What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-28 compared with 2020-04-30 · 490 added, 265 removed, 390 unchanged (66% of the section changed)

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

Presented below is Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") for IMAX Corporation and its consolidated subsidiaries (“IMAX” or the “Company”) for the three months ended March 31, 2020 and 2019.

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

MD&A should be read in conjunction with Note 14, "Segment Reporting" in the accompanying Condensed Consolidated Financial Statements in Item 1.

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the failure to respond to change and advancements in digital technology;

risks relating to recent consolidation among commercial exhibitors and studios;

risks relating to recent consolidation among commercial exhibitors and movie studios;

risks related to new business initiatives;

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risks related to cyber-security and data privacy;

risks related to the Company’s inability to protect the Company’s intellectual property;

risks related to the Company’s inability to protect its intellectual property;

general economic, market or business conditions;

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the failure to fully realize the projected cost savings and benefits from any of the Company’s restructuring initiatives;

the impact of COVID-19 on our financial condition and results of operations and on the businesses of our customers and exhibitor partners;

the impact of COVID-19 on our business, financial condition, and results of operations and on the businesses of our customers and exhibitor partners;

and other factors, many of which are beyond the control of the Company.

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No information included on the Company's website shall be deemed included or otherwise incorporated into this filing, except where expressly indicated.

The information posted on the Company’s corporate and Investor Relations website may be deemed material to investors.

Accordingly, investors, media and others interested in the Company should monitor the Company’s website in addition to the Company’s press releases, SEC filings and public conference calls and webcasts.

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 TM , are trademarks and trade names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions.

The information posted on the Company’s corporate and Investor Relations websites may be deemed material to investors.

Accordingly, investors, media and others interested in the Company should monitor the Company’s websites in addition to the Company’s press releases, SEC filings and public conference calls and webcasts.

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.

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 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 business, which principally consists of:

the digital remastering of films and other presentations into the IMAX format (“IMAX DMR”) by enhancing their image resolution and sound quality for exhibition in the IMAX network in exchange for a certain percentage of contingent box office receipts from movie studios and other content creators;

the sale or lease of premium IMAX theater systems (“IMAX Theater Systems”) to exhibitor customers.

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 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 52-year history.

The Company’s customers who purchase or lease IMAX Theater Systems are theater exhibitors that operate commercial theaters (particularly multiplexes), museums, science centers, or destination entertainment sites.

The customers who purchase or lease IMAX Theater Systems 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 licenses the use of its trademarks along with the sale or lease of the IMAX Theater System.

The Company refers to all theaters using the IMAX Theater System as “IMAX theaters”.

As at March 31, 2020, there were 1,616 IMAX Theater Systems operating in 81 countries and territories including 1,526 commercial multiplexes, 14 commercial destinations and 76 institutional locations.

This compares to 1,514 IMAX Theater Systems operating in 81 countries and territories as of March 31, 2019 including 1,420 commercial multiplexes, 14 commercial destinations, 80 institutional locations.

(See table below under “IMAX Network and Backlog” for additional information.)

The IMAX Theater System combines:

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

As at June 30, 2020, there were 1,615 IMAX Theater Systems operating in 81 countries and territories, including 1,527 commercial multiplexes, 13 commercial destinations and 75 institutional locations.

This compares to 1,541 IMAX Theater Systems operating in 81 countries and territories as of June 30, 2019 including 1,445 commercial multiplexes, 15 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;

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

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;

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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 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 in a traditional theater.

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.

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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, the Company’s next-generation laser projection system designed for IMAX theaters in commercial multiplexes, which represents a further evolution of IMAX’s proprietary technology.

In 2018, t he 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 commercial IMAX network.

As at March 31, 2020, the Company has signed IMAX with Laser agreements with leading, global exhibitors such as AMC Entertainment Holdings, Inc.

(“AMC”), Cineworld Group PLC (“Cineworld”), CGV Holdings Limited (“CGV”) and Les Cinémas Pathé Gaumont (“Pathé”) (among others) for a total of 140 new theaters, 157 upgrades to existing IMAX theaters, and 52 upgrades to existing arrangements in the Company’s backlog.

As at March 31, 2020, 140 IMAX with Laser systems have been installed, and the Company’s backlog included 147 new IMAX with Laser systems and 94 upgrades to IMAX with Laser systems.

To date, the Company has signed IMAX with Laser agreements with leading, global exhibitors such as AMC Entertainment Holdings, Inc.

(“AMC”), Cineworld Group PLC (“Cineworld”), CGV Holdings Limited (“CGV”) and Les Cinémas Pathé Gaumont (“Pathé”) (among others) which includes new theaters, upgrades to existing IMAX theaters, and upgrades to existing backlog arrangements.

As at June 30, 2020, 141 IMAX with Laser systems have been installed, and the Company’s backlog included 154 new IMAX with Laser systems and 94 upgrades to IMAX with Laser systems.

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.

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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.

The theaters have been closed since late-January 2020, and have not yet reopened as of the date of this report.

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 have 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, Hollywood and Chinese movie studios have also postponed the release of multiple films, including many scheduled to be shown in IMAX theaters.

The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the Company’s revenues and earnings in the first quarter of 2020 as gross box office (“GBO”) results declined significantly, the installation of theater systems was delayed, and maintenance services were suspended.

During the time period when a significant number of theaters in the IMAX network are closed, the Company has and will continue to experience a significant decline in earnings as it will generate effectively no GBO based revenue from its joint revenue sharing arrangements and digital remastering services, it will not charge maintenance fees to theater operators, and theater system installations will be delayed.

In addition, the Company will also experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who may now be facing financial difficulties as a result of the theater closures.

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, Hollywood and Chinese movie studios have postponed the theatrical release of multiple films, including many scheduled to be shown in IMAX theaters, while other films have been released directly to streaming platforms.

As of the date of this report, stay-at-home orders have been lifted in many countries and movie theaters are gradually reopening with reduced capacities, physical distancing requirements, and other safety measures.

Subsequent to June 30, 2020, approximately 40% of the theaters in the IMAX commercial multiplex network have begun to report gross box office (“GBO”) results in July.

These theaters span across 40 countries and include the Domestic, Greater China and Rest of World markets.

The repercussions of the COVID-19 global pandemic have resulted in a significant decrease in the Company’s revenues, earnings and operating cash flows during the three and six months ended June 30, 2020 as GBO results declined significantly, the installation of certain theater systems was delayed, and maintenance services were generally suspended.

During the time period when a significant number of theaters in the IMAX network are closed, the Company has and will continue to experience 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 may continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who are now facing financial difficulties as a result of the theater closures.

The Company may continue to be significantly impacted by the COVID-19 global pandemic even after some or all theaters are reopened.

The global economic impact of COVID-19 has led to record levels of unemployment in certain countries and may lead to lower consumer spending in the near term.

The timing 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 such time as consumer spending recovers.

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 such time as consumer behavior normalizes and consumer spending recovers.

In response to uncertainties associated with the COVID-19 pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, reducing employee hours and deferring 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 , management decided to draw down the $280.0 million in remaining borrowing capacity under its credit facility.

Furthermore, the Company is in the process of reviewing and applying for wage subsidies, tax credits and other financial support under the newly enacted COVID-19 relief legislation in the countries in which it operates.

However, the legislation and guidance from the authorities continues to evolve and so the amount and timing of support , if any, that the Company could receive is not determinable at this time, and there can be no guarantees that the Company will receive financial support through these programs.

In addition, in the first quarter of 2020, the Company drew down the $280.0 million in 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.

(See Note 7 of Notes to Condensed Consolidated Financial Statements.) Furthermore, the Company has applied for wage subsidies,

tax credits and other financial support under the newly enacted COVID-19 relief legislation in the countries in which it operates.

The Company received approximately $2.2 million in July 2020 under the Canada Emergency Wage Subsidy program and expects to receive $1.0 million under the U.S.

CARES Act , both of which were recognized in the second quarter of 2020 as reduction s to s elling, g eneral and administrative expenses ($2.9 million) and costs and expenses applicable to revenues ($0.3 million) in the Condensed Consolidated Statements of Operations.

The Company will continue to review and apply for additional subsidies and credits for the remaining terms of these programs, where applicable .

Consistent with the first quarter of 2020, the Company performed a quantitative goodwill impairment test taking into account the latest available information and determined that its goodwill was not impaired as of June 30, 2020.

As of that date, the Company’s total Goodwill was $39.0 million, of which $19.0 million relates to the IMAX Systems reporting unit, $13.6 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 fair value of each reporting unit was assessed using a discounted cash flow model based on management’s estimated long-term projections, against which various sensitivity analyses were performed.

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 .

(See Note 1 of Notes to Condensed Consolidated Financial Statements.)

If business conditions deteriorate further, or should they remain depressed for a 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 as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

Estimates related to future expected credit losses and deferred tax assets could also be materially impacted by changes in estimates in the future.

(See Notes 1, 4 and 11 of Notes to Condensed Consolidated Financial Statements.)

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 II, Item 1A of this Form 10-Q.

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(ii) Joint Revenue Sharing Arrangements;

(iii) IMAX Systems, (iv) IMAX Maintenance;

(iii) IMAX Systems;

(iv) IMAX Maintenance;

(v) Other Theater Business;

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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 studios in exchange for converting commercial films into IMAX DMR format and distributing them through the IMAX network.

