverse effect on the Company’s business, results of operations, and financial condition. However, the Company is unable to predict at this time, the potential effects, if any, that any climate change initiatives may have on its business. The Company’s business and financial results could be adversely affected by weather conditions and natural and man-made disasters. Physical risks, including man-made disasters, such as infrastructure failures, structural collapse, fires, explosions, and acts of war and terror, as well as weather conditions and natural disasters, such as earthquakes, droughts, floods, hailstorms, heavy or prolonged precipitation, wildfires, hurricanes, sea level rise and others, affecting the IMAX global network or corporate locations, could harm the Company’s business. Additionally, the physical impacts of climate change may cause occurrences of natural disasters to increase in frequency, severity and duration, magnifying the adverse impact of such occurrences and the cost of insuring against them. The 30 Table of Contents climates and geology of some of the regions in which the Company’s principal offices are located, including California, present increased risks of adverse weather or natural disasters. Any such events in the future could disrupt the Company’s operations and impact the Company’s ability to serve its customers.