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.

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.

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.

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.

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collectively, the Company refers to those enhancements as “IMAX DNA”.

Filmmakers and studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films.

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.

Endgame , the highest-grossing film in history, released in April 2019, was shot entirely using IMAX cameras.

In addition, to date in 2020 Universal Pictures’ 1917 was released with select scenes specifically formatted for IMAX screens.

In addition, in 2020, Universal Pictures’ 1917 was released with select scenes specifically formatted for IMAX screens.

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, including 1 4 in China and one in each of Japan, South Korea, India and Russia, were released to the IMAX network .

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 the three months ended March 31, 2020 , one local language IMAX DMR film was released to the IMAX network , in Russia .

The IMAX Experience was released in China in July 2019 and was the Company’s first Chinese animated local language film title.

During the six months ended June 30, 2020, two local language IMAX DMR films were released to the IMAX network, one in Russia and one in Japan.

The Company expects to announce additional local language IMAX DMR films to be released to the IMAX network in the remainder of 2020 and beyond.

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

However, as a result of the theater closures associated with COVID-19, Hollywood and Chinese movie studios have postponed the release of multiple films, including many scheduled to be shown in IMAX theaters.

However, as a result of the theater closures associated with the COVID-19 global pandemic, Hollywood and Chinese movie studios have postponed the theatrical release of multiple films, including many scheduled to be shown in IMAX theaters, while other films have been released directly to streaming platforms.

Accordingly, the anticipated release dates for any films are uncertain.

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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.

The contingent rent earned from these arrangements is reported within the IMAX Technology Network.

Rental payments from the customer are required throughout the term of the arrangement and are due either monthly or quarterly.

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For hybrid joint revenue sharing arrangements that take the form of a sale, see the discussion below under IMAX Technology Sales and Maintenance.

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.

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.

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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 theater systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.

IMAX Technology Sales and Maintenance

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.

IMAX Technology Sales and Mai n tenance

The IMAX Technology Sales and Maintenance category includes results from the IMAX Systems, IMAX Maintenance, and Other Theater Business segments, as well as certain revenues from the JRSA segment, as described in more detail below.

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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 as the unearned income on that financed sale or sales-type lease is earned.

In addition, in sale arrangements, the variable consideration 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 adjusted in future periods based on actual results and changes in estimates.

Variable consideration is only recognized on sales transactions to the extent the Company believes there is not a risk of significant revenue reversal.

In a sale agreement, the customer takes title to the IMAX Theater System equipment.

In a hybrid joint revenue sharing arrangement that takes the form of a sale, title and control of the IMAX Theater System generally transfers to the customer upon the earlier of client acceptance of the theater installation, including projectionist training, or the theater opening to the public.

In certain instances, however, 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.

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.

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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 in the period of the underlying box results within the IMAX Technology Network, as discussed above, while the fixed upfront payment is recorded as revenue within IMAX Technology Sales and Maintenance.

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.

IMAX Maintenance

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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 to leverage its proprietary, innovative technologies, its leadership position in the entertainment technology space and its unique relationship with content creators.

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.

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

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

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

Connected Theaters

The Company is currently exploring new technologies and forms of content as a way to deepen consumer engagement and brand loyalty.

As such, the Company is currently engaged in discussions regarding new technologies to further connect the IMAX network and to facilitate bringing more unique content, including live events, to IMAX theater audiences.

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.

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Film Distribution and Post-production

Through the Film Distribution segment, the Company distributes large-format films, primarily for its institutional theater partners.

Through the Film Distribution segment, the Company licenses film content and distributes large-format films, primarily for its institutional theater partners.

The Company generally distributes films which it produces or for which it has acquired distribution rights from independent producers.

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IMAX N ETWORK AND BACKLOG

The following table provides detailed information about the IMAX network by type and geographic location as at March 31:

The following table provides detailed information about the IMAX network by type and geographic location as at June 30, 2020 and 2019:

June 30, 2020

June 30, 2019

Institutional

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Latin America includes South America, Central America and Mexico.

The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,526 operating as at March 31, 2020.

The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,527 operating as at June 30, 2020.

The Company believes that the majority of its future growth will come from international markets.

As at March 31, 2020, 72.0% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 70.4% as at March 31, 2019.

As at June 30, 2020, 72.0% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 70.7% as at June 30, 2019.

Revenues and gross box office derived from international markets continue to exceed revenues and gross box office from the United States and Canada.

Risks associated with the Company’s international business are outlined in “Risk Factors – The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects” in Item 1A of the Company’s 2019 Form 10-K.

Greater China is the Company’s largest market, measured by revenues, with approximately 31.4% of overall revenues generated from the Company’s Greater China operations in the year ended December 31, 2019.

This percentage decreased to 15.1% in the three months ended March 31, 2020 due to the repercussions of COVID-19 on the Company’s business during the period.

As at March 31, 2020, the Company had 714 theaters operating in Greater China with an additional 260 theaters in backlog that are scheduled to be installed by 2023.

Greater China is the Company’s largest market, measured by revenues, with approximately 31% of overall revenues generated from its Greater China operations in the year ended December 31, 2019.

As at June 30, 2020, the Company had 714 theaters operating in Greater China with an additional 271 theaters in backlog that are scheduled to be installed by 2023.

The Company’s backlog in Greater China represents 48.5% of the Company’s current backlog including upgrades.

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” in Item 2 of this Form 10-Q 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 II, Item 1A of this Form 10-Q.

The following table s provide detailed information about the Commercial Multiplex theater s in operation within IMAX network by arrangement type and geographic location as at March 31 :

The following table s provide detailed information about the Commercial Multiplex theater s in operation within the IMAX network by arrangement type and geographic location as at June 30, 2020 and 2019 :

June 30, 2020

Commercial Multiplex Theaters in IMAX Network

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Worldwide Total (1)

June 30, 2019

Commercial Multiplex Theaters in IMAX Network

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Worldwide Total (1)

As at March 31, 2020, 278 (2019 — 273) of the 731 (2019 — 681) theaters under traditional joint revenue sharing arrangements in operation, or 38.0% (2019 — 40.1%), were located in the United States and Canada, with the remaining 453 (2019 — 408) or 62.0% (2019 — 59.9%) of theaters being located in international markets.

Period-to-period changes in tables above are reported net of the effect of permanently closed theaters.

As at June 30, 2020, 278 (2019 — 275) of the 730 (2019 — 693) theaters under traditional joint revenue sharing arrangements in operation, or 38.1% (2019 — 39.7%), were located in the United States and Canada, with the remaining 452 (2019 — 418) or 61.9% (2019 — 60.3%) of theaters being located in international markets.

Sales Backlog

The following table provides detailed information about the Company’s sales backlog:

March 31, 2020

March 31, 2019

The following table provides detailed information about the Company’s sales backlog as at June 30, 2020 and 2019:

June 30, 2020

June 30, 2019

(in thousands)

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Sales and sales-type lease arrangements

Joint revenue sharing arrangements

Hybrid lease arrangements

Traditional arrangements

Includes a variable consideration estimate of $17.2 million (2019 — $16.1 million).

Traditional JRSA

Includes 46 IMAX Theater Systems (2019 — 60) where the customer has the option to convert from a joint revenue sharing arrangement to a sales arrangement.

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Current backlog information reflects all known elections.

The following table s provide detailed information about the Company’s sales backlog by arrangement type and geographic location as at March 31 :

The following table s provide detailed information about the Company’s sales backlog by arrangement type and geographic location as at June 30, 2020 and 2019 :

June 30, 2020

IMAX Theater System Backlog

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Worldwide Total

June 30, 2019

IMAX Theater System Backlog

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Includes 139 new IMAX with Laser projection system configurations and 118 upgrades of existing locations to IMAX with Laser projection system configurations.

Approximately 74.1% of IMAX Theater System arrangements in backlog as at March 31, 2020 are scheduled to be installed in international markets (2019 — 72.7%).

Approximately 75.3% of IMAX Theater System arrangements in backlog as at June 30, 2020 are scheduled to be installed in international markets (2019 — 72.7%).

Signings and Installations

The following tables provide detailed information about IMAX Theater System signings and installations:

The following tables provide detailed information about IMAX Theater System signings and installations for the three and six months ended June 30, 2020 and 2019:

For the Three Months Ended

For the Six Months Ended

Theater System Signings:

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For the Three Months Ended

For the Six Months Ended

Theater System Installations:

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The Company’s business and future prospects are evaluated by Richard L.

Gelfond, its Chief Executive Officer (“CEO”), using a variety of financial and operational metric including:

the signing, installation and financial performance of theater system arrangements, particularly those involving joint revenue sharing arrangements and laser-based projection systems;

Gelfond, its Chief Executive Officer (“CEO”), using a variety of financial and operational metrics including:

the signing, installation and financial performance of theater system arrangements, particularly joint revenue sharing arrangements and those involving laser-based projection systems;

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

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revenues and gross margins from the Company’s segments, as discussed below;

earnings from operations as adjusted for unusual items;

consolidated earnings from operations, as adjusted for unusual items;

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

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short- and long-term cash flow projections.

The CEO is the Company’s Chief Operating Decision Maker (“CODM”), as such term is defined under generally accepted accounting principles.

The CEO is the Company’s Chief Operating Decision Maker (“CODM”), as such term is defined under U.S.

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 intangibles, receivables provisions (recoveries), write-downs (net of recoveries), interest income, interest expense and the income tax provision are not allocated to the segments.

Selling, general and administrative expenses, research and development costs, the amortization of intangibles, 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 segments.

The Company has organized its reportable segments into the following four categories:

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(vii) Film Distribution;

and (viii) Film Post-production which are described above under “Sources of Revenue.” The Company believes that this approach is consistent with how the CODM reviews the financial performance of the business and makes strategic decisions regarding resource allocation and investments to meet long-term business goals.

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.

Three Months Ended March 31, 2020 versus Three Months Ended March 31, 2019

For the three months ended March 31, 2020, the Company reported a net loss attributable to common shareholders of $(49.4) million, or $(0.82) per basic and diluted share, as compared to net income attributable to common shareholders of $8.3 million, or $0.13 per basic and diluted share, for the same period in 2019.

For the three months ended March 31, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(28.7) million, or $(0.48) per basic and diluted share*, as compared to adjusted net income attributable to common shareholders* of $10.8 million, or $0.18 per diluted share*, for the same period in 2019.

The following table sets forth the breakdown of revenue and gross margin by category and reportable segment for the three months ended March 31:

Results of Operations for the Three Months Ended June 30 , 2020 and June 30 , 2019

For the three months ended June 30, 2020, the Company reported a net loss attributable to common shareholders of $(26.0) million, or $(0.44) per basic and diluted share, as compared to net income attributable to common shareholders of $11.4 million, or $0.19 per basic and diluted share, for the same period in 2019.

For the three months ended June 30, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(26.1) million, or $(0.44) per basic and diluted share*, as compared to adjusted net income attributable to common shareholders* of $19.7 million, or $0.32 per diluted share*, for the same period in 2019.

The following table sets forth the breakdown of revenue and (margin loss) gross margin by category and reportable segment for the three months ended June 30, 2020 and 2019:

(In thousands of U.S.

(Margin Loss) Gross Margin

IMAX Technology Network

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Film Distribution and Post-production

Includes initial 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.

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.

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

(3) The Company is reporting negative revenue due to the continued amortization of lessee incentives that are typically netted against lease revenues, which are abnormally low in the period due to the COVID-19 global pandemic, as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

(4) The Company is reporting negative revenue due to an adjustment to prior period revenue.

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

Revenues and Gross Margin

In the first quarter of 2020, substantially all of the theaters in the IMAX network were closed for some period of the time, with the theaters in Greater China closed since late-January and the remainder of the Company’s theaters closed in mid-to-late March, due to the outbreak of the COVID-19 global pandemic.

As a result, the Company’s results of operations for the period materially declined versus the prior year period.

For the three months ended March 31, 2020, revenues and gross margin decreased $45.3 million (56.5%) and $40.0 million (88.7%), respectively, when compared to the same period in 2019.

Due to the COVID-19 global pandemic, substantially all of the theaters in the IMAX network were closed in the second quarter of 2020.

As a result, the Company’s results of operations for the period materially declined when compared to the prior year.

For the three months ended June 30, 2020, revenues and gross margin decreased by $95.9 million (92%) and $67.2 million (113%), respectively, when compared to the same period in 2019.

IMAX Technology Network

IMAX Technology Network performance is impacted by box office performance, as well as other factors including the timing of film release to the IMAX network, the commercial success of the film, the level of marketing spend associated with films released in the period, the Company’s take rates under its DMR and joint revenue sharing arrangements, and the distribution window for the exhibition of films in the IMAX network.

Other factors impacting IMAX Technology Network performance include fluctuations in the value of foreign currencies versus the U.S.

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 period.

Other factors impacting IMAX Technology Network results include fluctuations in the value of foreign currencies versus the U.S.

dollar and potential currency devaluations.

For the three months ended March 31, 2020, IMAX Technology Network revenues and gross margin decreased $29.4 million (63.9%) and $28.9 million (91.1%), respectively, when compared to the same period in 2019.

See below for a discussion of the performance of the IMAX DMR and JRSA, contingent rent, categories.

For the three months ended March 31, 2020, IMAX DMR revenues and gross margin decreased by $17.3 million (62.0%) and $15.4 million (77.5%), respectively, when compared to the same period in 2019.

These decreases are due to a $161.1 million (62.8%) decrease in GBO generated by IMAX DMR films in the first quarter of 2020, due to the temporary closure of theaters in the network due to the public health risks associated with the COVID-19 global pandemic.

In the first quarter of 2020, GBO was generated primarily by the exhibition of 13 films (9 new and 4 carryovers), as compared to 24 films (12 new and 12 carryovers) exhibited in the first quarter of 2019.

IMAX DMR gross margin is a function of the costs associated with the respective films exhibited in the period, and can vary particularly with respect to marketing expenses.

DMR marketing expenses in the first quarter of 2020 were $2.4 million, as compared to $3.9 million in the first quarter of 2019.

For the three months ended June 30, 2020, IMAX Technology Network revenues and gross margin decreased by $64.4 million (99%) and $49.8 million (115%), respectively, when compared to the same period in 2019.

See below for separate discussions of IMAX DMR and JRSA contingent rent results for the period.

Due to the COVID-19 global pandemic, substantially all of the theaters in the IMAX network were closed in the second quarter of 2020.

As a result, for the three months ended June 30, 2020, IMAX DMR revenues and gross margin decreased by $38.7 million (99%) and $24.0 million (100%), respectively, when compared to the same period in 2019.

These decreases are due to a $362.3 million (99%) reduction in GBO receipts generated by IMAX DMR films in the second quarter of 2020 as a result of the COVID-19 theater closures.

In the second quarter of 2020, GBO was generated by the exhibition of one new film as compared to 19 films (15 new and 4 carryovers) exhibited in the second quarter of 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 period, and can vary from period-to-period, particularly with respect to marketing expenses.

For the three months ended June 30, 2020, marketing expenses related to IMAX DMR films were $nil, as compared to $9.5 million during the same period of 2019.

Joint Revenue Sharing Arrangements – Contingent Rent

For the three months ended March 31, 2020, JRSA contingent rent revenue and gross margin decreased $12.0 million (66.9%) and $13.6 million (113.6%), respectively, when compared to the same period in 2019.

As at March 31, 2020, 867 theaters were operating under joint revenue sharing arrangements, as compared to 809 theaters as at March 31, 2019, an increase of 7.2%.

The decreases in revenue and gross margin are due to an $88.9 million (66.6%) decrease in GBO generated by IMAX DMR films in the first quarter of 2020 due to the temporary closure of theaters in the network due to the public health risks associated with the COVID-19 global pandemic.

JRSA margin is a function of the revenue generated at each JRSA theater system location, along with the costs associated with each theater system, such as the increase in depreciation on new IMAX with Laser systems and costs incurred for the upgrade of theater systems from a digital-xenon system to an IMAX with Laser system.

Included in the calculation of JRSA gross margin for the first quarter of 2020 was depreciation of $6.9 million, as compared to $5.6 million in the first quarter of 2019, as a result of the 7.2% increase in the number of theaters operating under joint revenue sharing arrangements.

The JRSA gross margin includes certain advertising, marketing and commission costs primarily associated with new theater launches of $0.5 million, as compared to $0.1 million during the first quarter of 2019.

Advertising, marketing and commission costs are driven by the number of JRSA theater systems deployed in a given quarter, for which there were 9 in the quarter.

Due to the COVID-19 global pandemic, substantially all of the theaters in the IMAX network were closed in the second quarter of 2020.

As a result, for the three months ended June 30, 2020, JRSA contingent rent revenue and gross margin decreased by $25.7 million (101%) and $25.8 million (134%), respectively, when compared to the same period in 2019.

These decreases are due to an $185.1 million (100%) reduction in GBO generated by theaters under joint revenue sharing arrangements in the second quarter of 2020 as a result of the COVID-19 theater closures.

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 period 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 three months ended June 30, 2020, JRSA gross margin included depreciation expense of $6.2 million, as compared to $5.7 million in the same period of the prior year as a result of the 5% increase in the number of theaters operating under joint revenue sharing arrangements.

For the three months ended June 30, 2020, JRSA gross margin includes advertising, marketing and commission costs of less than $0.1 million, as compared to $0.2 million in the same period of the prior year.

IMAX Technology Sales and Maintenance

The primary drivers of IMAX Technology Sales and Maintenance performance are the number of IMAX Theater systems installed in a period, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation.

The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a period, 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.

The following table provides detailed information about the mix of IMAX Theater System installations for the three months March 31:

For the Three Months Ended March 31,

The following table provides detailed information about the mix of IMAX Theater System installations for the three months ended June 30, 2020 and 2019:

For the Three Months Ended June 30,

New IMAX Theater Systems — installed and recognized

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Total IMAX Theater Systems installed and recognized

The arrangements for the sale of IMAX Theater System includes fixed upfront and ongoing consideration, including indexed annual minimum payment increases over the term of the arrangement, as well as provision for additional payments in excess of the minimum agreed payments in situations when the theater exceeds certain box office thresholds.

The average revenue per full, new IMAX Theater System under a sales and sales-type lease arrangement varies depending upon the number of IMAX Theater System commitments with a single respective exhibitor, an exhibitor’s location or various other factors.

Average revenue per full, new IMAX Theater System under a sales and sales-type lease arrangement was $1.0 million during the first quarter of 2020, compared to $1.4 million during the first quarter of 2019.

For the three months ended March 31, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased $15.1 million (49.9%) and $8.4 million (63.9%), respectively, when compared to the same period in 2019 due to the temporary closure of theaters in the network due to the public health risks associated with the COVID-19 global pandemic.

See below for a discussion of the performance of IMAX Systems and IMAX Maintenance.

For the three months ended March 31, 2020, IMAX Systems revenue and gross margin decreased $7.3 million (56.3%) and $3.9 million (55%), respectively, when compared to the same period in 2019.

These decreases are the result of eight fewer IMAX Theater System installations in the first quarter of 2020, as compared to the first quarter of 2019, due to a delay in theater system installations amidst the COVID-19 pandemic.

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 the provision for additional payments in excess of the minimum agreed payments in situations when the theater exceeds certain box office thresholds.

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.

Average revenue per IMAX Theater System under sales and sales-type lease arrangements was $0.9 million for the three months ended June 30, 2020, as compared to $1.3 million during the same period of the prior year.

For the three months ended June 30, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased by $30.2 million (87%) and $15.1 million (99%), respectively, when compared to the same period in the prior year as the pace of theater system installations slowed significantly and regular maintenance services were suspended due to the COVID-19 global pandemic.

See below for separate discussions of IMAX Systems and IMAX Maintenance results for the period.

For the three months ended June 30, 2020, IMAX Systems revenue and gross margin decreased by $12.0 million (72%) and $5.4 million (67%), respectively, when compared to the same period in the prior year.

These decreases are the result of the twelve fewer IMAX Theater System installations in the current period as the pace of theater system installations slowed significantly due to the COVID-19 global pandemic.

IMAX Maintenance

For the three months ended March 31, 2020, IMAX Maintenance revenue and gross margin decreased $5.6 million (43.1%) and $4.5 million (85.6%), respectively.

These decreases are due to the temporary closure of theaters in the network due to the public health risks associated with the COVID-19 global pandemic.

During the period while theaters are closed, the Company will not be able to provide maintenance services to the theaters in the network and the associated revenue will not be recognized.

For the three months ended June 30, 2020, IMAX Maintenance revenue and gross margin decreased by $13.2 million (100%) and $7.5 million (134%), respectively, as regular maintenance services were suspended and the associated revenue was not recognized during the period due to the COVID-19 global 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- p roduction

For the three months ended March 31, 2020, film distribution and post-production revenue decreased $0.2 million (6.3%) and the margin loss increased by $1.9 million, respectively, when compared to the same period in 2019.

The Company reviewed the carrying value of certain film assets as a result of lower than expected revenue being generated during the year and revised expectations for future revenues based on the latest information available.

In the first quarter of 2020, an impairment of $2.3 million was recorded based on the carrying value of the films as compared to the estimated future box office and related revenues that are ultimately expected to be generated by their exploitation.

For the three months ended June 30, 2020, Film Distribution and Post-production revenue decreased by $0.4 million (12%) and gross margin decreased by $1.9 million, respectively, when compared to the same period in the prior year.

The results for second quarter of 2020 are significantly influenced by a $2.2 million impairment loss recorded in the period 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 June 30, 2020 , following the recording of these write-downs, the Company’s film assets totaled $13.1 million, which principally consists of documentary and DMR content.

The recoverability of these assets assumes the return to historical levels of box office results as theaters reopen following the lifting of COVID-19 restrictions.

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 Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements.)

Selling, General and Administrative Expenses

The following reflects the significant items impacting selling, general and administrative expenses for the first quarter of 2020 and 2019:

Three Months Ended

Share-based compensation

Consulting and professional fees

Foreign exchange loss

Other general corporate expenditures

Other general corporate expenditures include professional fees and travel and entertainment.

For the three months ended March 31, 2020, selling, general and administrative expenses increased $1.0 million (3.6%), when compared to 2019.

Selling, general and administrative expenses excluding the impact of share-based compensation were $24.9 million in the first quarter of 2020, as compared to $23.7 million in the first quarter of 2019, representing an increase of $1.2 million (5.0%).

These increases are primarily driven by a $0.8 million increase to consulting and professional fees and a $0.9 million increase in other general corporate expenses, partially offset by decreases in marketing and staff costs.

For the three months ended June 30, 2020, Selling, General and Administrative Expenses decreased by $2.3 million (7%), when compared to the same period in 2019.

For the three months ended June 30, 2020, Selling, General and Administrative Expenses excluding the impact of share-based compensation were $23.3 million, as compared to $25.6 million in the same period in 2019, representing a decrease of $2.3 million (9%).

The comparison to the prior year is significantly influenced by COVID-19 government relief that the Company became entitled to receive during the period under the Canada Emergency Wage Subsidy program and the U.S.

CARES Act, of which $2.9 million was recognized in the second quarter of 2020 as a reduction to Selling, General and Administrative Expenses.

Also impacting the comparison to the prior period are management’s cost control efforts 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 an approximate $8.0 million 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 idling of the Company’s productive capacity during the COVID-19 global pandemic.

Credit Loss Expense

For the three months ended June 30, 2020, the Company recorded a provision for current expected credit losses of $1.4 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, as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

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 three months ended June 30, 2019, credit loss expense was $0.9 million.

(See Notes 2 and 3 of Notes to Condensed Consolidated Financial Statements.)

Gain (loss) in fair value of equity securities

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 three months ended June 30, 2020, the fair value of the Company’s investment in Maoyan experienced an unrealized gain of $2.0 million, as compared to an unrealized loss of $4.5 million in the same period of the prior year, which are both recognized in the Condensed Consolidated Statements of Operations.

The Company’s effective tax benefit rate for the three months ended June 30, 2020, is 25.4% and differs from the Canadian statutory tax rate of 26.2%, primarily due to permanent book to tax differences, investment and other tax credits, jurisdictional tax rate differences, management’s estimates of contingent liabilities related to the resolution of various tax examinations and withholding taxes associated with the reversal of the indefinite reinvestment assertion for certain foreign subsidiaries, as discussed below.

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 $19.7 million in the first quarter of 2020 for the estimated applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings.

In the second quarter of 2020, the estimate of the applicable foreign withholding taxes was reduced by $1.2 million to $18.5 million due to a reduction in the amount of distributable historical earnings .

Cash held outside of Canada as at June 30, 2020 was $75.0 million ( December 31, 2019 — $90.1 million ), of which $61.5 million was held in the People’s Republic of China (“PRC”) ( December 31, 2019 — $67.6 million ).

For the three months ended June 30, 2020, the Company recorded income tax benefit of $10.2 million (2019 — tax expense of $5.3 million), which includes the $1.2 million reduction to the foreign withholding taxes discussed above.

In addition, in the second quarter of 2020 , the Company recognized income tax expense of $0.3 million (2019 — $0.1 million) related to the provision for uncertain tax positions.

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheets include net deferred income tax assets of $46.8 million, net of a valuation allowance of $0.2 million (December 31, 2019 — $23.9 million).

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheets include a deferred income tax liability of $18.5 million (December 31, 2019 — $nil).

During the three months ended June 30, 2020, deferred tax assets increased by $8.9 million due to losses recognized in the period.

The recoverability of these deferred tax assets is subject to certain levels of future taxable income and the uncertainties associated with accounting estimates, as discussed in Note 1 of Notes to Condensed Consolidated Financial Statements.

Based on a review of the projected future earnings of the Company there was no change in management’s estimates of the recoverability of the Company’s deferred tax assets.

Should actual results differ from management’s estimates of future taxable income, an increased valuation allowance may be required.

The Company’s Chinese subsidiary had taken a deduction for certain share-based compensation issued by its parent company in a prior period and had recognized a related deferred tax asset of $ 1.4 million (December 31, 2019 — $ 1.4 million).

Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed settlement of these transactions before they can be completed.

There may be a requirement for future investment of funds into China in order to secure the deduction.

Should the Company proceed, any such future investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary.

Non-Controlling Interests

The Company’s Condensed Consolidated Financial Statements primarily 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 three months ended June 30, 2020, the net loss attributable to non-controlling interests of the Company’s subsidiaries was $4.1 million (2019 ─ net income of $2.4 million).

Results of Operations for the Six Months Ended June 30 , 2020 and 2019

For the six months ended June 30, 2020, the Company reported a net loss attributable to common shareholders of $(75.3) million, or $(1.26) per basic and diluted share, as compared to net income attributable to common shareholders of $19.7 million, or $0.32 per basic and diluted share, for the same period in 2019.

For the six months ended June 30, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(54.8) million, or $(0.92) per basic and diluted share*, as compared to adjusted net income attributable to common shareholders* of $30.5 million, or $0.50 per diluted share*, for the same period in 2019.

The following table sets forth the breakdown of revenue and (margin loss) gross margin by category and reportable segment for the six months ended June 30, 2020 and 2019:

(In thousands of U.S.

(Margin Loss) Gross Margin

IMAX Technology Network

Joint revenue sharing arrangements, contingent rent

IMAX Technology Sales and Maintenance

IMAX Systems (1)

Joint revenue sharing arrangements, fixed fees

IMAX Maintenance

Other Theater Business (2)

New Business Initiatives

Film Distribution and Post-production

To a lesser extent, also includes finance income associated with these revenue streams.

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.

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 the six months ended June 30, 2020, with the theaters in Greater China closed since late-January and substantially all of the Company’s remaining theaters closed since mid-to-late March.

As a result, the Company’s results of operations for the six-month period materially declined versus the prior year.

For the six months ended June 30, 2020, revenues and gross margin decreased by $141.2 million (76%) and $107.3 million (102%), respectively, when compared to the same period in 2019.

IMAX Technology Network

Other factors impacting IMAX Technology Network results include fluctuations in the value of foreign currencies versus the U.S.

dollar and potential currency devaluations.

For the six months ended June 30, 2020 , IMAX Technology Network revenues and gross margin decreased by $93.8 million ( 85 %) and $78.7 million ( 105 %), respec tively, when compared to the same period in 2019 .

See below for separate discussion s of IMAX DMR and JRSA contingent rent results for the period .

As a result, for the six months ended June 30, 2020, IMAX DMR revenues and gross margin decreased by $56.1 million (83%) and $39.3 million (90%), respectively, when compared to the same period in 2019.

These decreases are due to a $523.4 million (84%) reduction in GBO generated by IMAX DMR films as a result of the theater closures.

For the six months ended June 30, 2020, GBO was generated primarily by the exhibition of 14 films (10 new and 4 carryovers), as compared to 39 films (27 new and 12 carryovers) exhibited in the six months ended June 30, 2019.

For the six months ended June 30, 2020, marketing expenses related to IMAX DMR films were $2.4 million, as compared to $13.4 million during the same period of 2019.

Joint Revenue Sharing Arrangements – Contingent Rent

As a result, for the six months ended June 30, 2020, JRSA contingent rent revenue and gross margin decreased by $37.8 million (87%) and $39.4 million (126%), respectively, when compared to the same period in 2019.

The decreases in revenue and gross margin are due to a $274.0 million (86%) reduction in GBO generated by theaters under joint revenue sharing arrangements during the current period due to the theater closures.

As at June 30, 2020, 868 theaters were operating under joint revenue sharing arrangements, as compared to 826 theaters as at June 30, 2019, an increase of 5%.

The level of depreciation expense in a period 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 six months ended June 30, 2020, JRSA gross margin included depreciation expense of $13.2 million, as compared to $11.3 million in the same period of the prior year as a result of the 5% increase in the number of theaters operating under joint revenue sharing arrangements.

For the six months ended June 30, 2020, JRSA gross margin includes certain advertising, marketing and commission costs of $0.6 million, as compared to $0.3 million in the same period of the prior year.

IMAX Technology Sales and Maintenance

The following table provides detailed information about the mix of IMAX Theater System installations for the six months ended June 30, 2020 and 2019:

For the Six Months Ended June 30,

New IMAX Theater Systems — installed and recognized

Sales and sales-types lease arrangements (1)

Joint revenue sharing arrangements — hybrid

Total new IMAX Theater Systems

IMAX theater system upgrades — installed and recognized

Sales and sales-types lease arrangements

Total IMAX Theater Systems installed and recognized

Average revenue per IMAX Theater System under sales and sales-type lease arrangements was $0.9 million during the six months ended June 30, 2020, compared to $1.3 million during the same period of the prior year.

For the six months ended June 30, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased by $45.3 million (70%) and $23.5 million (83%), respectively, when compared to the same period in the prior year as the pace of theater system installations slowed significantly and regular maintenance services were suspended due to the temporary closure of theaters in the network due to the public health risks associated with the COVID-19 global pandemic.

See below for separate discussions of IMAX Systems and IMAX Maintenance results for the period.

For the six months ended June 30, 2020, IMAX Systems revenue and gross margin decreased by $19.3 million (65%) and $9.2 million (61%), respectively, when compared to the same period in the prior year.

These decreases are the result of 20 fewer IMAX Theater System installations in the current period as the pace of theater system installations slowed significantly due to the COVID-19 global pandemic.

IMAX Maintenance

For the six months ended June 30, 2020, IMAX Maintenance revenue and gross margin decreased by $18.8 million (72%) and $12.1 million (111%), respectively, as regular maintenance services were suspended and the associated revenue was not recognized during the period when substantially all of the theaters in the network were temporarily closed due to the COVID-19 global pandemic.

Film Distribution and Post-production

For the six months ended June 30, 2020, Film Distribution and Post-production revenue decreased by $0.6 million (9%) and gross margin decreased by $3.8 million, respectively, when compared to the same period in the prior year.

The results for the current six-month period are significantly influenced by a $4.5 million impairment loss recorded in the period 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 June 30, 2020 , following the recording of these write-downs, the Company’s film assets totaled $13.1 million, which principally consists of documentary and DMR content.

The recoverability of these assets assumes the return to historical levels of box office results as theaters reopen following the lifting of COVID-19 restrictions.

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 Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements.)

Selling, General and Administrative Expenses

For the six months ended June 30, 2020, Selling, General and Administrative Expenses decreased by $1.4 million (2%), when compared to the same period in 2019.

For the three months ended June 30, 2020, Selling, General and Administrative Expenses excluding the impact of share-based compensation were $48.2 million, as compared to $49.4 million in the same period in 2019, representing a decrease of $1.2 million (2%).

CARES Act, of which $2.9 million was recognized in the second quarter of 2020 as a reduction to Selling, General and Administrative Expenses.

Also impacting the comparison to the prior period are management’s cost control efforts 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 an approximate $9.0 million 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 idling of the Company’s productive capacity during the COVID-19 global pandemic.

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 next-generation laser-based projection system, which the Company believes delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today.

For the three months ended March 31, 2020, research and development expenses increased $1.1 million (93.7%), when compared to the same period in 2019, primarily due to costs associated with the Connected Theaters initiative.

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 six months ended June 30, 2020, Research and Development expenses increased by $1.1 million (46%), when compared to the same period in 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.

The Company has been, and intends to continue, using time and resources during the theater shutdown 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.

In addition, the Company has been, and intends to continue, using time and resources during the theater shutdown 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 three months ended March 31, 2020, the Company recorded a provision for current expected credit losses of $10.2 million reflecting a reduction in the credit quality of its theater and studio related receivable balances as a result of the risks and uncertainties associated with the COVID-19 pandemic, as discussed in Note 2 of Notes to the Condensed Consolidated Financial Statements.

Management’s judgments regarding expected credit losses are based on the facts available to management.

For the six months ended June 30, 2020, the Company recorded a provision for current expected credit losses of $11.7 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, as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

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 three months ended March 31, 2019, credit loss expense was $0.4 million.

(See Notes 2 and 3 of Notes to the Condensed Consolidated Financial Statements)

For the six months ended June 30, 2019, credit loss expense was $1.4 million.

(See Notes 2 and 3 of Notes to Condensed Consolidated Financial Statements.)

Asset Impairments

For the three months ended March 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 period.

Change in fair value of equity securities

For the six months ended June 30, 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 period.

(See Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements.)

Gain (loss) in fair value of equity securities

In the second 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 three months ended March 31, 2020, the fair value of the Company’s investment in Maoyan had an unrealized loss of $4.5 million, as compared to an unrealized gain of $2.5 million in the same period of 2019, which are both recognized in the Condensed Consolidated Statements of Operations.

The Company’s effective tax rate for the three months ended March 31, 2020 is -35.8% and differs from the Canadian statutory tax rate of 26.2%, primarily due to permanent book to tax differences, investment and other tax credits, jurisdictional tax rate differences, managements estimates for favourable or unfavourable resolution of various tax examinations and the reversal of the indefinite reinvestment assertion.

For the quarter ended March 31, 2020, the Company recorded income tax expense of $15.5 million (2019 — $3.6 million).

This adjustment will fluctuate based on the closing market price at the end of each

For the six months ended June 30, 2020 , the fair value of the Company’s investment in Maoyan experienced an unrealized loss of $2.5 million , as compared to an unrealized loss of $2.1 million in the same period in the prior year , which are both recognized in the Condensed Consolidated Statements of Operations.

The Company’s effective tax rate for the six months ended June 30, 2020 is -6.3% and differs from the Canadian statutory tax rate of 26.2%, primarily due to permanent book to tax differences, investment and other tax credits, jurisdictional tax rate differences, managements estimates of contingent liabilities related to the resolution of various tax examinations and withholding taxes associated with the reversal of the indefinite reinvestment assertion for certain foreign subsidiaries, as discussed below.

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.

As a result, the Company recognized a deferred tax liability of $19.7 million in the first quarter of 2020 for the applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings.

Cash held outside of Canada as at March 31, 2020 was $89.5 million (December 31, 2019 — $90.1 million), of which $67.8 million was held in the People’s Republic of China (“PRC”) (December 31, 2019 — $67.6 million).

In addition, in the first quarter of 2020, the Company recognized income tax expense of $4.8 million (2019 — $0.4 million) related to a provision for uncertain tax positions and an expense of $0.7 million (2019 — $0.3 million) recognized to reduce the tax benefit available on share-based compensation costs recognized in the period.

As at March 31, 2020, the Company had net deferred income tax assets after valuation allowance of $38.0 million (December 31, 2019 — $23.9 million), which consists of a gross deferred income tax asset of $38.2 million (December 31, 2019 — $24.1 million), against which the Company is carrying a $0.2 million valuation allowance (December 31, 2019 — $0.2 million) and a deferred income tax liability of $19.7 million (December 31, 2019 — $nil).

During the three months ended March 31, 2020, deferred tax assets increased by $14.1 million due to losses recognized in the period.

The recoverability of these deferred tax assets is subject to certain levels of future taxable income and is subject to the uncertainties associated with accounting estimates, as discussed in Note 1 of Notes to the Condensed Consolidated Financial Statements.

Cash held outside of Canada as at June 30, 2020 was $75.0 million (December 31, 2019 — $90.1 million), of which $61.5 million was held in the People’s Republic of China (“PRC”) (December 31, 2019 — $67.6 million).

For the six months ended June 30, 2020 , the Company recorded income tax expense of $5.3 million (2019 — $9.0 million) , which includes the $18.5 million foreign withholding taxes discussed above .

In addition, in the six months ended June 30, 2020, the Company recognized income tax expense of $5.1 million ( 2019 — $0.5 million) related to the provision for uncertain tax positions and an expense of $0.7 million ( 2019 — $0.3 million) recognized to reduce the tax benefit available on share-based compensation costs recognized in the period.

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheets include a deferred income tax liability of $18.5 million (December 31, 2019 — $nil).

During the six months ended June 30, 2020, deferred tax assets increased by $22.9 million due to losses recognized in the period.

Based on a review of the projected future earnings of the Company there was no change in management’s estimates of the recoverability of the Company’s deferred tax assets.

The Company’s Chinese subsidiary had taken a deduction for certain share-based compensation issued by the Chinese subsidiary’s parent company in a prior period and had recognized a related deferred tax asset of $1.4 million (December 31, 2019 — $1.4 million).

Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed settlement

of these transactions before they can be completed.

Should actual results differ from management’s estimates of future taxable income, an increased valuation allowance may be required.

Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed settlement of these transactions before they can be completed.

There may be a requirement for future investment of funds into China in order to secure the deduction.

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Equity Method Investments

For the three months ended March 31, 2020, the Company reported a loss of $0.5 million related its proportionate share of equity investee results, as compared to a loss of $0.1 million in the same period of the prior year, due to the write-off of deferred tax assets related to an equity method investment.

For the six months ended June 30, 2020, the Company reported a loss of $0.5 million related its proportionate share of equity investee results, as compared to $0.2 million in the same period in the prior year, due to the write-off of deferred tax assets related to an equity method investment.

Non-Controlling Interests

The Company’s Condensed Consolidated Financial Statements include the non-controlling interest in the net income of IMAX China as well as the impact of non-controlling interests in its subsidiaries created for the Original Film Fund and VR Content Fund activity.

For the three months ended March 31, 2020 the net loss attributable to non-controlling interests of the Company’s subsidiaries was $10.1 million (2019 ─ income of $4.2 million).

The Company’s Condensed 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 six months ended June 30, 2020, the net loss attributable to non-controlling interests of the Company’s subsidiaries was $14.1 million (2019 ─ net income of $6.7 million).

LIQUIDITY AND CAPITAL RESOURCES

The Company has Fifth Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as agent, and a syndicate of lenders party thereto.

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

Under the Credit Agreement expands the Company’s revolving borrowing capacity is $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.

The facility (the “Credit Facility”) matures on June 28, 2023.

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, management decided to draw down the remaining available Credit Facility borrowing capacity of $280.0 million, resulting in total outstanding borrowings of $300.0 million.

The effective interest rate for the three months ended March 31, 2020 was 2.03% (2019 ― 3.57%).

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;

Credit Agreement

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 the $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 at 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”).

The Company was in compliance with all of its requirements under the Credit Agreement, as amended, as at June 30, 2020, and based on current projections expects to be in compliance through at least the next year.

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);

In addition, the Credit Facility has standby fees ranging from 0.25% to 0.38% based upon the Total Leverage Ratio.

The Credit Facility requires that the Company maintain a Senior Secured Net Leverage Ratio, as at the last day of any Fiscal Quarter (as defined in the Credit Agreement) of no greater than 3.25:1.00.

The Company was in compliance with this requirement at March 31, 2020.

The Senior Secured Net Leverage Ratio (as defined in the Credit Agreement) was 1.93:1 as at March 31, 2020, where Total Debt (as defined in the Credit Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar instruments, net of up to $75.0 million in unrestricted cash and cash equivalents outside of the People’s Republic of China (“PRC”), was $225.0 million.

The longer the COVID-19 pandemic and associated protective measures persist, the more likely it becomes, in the absence of other actions by the Company, that it will be unable to maintain compliance with this covenant.

In such an event, however, the Company expects to be able to obtain an amendment or waiver from its lenders, refinance the borrowings subject to covenants or take other mitigating actions prior to a potential breach.

See “Non-GAAP Financial Measures” below for the Adjusted EBITDA per Credit Facility calculation.

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 three and six months ended June 30, 2020 was 1.83% and 1.86%, respectively (2019 ― 3.52% and 3.55%, respectively).

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;

The Company incurred fees of approximately $1.0 million in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.

Working Capital Loan

Working Capital Facility

On July 24, 2019, IMAX (Shanghai) Multimedia Technology Co., Ltd.

(“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.0 million USD) to fund ongoing working capital requirements.

There were no amounts drawn under the working capital facility at March 31, 2020 and December 31, 2019, and the amounts available for borrowing were 200.0 million Renminbi (approximately $30.0 million U.S.

The amounts available for borrowing are not subject to a standby fee.

(“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.0 million) to fund ongoing working capital requirements (the “Working Capital Facility”).

As at June 30, 2020, there was 1.7 million Renminbi ($0.2 million) in borrowings outstanding under the Working Capital Facility, and 198.3 million Renminbi ($29.8 million) was available for future borrowings.

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 three and six months ended June 30, 2020 was 4.35%, respectively.

Subsequent to June 30, 2020, IMAX Shanghai renewed its Working Capital Facility.

Letters of Credit and Other Commitments

As at March 31, 2020, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2019 — $nil), under the Credit Facility.

As at June 30, 2020, the Company did not have any letters of credit or advance payment guarantees outstanding (December 31, 2019 — $nil), under the Credit Facility.

On October 28, 2019, the Company entered into a $5.0 million facility for advance payment guarantees and letters of credit through the National Bank of Canada for use solely in conjunction with guarantees fully insured by Export Development Canada (the “NBC Facility”) to replace a Bank of Montreal Facility with substantially the same terms which expired on September 30, 2019.

The NBC Facility is unsecured and includes typical affirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year.

As at March 31, 2020, the Company did not have any letters of credit or advance payment guarantees outstanding under the NBC Facility.

As at June 30, 2020, the Company did not have any letters of credit or advance payment guarantees outstanding under the NBC Facility.

Cash and Cash Equivalents

As at March 31, 2020, the Company’s principal sources of liquidity included cash and cash equivalents of $352.3 million (including the $280.0 million in Credit Facility borrowings drawn in the first quarter of 2020, as discussed above), the anticipated collection of trade accounts receivable of $64.8 million including receivables from theaters under joint revenue sharing arrangements and DMR agreements with studios, anticipated collection from financing receivables due in the next 12 months of $29.4 million and payments expected in the next 12 months on existing backlog deals.

There were no letters of credit and advance payment guarantees outstanding under the Credit Facility or the NBC Facility.

Cash held outside of Canada as at March 31, 2020 was $89.5 million (December 31, 2019 — $90.1 million), of which $67.8 million was held in the PRC (December 31, 2019 — $67.6 million).

Funds repatriated from certain jurisdictions are subject to withholding taxes when dividends are paid.

The Company recognized a charge of $19.7 million in the three months ended March 31, 2020 for withholding taxes applicable to historical foreign earnings.

In 2017, the Company's Board of Directors announced a new share repurchase program which authorizes the repurchase of up to $200.0 million of its common shares by June 30, 2020.

The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors.

The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time.

During the three months ended March 31, 2020, the Company repurchased 2,484,123 common shares at an average price of $14.72 per share, excluding commissions.

During the three months ended March 31, 2020, the Company had an increase in cash of $242.8 million.

The Company used cash of $2.7 million to fund investing activities, of which $1.6 million was invested in equipment for use in the Company’s joint revenue sharing arrangements with exhibitors.

In addition, $1.1 million was used to purchase other intangible assets and to purchase property, plant and equipment.

Based on management’s current operating plan for 2020, the Company expects to continue to use cash to deploy additional IMAX Theater Systems under joint revenue sharing arrangements, to fund DMR agreements with studios, and to potentially make share repurchases.

Cash flows from joint revenue sharing arrangements are derived from the theater box-office and concession revenues and the Company invested directly in the roll out of 2 new IMAX Theater Systems under joint revenue sharing arrangements during the three months ended March 31, 2020, which were capitalized by the Company.

As of June 30, 2020, the Company’s principal sources of liquidity included:

(i) its balances of cash and cash equivalents ($319.0 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 from financing receivables due in the next 12 months and (iv) payments expected in the next 12 months on its existing sales and sales type lease backlog.

The Company’s $319.0 million balance of cash and cash equivalents as of June 30, 2020 includes $75.0 million in cash held outside of Canada (December 31, 2019 — $90.1 million), of which $61.5 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.

As a result, during the six months ended June 30, 2020 , the Company recognized a deferred tax liability of $18.5 million for the applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings.

During the six months ended June 30, 2020, cash and cash equivalents increased by $209.5 million, which reflects the full draw of the Credit Facility in the first quarter of 2020, as discussed above.

This financing cash inflow was partially offset by $20.9 million in 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 six months ended June 30, 2020, the Company repurchased $36.6 million of its common shares under the share repurchase program and invested $3.9 million in equipment to be used in its joint revenue sharing arrangements with exhibitors.

Based on management’s current operating plan for 2020, the Company expects to continue to use cash to deploy additional IMAX Theater Systems under joint revenue sharing arrangements.

The Company’s operating cash flow will be adversely affected if management’s projections of future signings for IMAX Theater Systems and film performance, theater installations and film productions are not realized.

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Similarly, the Company receives cash payments for some of its film productions in advance of related cash expenditures.

Based on the Company’s cash flow from operations and facilities, it expects to have sufficient capital and liquidity to fund its operations in the normal course for the next 12 months.

The repercussions of COVID-19 resulted in a significant decrease in the Company’s revenues and earnings in the first quarter of 2020 as GBO results declined significantly, the

installation of theater systems was delayed, and maintenance services were suspended .

The Company expects that it will continue to experience a significant decrease in revenues and earnings during the time period when a significant portion of the theaters in the IMAX network are closed.

In addition, the Company has experienced and may 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.

Based on the Company’s current cash balances and operating cash flows, it expects to have sufficient capital and liquidity to fund its operations in the normal course for the next 12 months.

Operating Activities

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

Cash provided by operating activities amounted to $6.0 million for the three months ended March 31, 2020.

Changes in other non-cash operating assets and liabilities as compared to December 31, 2019 include:

Three Months Ended

March 31, 2020

Decrease (increase) in:

Accounts receivable (1)

Financing receivables

Inventories (2)

Prepaid expenses

Variable consideration receivable

Increase (decrease) in:

Accounts payable

Accrued and other liabilities

Deferred revenue

Cash receipts partially offset by amounts billed

Slowdown in manufacturing, shipments and installation of IMAX Theater Systems at customer sites due to government restrictions in various countries limiting public gatherings as a result of the outbreak of the COVID-19 global pandemic.

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.

Net cash used in operating activities totaled $20.9 million for the six months ended June 30, 2020 as compared to net cash provided by operating activities of $48.5 million for the six months ended June 30, 2019.

In the six months ended June 30, 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.

In addition, the Company has experienced a slowdown in manufacturing, shipments and installation of IMAX Theater Systems at customer sites, resulting in an increase in inventories.

These cash outflows are partially offset by a $37.0 million decrease in accounts receivable.

Investing Activities

Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, other intangible assets and investments in film assets were $5.8 million for the three months ended March 31, 2020 as compared to $16.2 million for the three months ended March 31, 2019.

Net cash used in investing activities amounted to $2.7 million in the three months ended March 31, 2020, which includes an investment in joint revenue sharing equipment of $1.6 million, purchases of $0.3 million in property, plant and equipment and an investment in other intangible assets of $0.9 million, principally related to the purchase or development of software.

Net cash used in investing activities totaled $5.7 million for the six months ended June 30, 2020, which includes $3.9 million invested in equipment to be used in the Company’s joint revenue sharing arrangements with exhibitors.

In addition, the Company acquired $1.2 million of intangible asset, principally related to the purchase or development of software, and purchased $0.6 million of property, plant and equipment.

In the six months ended June 30, 2019, net cash used in investing activities totaled $42.7 million including the purchase by IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China of equity securities in Maoyan for $15.2 million.

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 $9.8 million for the six months ended June 30, 2020 as compared to $35.7 million for the six months ended June 30, 2019.

Financing Activities

Net cash provided from financing activities in the three months ended March 31, 2020 amounted to $239.2 million as compared to $9.6 million in the three months ended March 31, 2019.

In the three months ended March 31, 2020 , the Company drew down the remaining $ 280 .0 million in available capacity from its Credit Facility in response to uncertainties associated with the outbreak of the COVID-19 global pandemic .

In addition, the Company paid $3.1 million to purchase treasury stock for the settlement of restricted share units, $36.6 million for the repurchase of common shares under the Company’s share repurchase program, $0.9 million for the repurchase of common shares under the IMAX China share repurchase program and $0.2 million of taxes were withheld and paid on vested employee stock awards.

Net cash provided by financing activities totaled $235.7 million for the six months ended June 30, 2020, as compared to $41.3 million used in financing activities in the six months ended June 30, 2019.

During the six months ended June 30, 2020, the net cash provided by financing activities was principally due to the $280.0 million in Credit Facility borrowings drawn in the first quarter of 2020, as discussed above, and $0.2 million drawn on IMAX China’s Working Capital Facility, partially offset by $36.6 million paid to repurchase common shares under the Company’s share repurchase program, $3.3 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, $2.1 million of dividends paid to the non-controlling interest shareholders of IMAX China and $1.0 million in credit agreement amendment fees.

CONTRACTUAL OBLIGATIONS

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

Payments to be made by the Company under contractual obligations as at June 30, 2020 are as follows:

Payments Due by Period

(In thousands of U.S.

> 1 - 3 years

> 3 - 5 years

Less Than One Year

Purchase obligations (1)

2 unchanged sentences

Credit Facility (4)

Working Capital Facility (5)

Postretirement benefits obligations

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

The SERP assumptions are that Mr.

Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2022), although Mr.

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.

The Company has an unfunded defined benefit pension plan, the SERP, covering Mr.

Gelfond, with 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 (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.

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

The Company is not required to make any minimum payments on its Credit Facility.

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

The Company is not required to make any minimum payments on the Credit Facility.

(5) Subsequent to June 30, 2020, IMAX Shanghai renewed its Working Capital Facility.

Pension and Postretirement Obligations

The Company has an unfunded defined benefit pension plan, the SERP, covering Mr.

As at March 31, 2020, the Company had an unfunded and accrued benefit obligation of approximately $18.9 million (December 31, 2019— $18.8 million) in respect of the SERP.

Pursuant to an amendment dated November 1, 2019 to the existing employment agreement, the term of Mr.

Pursuant to an amendment dated November 1, 2019 to an existing employment agreement, the term of Mr.

Gelfond’s employment was extended through December 31, 2022, although Mr.

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Gelfond under the SERP has been fixed at $20.3 million.

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheet includes the related benefit obligation of approximately $19.0 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 at March 31, 2020, the Company had an unfunded benefit obligation of $1.5 million (December 31, 2019 — $1.6 million).

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheet includes an unfunded benefit obligation of $1.5 million recorded within accrued and other liabilities (December 31, 2019 — $1.6 million).

In July 2000, the Company agreed to maintain health benefits for Messrs.

1 unchanged sentence

Wechsler, the Company’s former Co-CEO and current Chairman of its Board of Directors, upon retirement.

As at March 31, 2020, the Company had an unfunded benefit obligation of $0.6 million (December 31, 2019 — $0.7 million).

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheet includes an unfunded benefit obligation of $0.6 million recorded within accrued and other liabilities (December 31, 2019 — $0.7 million).

The Company maintained a nonqualified 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 his Retirement Plan with the Company, the Retirement Plan will vest in full if he incurs a separation from service (as defined therein).

In the fourth quarter of 2018, Mr.

Foster incurred a separation from service, and as such, his Retirement Plan benefits became fully vested as at December 31, 2018 and the accelerated costs were recognized and reflected in the executive transition costs line on the consolidated statement of operations.

As at March 31, 2020, the Company had a funded benefit obligation recorded of $3.6 million (December 31, 2019 — unfunded benefit obligation of $3.6 million).

Under the terms of the Retirement Plan, the benefits were due to vest in full if he incurred a separation from service (as defined therein).

In the fourth quarter of 2018, the executive incurred a separation from service, and as such, the Retirement Plan benefits became fully vested as at December 31, 2018 and the accelerated costs were recognized and reflected in Executive Transition Costs in the Consolidated Statement of Operations.

As at June 30, 2020, the Company’s Condensed Consolidated Balance Sheet includes a funded benefit obligation of $3.6 million recorded within accrued and other liabilities (December 31, 2019 —$3.6 million).

RECENTLY ISSUED ACCOUNTING STANDARDS

10 unchanged sentences

(i) share-based compensation;

(ii) exit costs, restructuring charges and associated impairments, and (iii) changes in the fair value of equity investments, as well as the related tax impact of these adjustments, and (iv) income tax expense related to the removal of the indefinitely reinvested assertion on the historical earnings of certain 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 charges to net (loss) income attributable to common shareholders .

(ii) exit costs, restructuring charges and associated impairments, (iii) changes in the fair value of equity investments, (iv) COVID-19 government relief benefits, as well as the related tax impact of these adjustments, and (v) the income tax effects related to the removal of the indefinitely reinvested assertion on the historical earnings of certain 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.

2 unchanged sentences

As such, beginning in the first quarter of 2020, the Company has updated the reconciliations for such non-GAAP financial measures included herein.

(In thousands of U.S.

dollars, except per share amounts)

Three Months Ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

(In thousands of U.S.

dollars, except per share amounts)

Reported net (loss) income attributable to common shareholders

Adjustments (1) :

Share-based compensation

Changes in the fair value of equity securities

COVID-19 government relief benefits

Tax impact on items listed above

Income tax effects related to the removal of the indefinitely reinvested assertion on the historical earnings of certain subsidiaries

Adjusted net (loss) income (1)

Weighted average basic shares outstanding

Weighted average diluted shares outstanding

Six Months Ended

June 30, 2020

June 30, 2019

(In thousands of U.S.

dollars, except per share amounts)

Reported net (loss) income attributable to common shareholders

Adjustments (1) :

Share-based compensation

Exit costs, restructuring charges and associated impairments

Change in fair value of equity securities

Change in the fair value of equity securities

COVID-19 government relief benefits

Tax impact on items listed above

Income tax expense related to removal of indefinitely reinvested assertion on the historical earnings of certain subsidiaries

Income tax effects related to the removal of the indefinitely reinvested assertion on the historical earnings of certain subsidiaries

Adjusted net (loss) income (1)

1 unchanged sentence

Weighted average diluted shares outstanding

In addition to the non-GAAP financial measures discussed above, management also uses “EBITDA,” as such term is defined in the Company’s credit agreement, and which is referred to herein as “Adjusted EBITDA per Credit Facility.” As allowed by the Company’s credit agreement, Adjusted EBITDA per Credit Facility includes adjustments in addition to the exclusion of interest, taxes, depreciation and amortization.

Accordingly, this non-GAAP financial measure 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 in the current period.

Reflects amounts attributable to common shareholders.

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, depreciation and amortization.

Accordingly, this non-GAAP financial measure 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 in the current period, if 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 (loss) income excluding:

(i) interest income (expense), net;

(ii) income tax provision (benefit);

and (iii) depreciation and amortization.

(i) interest expense, net of interest income;

(ii) income tax (benefit) expense;

and (iii) depreciation and amortization, including film asset amortization.

Adjusted EBITDA per Credit Facility is defined as EBITDA excluding:

(i) gain (loss) from equity accounted investments;

(ii) stock and other non-cash compensation;

(iii) exit costs, restructuring charges and associated impairments;

(iv) change in fair value of equity investment;

(v) write-downs, net of recoveries, including asset impairments and receivable provisions;

and (vi) adjusted EBITDA attributable to non-controlling interests.

A reconciliation of net (loss) income attributable to common shareholders , the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA per Credit Facility is presented in the table below.

(i) share-based and other non-cash compensation;

(ii) gain (loss) in fair value of equity investment;

(iii) write-downs, net of recoveries, including asset impairments and credit loss expense;

and (iv) (gain) loss from equity accounted investments.

A reconciliation of net loss attributable to common shareholders, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA per Credit Facility is presented in the table below.

The Company believes that 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 including the non-controlling interest.

As such, beginning in the first quarter of 2020, the Company has updated the reconciliations for such non-GAAP financial measures included herein.

Three Months Ended

Twelve Months Ended

For the Three Months Ended June 30, 2020 (1)

Attributable to

Non-controlling

Interests and

Attributable to

Common Shareholders

Non-controlling Interests

Common Shareholders

(In thousands of U.S.

Reported net loss

Add (subtract):

Income tax (benefit) expense

Interest expense, net of interest income

Depreciation and amortization, including film asset amortization

Share-based and other non-cash compensation

Gain in fair value of equity investment

Write-downs, including asset impairments and credit loss expense

Adjusted EBITDA per Credit Facility

March 31, 2020

March 31, 2020 (1)

For the Twelve Months Ended June 30, 2020 (1)

Attributable to

Non-controlling

Interests and

Attributable to

Common Shareholders

Non-controlling Interests

Common Shareholders

(In thousands of U.S.

Reported net loss attributable to common shareholders

Reported net loss

Add (subtract):

2 unchanged sentences

Depreciation and amortization, including film asset amortization

Stock and other non-cash compensation

Change in fair value of equity investment

Share-based and other non-cash compensation

Loss in fair value of equity investment

Write-downs, including asset impairments and credit loss expense

Loss from equity accounted investments

Adjusted EBITDA attributable to common shareholders

Adjusted EBITDA per Credit Facility

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

During the second quarter of 2020, the Company entered into the 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 7 of Notes to Condensed Consolidated Financial Statements.

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.

2 unchanged sentences

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.

Quantitative and Qualit ative Disclosures about Market Risk

The Company is exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows.

Market risk is the potential change in an instrument’s value caused by, for example, fluctuations in interest and currency exchange rates.

The Company’s primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S.

dollar, the Canadian dollar and the Chinese Yuan Renminbi.

The Company does not use financial instruments for trading or other speculative purposes.

Foreign Exchange Rate Risk

A majority of the Company’s revenue is denominated in U.S.

dollars while a significant portion of its costs and expenses is denominated in Canadian dollars.

A portion of the Company’s net U.S.

dollar cash flows is converted to Canadian dollars to fund Canadian dollar expenses through the spot market.

In addition, IMAX films generate box office in 81 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S.

dollar could have an impact on the Company’s reported gross box office and revenues.

The Company has incoming cash flows from its revenue generating theaters and ongoing operating expenses in China through its majority-owned subsidiary IMAX (Shanghai) Multimedia Technology Co., Ltd.

In Japan, the Company has ongoing Yen-denominated operating expenses related to its Japanese operations.

Net Renminbi and Japanese Yen cash flows are converted to U.S.

dollars through the spot market.

The Company also has cash receipts under leases denominated in Renminbi, Japanese Yen, Euros and Canadian dollars.

The Company manages its exposure to foreign exchange rate risks through the Company’s regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

These derivative financial instruments are utilized to hedge economic exposures as well as reduce earnings and cash flow volatility resulting from shifts in market rates.

Certain of the Company’s subsidiaries held approximately 434.9 million Renminbi ($61.5 million) in cash and cash equivalents as at June 30, 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 China government are beyond the control of the Company;

however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements.

For the three and six months ended June 30, 2020, the Company recorded a foreign exchange net loss of $0.3 million and net loss of $1.0 million, respectively, as compared to a foreign exchange net loss of $0.2 million and net loss of $0.4 million for the three and six months ended June 30, 2019, respectively, associated with the translation of foreign currency denominated monetary assets and liabilities.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies.

The forward contracts have settlement dates throughout 2020 and 2021.

Foreign currency derivatives are recognized and measured in the balance sheet at fair value.

Changes in the fair value (gains or losses) are recognized in the Condensed Consolidated Statements of Operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments.

The Company currently has cash flow hedging instruments associated with selling, general and administrative expenses and inventories.

For foreign currency cash flow hedging instruments related to selling, general and administrative expenses, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in Other Comprehensive Income and reclassified to the Condensed Consolidated Statements of Operations when the forecasted transaction occurs.

For foreign currency cash flow hedging instruments related to 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 Condensed Consolidated Balance Sheets when the forecasted transaction occurs.

Any ineffective portion is recognized immediately in the Condensed Consolidated Statement of Operations.

The notional value of foreign currency cash flow hedging instruments that qualify for hedge accounting at June 30, 2020 was $32.4 million (December 31, 2019 — $36.1 million).

A gain of $1.3 million and a loss of $1.5 million was recorded to Other Comprehensive Income with respect to the change in fair value of these contracts for the three and six months ended June 30, 2020, respectively (2019 — gain of $0.3 million and a gain of $0.4 million, respectively).

A loss of $0.3 million and a loss of $0.7 million was reclassified from Accumulated Other Comprehensive Income to Selling, General and Administrative Expenses, Inventories and Property, Plant and Equipment for the three and six months ended June 30, 2020, respectively (2019 — loss of $0.4 million and a loss of $0.7 million, respectively).

The Company's estimated net amount of existing losses as at June 30, 2020 is $0.4 million, which is expected to be reclassified to earnings within the next twelve months.

Appreciation or depreciation on forward contracts not meeting the requirements for hedge accounting in the Derivatives and Hedging Topic of the FASB Accounting Standards Codification are

recorded to S elling, G eneral and A dministrative E xpenses.

The notional value of forward contracts that do not qualify for hedge accounting at June 30, 2020 was $3.6 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 June 30, 2020, the Company’s financing receivables and working capital items denominated in Canadian dollars, Renminbi, Japanese yen and Euros translated into U.S.

dollars was $119.9 million.

Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at June 30, 2020, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $12.0 million.

A significant portion of the Company’s selling, general, and administrative expenses is denominated in Canadian dollars.

Assuming a 1% appreciation or depreciation in foreign currency exchange rates at June 30, 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 at June 30, 2020, the Company had drawn down $300.0 million on its Credit Facility (December 31, 2019 — $20.0 million) and $0.2 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 the LIBOR.

The Company had variable rate debt instruments representing 55.3% and 8.1% of its total liabilities as at June 30, 2020 and December 31, 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 June 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis