Item 1. Financial Statements
Item 1. Financial Statements
Page
The following unaudited Condensed Consolidated Financial Statements are filed as part of this Report:
Condensed Consolidated Balance Sheets as at June 30, 2020 and December 31, 2019
4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019
5
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2020 and 2019
6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019
7
Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019
8
Notes to Condensed Consolidated Financial Statements
9
3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars except per share amounts)
(Unaudited)
June 30,
December 31,
2020
2019
Assets
Cash and cash equivalents
$
318,986
$
109,484
Accounts receivable, net of allowance for credit losses
54,839
99,513
Financing receivables, net of allowance for credit losses
123,865
128,038
Variable consideration receivable, net of allowance for credit losses
39,397
40,040
Inventories
60,179
42,989
Prepaid expenses
12,008
10,237
Film assets
13,147
17,921
Property, plant and equipment
287,220
306,849
Investment in equity securities
13,192
15,685
Other assets
24,575
25,034
Deferred income tax assets
46,826
23,905
Other intangible assets
28,204
30,347
Goodwill
39,027
39,027
Total assets
$
1,061,465
$
889,069
Liabilities
Bank indebtedness
$
297,765
$
18,229
Accounts payable
13,668
20,414
Accrued and other liabilities
108,917
112,779
Deferred revenue
104,311
94,552
Deferred income tax liabilities
18,475
—
Total liabilities
543,136
245,974
Commitments and contingencies
Non-controlling interests
4,237
5,908
Shareholders' equity
Capital stock common shares — no par value. Authorized — unlimited number.
58,878,749 issued and 58,857,436 outstanding (December 31, 2019 — 61,362,872 issued and 61,175,852 outstanding)
405,583
423,386
Less: Treasury stock, 21,313 shares at cost (December 31, 2019 — 187,020 )
( 329
)
( 4,038
)
Other equity
172,690
171,789
Accumulated deficit
( 134,395
)
( 40,253
)
Accumulated other comprehensive loss
( 4,180
)
( 3,190
)
Total shareholders' equity attributable to common shareholders
439,369
547,694
Non-controlling interests
74,723
89,493
Total shareholders' equity
514,092
637,187
Total liabilities and shareholders' equity
$
1,061,465
$
889,069
(See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements)
4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Revenues
Technology sales
$
2,687
$
19,694
$
8,349
$
34,894
Image enhancement and maintenance services
3,799
56,662
24,520
100,809
Technology rentals
( 137
)
25,863
5,834
44,033
Finance income
2,506
2,578
5,054
5,259
8,855
104,797
43,757
184,995
Costs and expenses applicable to revenues
Technology sales
2,546
11,939
6,415
21,374
Image enhancement and maintenance services
7,244
26,781
25,060
46,024
Technology rentals
6,753
6,524
14,884
12,904
16,543
45,244
46,359
80,302
(Margin loss) gross margin
( 7,688
)
59,553
( 2,602
)
104,693
Selling, general and administrative expenses
29,796
32,136
58,432
59,785
Research and development
1,232
1,222
3,432
2,358
Amortization of intangibles
1,344
1,218
2,665
2,293
Credit loss expense
1,440
927
11,657
1,358
Asset impairments
—
—
1,151
—
Exit costs, restructuring charges and associated impairments
—
—
—
850
(Loss) income from operations
( 41,500
)
24,050
( 79,939
)
38,049
Gain (loss) in fair value of equity securities
2,025
( 4,544
)
( 2,514
)
( 2,053
)
Retirement benefits non-service expense
( 130
)
( 160
)
( 246
)
( 320
)
Interest income
891
572
1,256
1,142
Interest expense
( 1,581
)
( 636
)
( 2,229
)
( 1,317
)
(Loss) income before taxes
( 40,295
)
19,282
( 83,672
)
35,501
Income tax benefit (expense)
10,248
( 5,308
)
( 5,257
)
( 8,956
)
Equity in losses of investees, net of tax
—
( 138
)
( 529
)
( 222
)
Net (loss) income
( 30,047
)
13,836
( 89,458
)
26,323
Less: Net loss (income) attributable to non-controlling interests
4,080
( 2,439
)
14,137
( 6,661
)
Net (loss) income attributable to common shareholders
$
( 25,967
)
$
11,397
$
( 75,321
)
$
19,662
Net (loss) income per share attributable to common shareholders - basic and diluted:
Net (loss) income per share — basic and diluted
$
( 0.44
)
$
0.19
$
( 1.26
)
$
0.32
(See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.)
5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands of U.S. dollars)
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Net (loss) income
$
( 30,047
)
$
13,836
$
( 89,458
)
$
26,323
Unrealized net gain (loss) from cash flow hedging instruments
1,334
297
( 1,526
)
365
Realized net loss from cash flow hedging instruments
337
374
695
693
Foreign currency translation adjustments
496
( 1,257
)
( 615
)
( 172
)
Defined benefit and postretirement benefit plans
4
—
17
—
Other comprehensive income (loss), before tax
2,171
( 586
)
( 1,429
)
886
Income tax (expense) benefit related to other comprehensive (loss) income
( 442
)
( 177
)
253
( 278
)
Other comprehensive income (loss), net of tax
1,729
( 763
)
( 1,176
)
608
Comprehensive (loss) income
( 28,318
)
13,073
( 90,634
)
26,931
Less: Comprehensive (loss) income attributable to non-controlling interests
3,930
( 2,040
)
14,323
( 6,607
)
Comprehensive (loss) income attributable to common shareholders
$
( 24,388
)
$
11,033
$
( 76,311
)
$
20,324
(See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.)
6
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
Six Months Ended
June 30,
2020
2019
Cash (used in) provided by:
Operating Activities
Net (loss) income
$
( 89,458
)
$
26,323
Adjustments to reconcile net (loss) income to cash from operating activities:
Depreciation and amortization
27,182
29,804
Credit loss expense
11,657
1,358
Write-downs
6,806
508
Deferred income tax (benefit) expense
( 4,878
)
1,296
Share-based and other non-cash compensation
10,850
11,710
Unrealized foreign currency exchange loss (gain)
312
( 14
)
Loss in fair value of equity securities
2,514
2,053
Equity in losses of investees
529
222
Changes in assets and liabilities:
Accounts receivable
36,971
489
Inventories
( 16,887
)
( 3,226
)
Film assets
( 4,057
)
( 8,214
)
Deferred revenue
9,799
( 1,355
)
Changes in other operating assets and liabilities
( 12,220
)
( 12,437
)
Net cash (used in) provided by operating activities
( 20,880
)
48,517
Investing Activities
Purchase of property, plant and equipment
( 594
)
( 4,175
)
Purchase of equipment for joint revenue sharing arrangements
( 3,908
)
( 22,235
)
Acquisition of other intangible assets
( 1,221
)
( 1,121
)
Investment in equity securities
—
( 15,153
)
Net cash used in investing activities
( 5,723
)
( 42,684
)
Financing Activities
Increase in credit facility borrowings
280,244
35,000
Repayment of credit facility borrowings
—
( 50,000
)
Credit facility amendment fees paid
( 959
)
—
Settlement of restricted share units and options
( 2,757
)
( 7,619
)
Treasury stock repurchased for future settlement of restricted share units
( 329
)
( 1,575
)
Repurchase of common shares, IMAX China
( 1,532
)
( 16,813
)
Taxes withheld and paid on employee stock awards vested
( 251
)
( 219
)
Common shares issued - stock options exercised
—
2,379
Repurchase of common shares
( 36,624
)
( 1,258
)
Issuance of subsidiary shares to non-controlling interests (net of return on capital)
—
1,106
Dividends paid to non-controlling interests
( 2,118
)
( 2,266
)
Net cash provided by (used in) financing activities
235,674
( 41,265
)
Effects of exchange rate changes on cash
431
293
Increase (decrease) in cash and cash equivalents during period
209,502
( 35,139
)
Cash and cash equivalents, beginning of period
109,484
141,590
Cash and cash equivalents, end of period
$
318,986
$
106,451
(See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.)
7
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of U.S. dollars)
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Adjustments to capital stock:
Balance, beginning of period
$
404,164
$
418,907
$
419,348
$
421,539
Change in shares held in treasury
1,090
2,632
3,709
( 659
)
Employee stock options exercised
—
1,092
—
1,728
Fair value of stock options exercised at the grant date
—
74
—
97
Average carrying value of repurchased and retired common shares
—
( 604
)
( 17,803
)
( 604
)
Balance, end of period
405,254
422,101
405,254
422,101
Adjustments to other equity:
Balance, beginning of period
168,892
176,587
171,789
179,595
Amortization of share-based payment expense - stock options
505
2,382
1,103
4,488
Amortization of share-based payment expense - restricted share units
4,948
4,842
7,762
7,253
Amortization of share-based payment expense - performance stock units
506
—
793
—
Restricted share units vested
( 1,520
)
( 1,392
)
( 7,225
)
( 7,294
)
Cash received from the issuance of common shares in excess of par value
—
484
—
651
Fair value of stock options exercised at the grant date
—
( 74
)
—
( 97
)
Common shares repurchased, IMAX China
( 641
)
( 15,046
)
( 1,532
)
( 16,813
)
Stock options exercised from treasury shares purchased on open market
—
( 1,551
)
—
( 1,551
)
Balance, end of period
172,690
166,232
172,690
166,232
Adjustments to accumulated deficit:
Balance, beginning of period
( 108,428
)
( 77,120
)
( 40,253
)
( 85,385
)
Net (loss) income attributable to common shareholders
( 25,967
)
11,397
( 75,321
)
19,662
Common shares repurchased and retired
—
( 1,105
)
( 18,821
)
( 1,105
)
Balance, end of period
( 134,395
)
( 66,828
)
( 134,395
)
( 66,828
)
Adjustments to accumulated other comprehensive loss:
Balance, beginning of period
( 5,759
)
( 2,562
)
( 3,190
)
( 3,588
)
Other comprehensive income (loss), net of tax
1,579
( 364
)
( 990
)
662
Balance, end of period
( 4,180
)
( 2,926
)
( 4,180
)
( 2,926
)
Adjustments to non-controlling interests:
Balance, beginning of period
79,508
85,434
89,493
80,757
Net (loss) income attributable to non-controlling interests
( 2,817
)
2,703
( 12,466
)
7,035
Other comprehensive income (loss), net of tax
150
( 399
)
( 186
)
( 54
)
Dividends paid to non-controlling shareholders
( 2,118
)
( 2,266
)
( 2,118
)
( 2,266
)
Balance, end of period
74,723
85,472
74,723
85,472
Total Shareholders' Equity
$
514,092
$
604,051
$
514,092
$
604,051
(See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.)
8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
(Unaudited )
1. Basis of Presentation
Accounting Principles
IMAX Corporation, together with its consolidated subsidiaries (the “Company”), prepares its financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. In the Company’s opinion, the unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. The interim results presented in the Company’s Condensed Consolidated Statements of Operations are not necessarily indicative of results for a full year, particularly in this interim period due to the impacts of the COVID-19 global pandemic. (See Note 2.)
The Company’s Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the its 2019 Annual Report on Form 10-K (the “2019 Form 10-K”), which should be consulted for a summary of the significant accounting policies utilized by the Company. The Condensed Consolidated Financial Statements are prepared following the same accounting policies disclosed in the Company’s 2019 Form 10-K, except as described in Note 4 below. In the first quarter of 2020, the Company updated certain account names within Revenues and Costs and Expenses Applicable to Revenues in its Condensed Consolidated Statements of Operations to better describe the nature of its revenue-generating activities and related costs.
Principles of Consolidation
These Condensed Consolidated Financial Statements include the accounts of the Company, except for subsidiaries which have been identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary. All intercompany accounts and transactions, including all unrealized intercompany profits on transactions with equity method investees, have been eliminated.
The Company has interests in ten film production companies, which have been identified as VIEs. The Company is the primary beneficiary of five of these entities as it has the power to direct the activities that most significantly impact the economic performance of the VIE, and it has the obligation to absorb losses or the right to receive benefits from the respective VIE that could potentially be significant. The majority of the assets relating to these production companies are held by the IMAX Original Film Fund (the “Original Film Fund”) as described in Note 17(b). The Company does not consolidate the other five film production companies because it does not have the power to direct their activities and does not have the obligation to absorb the majority of the expected losses or the right to receive expected residual returns. The Company uses the equity method of accounting for these entities, which are not material to the Company’s Condensed Consolidated Financial Statements. A loss in value of an investment that is other than temporary is recognized as a charge to the Condensed Consolidated Statements of Operations.
Total assets and liabilities of the Company’s consolidated VIEs are as follows:
June 30,
December 31,
2020
2019
Total assets
$
7,010
$
9,677
Total liabilities
$
15,494
$
15,528
Estimates and Assumptions
In preparing the Company’s Condensed Consolidated Financial Statements, management makes judgments in applying various accounting policies. The areas of policy judgment are consistent with those reported in the Company’s 2019 Form 10-K, with the exception of the adoption of the estimate of current expected credit losses that became effective January 1, 2020, which also involves significant judgment and estimation, and is described in Note 4 below. In addition, management makes assumptions about the Company’s future operating results and cash flows in deriving critical accounting estimates used in preparing the Condensed Consolidated Financial Statements. As disclosed in the Company’s 2019 Form 10-K, such sources of estimation include estimates used to determine the recoverable amounts of receivables, inventory, film assets, long-lived assets (including assets used to support
9
joint revenue sharing arrangements), goodwill and deferred tax assets, as well as estimates of variable consideration related to future box office performance.
To date, the Company’s operations have been significantly impacted by the COVID-19 pandemic, as described in Note 2. There continues to be significant ongoing uncertainty surrounding the extent and duration of the impacts that the pandemic will have on box office results and the installation of IMAX Theater Systems, as well as the Company’s customers, suppliers, and employees. There is heightened potential for future credit losses on receivables, inventory write downs, impairments of film assets, impairments of long-lived assets (including the theater system equipment supporting the Company’s joint revenue sharing arrangements), impairments of goodwill, valuation allowances against deferred tax assets, and the reversal of variable consideration receivables that are based on future box office performance. In the current environment, assumptions about box office results, IMAX Theater System installations, and customer creditworthiness have greater variability than normal, which could in the future significantly affect the valuation of the Company’s assets, both financial and non-financial. The Company’s cash flow estimates for testing the recoverability of certain long-lived assets are based on a longer time horizon due to the long-term nature of its underlying contracts, allowing time for a recovery of the cash flows associated with the underlying assets groups, which management has factored into its estimates. The accuracy of management’s estimates is dependent, in part, on the timing of the reopening of theaters in the IMAX network, and on the release of new films by production studios. These theater reopening and film release scenarios are highly uncertain and have been factored into management’s cash flow estimates. As an understanding of the longer-term impacts of COVID-19 on the Company’s customers and business develops, there is a heightened potential for changes in management’s estimates over the remainder of 2020.
2. Impact of COVID-19 Pandemic
In late-January 2020, in response to the public health risks associated with the novel coronavirus and the disease that it causes (“COVID-19”), the Chinese government directed exhibitors in China to temporarily close more than 70,000 movie theaters, including all of the approximately 700 IMAX theaters in mainland China. On March 11, 2020, due to the worsening public health crisis associated with the novel coronavirus, COVID-19 was characterized as a pandemic by the World Health Organization, and in the following weeks, local, state and national governments instituted stay-at-home orders and restrictions on large public gatherings which caused movie theaters in countries around the world to temporarily close, including substantially all of the IMAX theaters in those countries. As a result of the theater closures, 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.
T he 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, 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, 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
10
(see Note 7) . 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 receive d approximately $ 2.2 million in July 2020 under the Canada Emergency Wage Subsidy program and expects to receive approximately $ 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 A dministrative E xpenses ( $ 2.9 million) and C osts and E xpenses A pplicable to R evenues ( $ 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 no t 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.)
In the second quarter of 2020, the Company also updated its recoverability tests of the carrying values of the theater system equipment supporting its joint revenue sharing arrangements, which are recorded within Property, Plant and Equipment . In performing its reviews of recoverability, the Company estimated the undiscounted future cash flows expected to result from the use of the assets and determined that there was no impairment as of the date of each test. The cash flow estimates used in these reviews are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 pandemic, therefore management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic . (See Note 1.)
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 (Note 4) and deferred tax assets (Note 11) could also be materially impacted by changes in estimates in the future. (See Note 1.)
3. Recently Issued Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2019-05 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of ASU 2020-04 on its Condensed Consolidated Financial Statements.
The Company considers the applicability and impact of all recently issued FASB accounting standard codification updates. Accounting standards updates that are not noted above were assessed and determined to be not applicable or not significant to the Company’s Condensed Consolidated Financial Statements for the period ended June 30, 2020.
4. Current Expected Credit Losses
In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The standard requires financial assets measured on the amortized cost basis to be presented at the net amount expected to be collected. The Company’s accounts receivable, financing receivables and variable consideration receivables are within the scope of ASU No. 2016-13. The Company adopted ASU No. 2016-13 and several associated ASUs on January 1, 2020 with no required cumulative-effect adjustment to accumulated deficit.
11
Accounts Receivable
Accounts receivable principally includes amounts currently due to the Company under theater sale and sales-type lease arrangements, contingent fees earned from theaters operators as a result of box office performance, and fees for theater maintenance services. To a lesser extent, accounts receivable also includes amounts due from movie studios and other content creators for digitally remastering films into IMAX formats, as well as for film distribution and post-production services.
In order to mitigate the credit risk associated with accounts receivable, management performs an initial credit evaluation prior to entering into an arrangement with a customer and then regularly monitors the credit quality of each customer through an analysis of collections history and aging. This monitoring process includes meetings on at least a monthly basis to identify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or when the customer has agreed to a payment plan and payments have commenced in accordance with that plan. Changes in credit quality classification are dependent upon management approval. The Company’s internal credit quality classifications for theater operators are as follows:
•
Good Standing — The theater operator continues to be in good standing as payments and reporting are up to date.
•
Credit Watch — The theater operator has demonstrated a delay in payments, but continues to be in active communication with the Company. Theater operators placed on Credit Watch are subject to enhanced monitoring. In addition, depending on the size of the outstanding balance, length of time in arrears and other factors, future transactions may need to be approved by management. These receivables are in better condition than those in the Pre-Approved Transactions Only category, but are not in as good condition as the receivables in the Good Standing category.
•
Pre-Approved Transactions Only — The theater operator has demonstrated a delay in payments with little or no communication with the Company. All services and shipments to the theater operator must be reviewed and approved by management. These receivables are in better condition than those in the All Transactions Suspended category, but are not in as good condition as the receivables in the Credit Watch category. In certain situation, depending on the individual facts and circumstances related to each customer, finance income recognition may be suspended for the net investment in lease and financed sale receivable balances for customers in the Pre-Approved Transactions Only category. See below for a discussion of the Company’s net investment in leases and financed sale receivables.
•
All Transactions Suspended — The theater operator is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater operator is classified within the All Transactions Suspended category, the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped.
The ability of the Company to collect its accounts receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators, or other customers, may experience financial difficulties that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
The following table summarizes the activity in the allowance for credit losses related to accounts receivable for the three and six months ended June 30, 2020:
Three Months Ended June 30, 2020
Six Months Ended June 30, 2020
Theater
Operators
Studios
Other
Total
Theater
Operators
Studios
Other
Total
Beginning balance
$
6,504
$
3,983
$
1,041
$
11,528
$
3,302
$
893
$
942
$
5,137
Current period provision
( 107
)
1,596
( 203
)
1,286
3,095
4,686
( 104
)
7,677
Write-offs
—
—
—
—
—
—
—
—
Recoveries
—
—
—
—
—
—
—
—
Foreign exchange
( 80
)
( 124
)
—
( 204
)
( 80
)
( 124
)
—
( 204
)
Ending balance
$
6,317
$
5,455
$
838
$
12,610
$
6,317
$
5,455
$
838
$
12,610
12
For the three and six months ended June 30, 2020, the Company recorded provisions for current expected credit losses of $ 1.3 million and $ 7.7 million, respectively, reflecting a reduction in the credit quality of its theater and studio related accounts receivable, which management believes is primarily related to the COVID-19 global pandemic. For the three months ended June 30, 2020, the reductions to the provisions for the Theater Operators and Other categories are principally due to decreases in the underlying receivable balances. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect. (See Notes 1 and 2.)
Financing Receivables
Financing receivables are due from theater operators and consist of the Company’s net investment in sales-type leases and receivables associated with financed sales of IMAX Theater Systems. Similar to accounts receivable, management performs an initial credit evaluation prior to entering into an arrangement with a customer and then regularly monitors the credit quality of each customer through an analysis of collections history and aging. This monitoring process includes meetings on at least a monthly basis to identify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or when the customer has agreed to a payment plan and payments have commenced in accordance with that plan. Changes in credit quality classification are dependent upon management approval. The internal credit quality classifications utilized by the Company for accounts receivable, as described above, are also used for financing receivables.
The ability of the Company to collect its financing receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators may experience financial difficulties that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
As at June 30, 2020 and December 31, 2019, financing receivables consist of the following:
June 30,
December 31,
2020
2019
Net investment in leases
Gross minimum payments due under sales-type leases
$
17,142
$
16,766
Unearned finance income
( 899
)
( 1,005
)
Present value of minimum payments due under sales-type leases
16,243
15,761
Allowance for credit losses
( 459
)
( 155
)
Net investment in leases
15,784
15,606
Financed sales receivables
Gross minimum payments due under financed sales
142,380
146,660
Unearned finance income
( 30,590
)
( 33,313
)
Present value of minimum payments due under financed sales
111,790
113,347
Allowance for credit losses
( 3,709
)
( 915
)
Net financed sales receivables
108,081
112,432
Total financing receivables
$
123,865
$
128,038
Net financed sales receivables due within one year
$
31,061
$
27,595
Net financed sales receivables due after one year
$
77,020
$
84,837
Total financed sales receivables
$
108,081
$
112,432
13
As at June 30, 2020 and December 31, 2019, the weighted-average remaining lease term and weighted-average interest rate associated with the Company’s sales-type lease arrangements and financed sale receivables, as applicable, are as follows:
June 30,
December 31,
2020
2019
Weighted-average remaining lease term (in years)
Sales-type lease arrangements
7.9
8.1
Weighted-average interest rate
Sales-type lease arrangements
6.85
%
6.68
%
Financed sales receivables
9.02
%
9.00
%
The following tables provide information on the Company’s net investment in leases by credit quality indicator as at June 30, 2020 and December 31, 2019:
By Origination Year
As at June 30, 2020
2020
2019
2018
2017
2016
Prior
Total
Net investment in leases:
Credit quality classification:
In good standing
$
924
$
7,804
$
2,991
$
942
$
—
$
2,786
$
15,447
Credit Watch
—
—
—
—
—
88
88
Pre-approved transactions
—
—
—
—
—
—
—
Transactions suspended
—
—
—
—
—
708
708
Total net investment in leases
$
924
$
7,804
$
2,991
$
942
$
—
$
3,582
$
16,243
Current-period gross write-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Current-period recoveries
—
—
—
—
—
—
—
Current-period net write-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
By Origination Year
As at December 31, 2019
2019
2018
2017
2016
2015
Prior
Total
Net investment in leases:
Credit quality classification:
In good standing
$
7,874
$
3,045
$
989
$
—
$
—
$
3,186
$
15,094
Credit Watch
—
—
—
—
—
667
667
Pre-approved transactions
—
—
—
—
—
—
—
Transactions suspended
—
—
—
—
—
—
—
Total net investment in leases
$
7,874
$
3,045
$
989
$
—
$
—
$
3,853
$
15,761
14
The following tables provide information on the Company’s financed sale receivables by credit quality indicator as at June 30, 2020 and December 31, 2019:
By Origination Year
As at June 30, 2020
2020
2019
2018
2017
2016
Prior
Total
Financed sales receivables:
Credit quality classification:
In good standing
$
1,606
$
11,474
$
14,382
$
15,381
$
15,495
$
47,551
$
105,889
Credit Watch
—
331
—
—
304
1,171
1,806
Pre-approved transactions
—
—
—
—
585
671
1,256
Transactions suspended
—
—
—
896
937
1,006
2,839
Total financed sales receivables
$
1,606
$
11,805
$
14,382
$
16,277
$
17,321
$
50,399
$
111,790
Current-period gross write-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Current-period recoveries
—
—
—
—
—
—
—
Current-period net write-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
By Origination Year
As at December 31, 2019
2019
2018
2017
2016
2015
Prior
Total
Financed sales receivables:
Credit quality classification:
In good standing
$
11,981
$
14,414
$
16,556
$
15,208
$
—
$
44,291
$
102,450
Credit Watch
—
—
637
1,687
—
6,955
9,279
Pre-approved transactions
—
—
250
295
—
285
830
Transactions suspended
—
—
—
165
—
623
788
Total financed sales receivables
$
11,981
$
14,414
$
17,443
$
17,355
$
—
$
52,154
$
113,347
The following tables provide an aging analysis for the Company’s net investment in leases and financed sale receivables as at June 30, 2020 and December 31, 2019:
As at June 30, 2020
Accrued
and
Current
30-89
Days
90+
Days
Billed
Unbilled
Recorded
Receivable
Allowance
for Credit
Losses
Net
Net investment in leases
$
11
$
262
$
735
$
1,008
$
15,235
$
16,243
$
( 459
)
$
15,784
Financed sales receivables
688
2,941
10,166
13,795
97,995
111,790
( 3,709
)
108,081
Total
$
699
$
3,203
$
10,901
$
14,803
$
113,230
$
128,033
$
( 4,168
)
$
123,865
As at December 31, 2019
Accrued
and
Current
30-89
Days
90+
Days
Billed
Unbilled
Recorded
Receivable
Allowance
for Credit
Losses
Net
Net investment in leases
$
30
$
68
$
251
$
349
$
15,412
$
15,761
$
( 155
)
$
15,606
Financed sales receivables
1,678
2,772
5,446
9,896
103,451
113,347
( 915
)
112,432
Total
$
1,708
$
2,840
$
5,697
$
10,245
$
118,863
$
129,108
$
( 1,070
)
$
128,038
15
The Company considers financing receivables with an aging between 60-89 days as indications of theaters with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once a theater’s aging exceeds 90 days, the Company’s policy is to perform an enhanced review to assess collectibility of the theater’s past due accounts. The over 90 days past due category may be an indicator of potential impairment as up to 90 days outstanding is considered to be a reasonable time to resolve any issues. Given the potential impacts of the COVID-19 global pandemic on the Company’s customers, management is enhancing its monitoring procedures with respect to overdue receivables.
The following table provides information about the Company’s net investment in leases and financed sale receivables with billed amounts past due for which it continues to accrue finance income as at June 30, 2020 and December 31, 2019:
As at June 30, 2020
Accrued
and
Current
30-89 Days
90+ Days
Billed
Unbilled
Allowance
for Credit
Losses
Net
Net investment in leases
$
9
$
255
$
729
$
993
$
12,338
$
( 264
)
$
13,067
Financed sales receivables
570
2,862
10,187
13,619
64,654
( 2,427
)
75,846
Total
$
579
$
3,117
$
10,916
$
14,612
$
76,992
$
( 2,691
)
$
88,913
As at December 31, 2019
Accrued
and
Current
30-89 Days
90+ Days
Billed
Unbilled
Allowance
for Credit
Losses
Net
Net investment in leases
$
9
$
19
$
251
$
279
$
578
$
—
$
857
Financed sales receivables
1,146
1,290
5,523
7,959
29,173
—
37,132
Total
$
1,155
$
1,309
$
5,774
$
8,238
$
29,751
$
—
$
37,989
The following table provides information about the Company’s net investment in leases and financed sale receivables that are on nonaccrual status as at June 30, 2020 and December 31, 2019:
As at June 30, 2020
As at December 31, 2019
Recorded
Receivable
Allowance
for Credit
Losses
Net
Recorded
Receivable
Allowance
for Credit
Losses
Net
Net investment in leases
$
708
$
( 10
)
$
698
$
—
$
—
$
—
Net financed sales receivables
2,839
( 1,032
)
1,807
788
( 732
)
56
Total
$
3,547
$
( 1,042
)
$
2,505
$
788
$
( 732
)
$
56
A theater operator that is classified within the “All Transactions Suspended” category is placed on nonaccrual status and all revenue recognitions related to the theater are stopped. While the recognition of finance income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectibility issues are resolved and the customer has returned to being in good standing, the Company will resume recognition of finance income.
For the three and six months ended June 30, 2020, the Company recognized $ 0.1 million and $ 0.2 million, respectively (2019 — $ 0.1 million and $ 0.2 million, respectively) in finance income related to the net investment in leases with billed amounts past due. For the three and six months ended June 30, 2020, the Company recognized $ 0.9 million and $ 3.0 million, respectively (2019 —$ 2.1 million and $ 4.6 million, respectively) in finance income related to the financed sale receivables with billed amounts past due.
16
The following table summarizes the activity in the allowance for credit losses related to the Company’s net investment in leases and financed sale receivables for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30, 2020
Six Months Ended June 30, 2020
Net Investment
Financed
Net Investment
Financed
in Leases
Sales Receivables
in Leases
Sales Receivables
Beginning balance
$
464
$
3,557
$
155
$
915
Current period provision
( 5
)
171
304
2,813
Write-offs
—
—
—
—
Recoveries
—
—
—
—
Foreign exchange
—
( 19
)
—
( 19
)
Ending balance
$
459
$
3,709
$
459
$
3,709
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Net Investment
Net Financed
Net Investment
Net Financed
in Leases
Sales Receivables
in Leases
Sales Receivables
Beginning balance
$
155
$
839
$
155
$
839
Charge-offs
—
—
—
—
Recoveries
—
—
—
—
Provision
—
—
—
—
Ending balance
$
155
$
839
$
155
$
839
For the three and six months ended June 30, 2020, the Company recorded a provision for current expected credit losses of $ 0.2 million and $ 3.1 million, respectively, reflecting a reduction in the credit quality of its theater related financing receivables, which management believes is primarily related to the COVID-19 global pandemic. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect. (See Notes 1 and 2.)
Variable Consideration Receivable
In sale arrangements, variable consideration may become due to the Company from theater operators if certain annual minimum box office receipt thresholds are exceeded. Such variable consideration is recorded as revenue in the period when the sale is recognized and adjusted in future periods based on actual results and changes in estimates. Variable consideration is only recognized to the extent the Company believes there is not a risk of significant revenue reversal.
The ability of the Company to collect its variable consideration receivables is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators may experience financial difficulties that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation utilizing historical loss rates for financed sale receivables which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
17
The following table summarizes the activity in the allowance for credit losses related to variable consideration receivables for the three and six months ended June 30, 2020 :
Three Months Ended June 30, 2020
Six Months Ended June 30, 2020
Theater
Operators
Theater
Operators
Beginning balance
$
875
$
—
Current period provision
( 12
)
863
Write-offs
—
—
Recoveries
—
—
Ending balance
$
863
$
863
For the six months ended June 30, 2020, the Company recorded a provision of $ 0.9 million for current expected credit losses, reflecting a reduction in the credit quality of its theater related variable consideration receivables, which management believes is primarily related to the COVID-19 global pandemic. Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future. Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict. As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect. (See Notes 1 and 2.)
5. Lease Arrangements
IMAX Corporation as a Lessee
The Company’s operating lease arrangements principally involve office and warehouse space. Office equipment is generally purchased outright. Leases with an initial term of less than 12 months are not recorded on the Condensed Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it is reasonably certain that the renewal options on its warehouse leases will be exercised based on previous history, its current understanding of future business needs and its level of investment in leasehold improvements, among other factors. The incremental borrowing rate used in the calculation of the Company’s lease liability is based on the location of each leased property. None of the Company’s leases include options to purchase the leased property. The depreciable lives of right-of-use assets and related leasehold improvements are limited by the expected lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain office space to third parties, which have a remaining term of less than 12 months and are not expected to be renewed.
For three and six months ended June 30, 2020 and 2019, the components of lease expense recorded within Selling, General and Administrative expenses are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Operating lease cost (1)
$
121
$
220
$
259
$
463
Amortization of lease assets
701
664
1,449
1,195
Interest on lease liabilities
245
274
507
542
Total lease cost
$
1,067
$
1,158
$
2,215
$
2,200
(1)
Includes short-term leases and variable lease costs, which are not significant for the three and six months ended June 30, 2020 and 2019.
18
For three and six months ended June 30, 2020 and 2019, supplemental cash flow information related to leases is as follows:
Six Months Ended
June 30,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities
$
1,730
$
1,782
Right-of-use assets obtained in exchange for lease obligations
286
17,515
$
2,016
$
19,297
As at June 30, 2020 and December 31, 2019, supplemental balance sheet information related to leases is as follows:
June 30,
December 31,
2020
2019
Assets
Right-of-Use Assets
Property, plant and equipment
$
15,074
$
16,262
Liabilities
Operating Leases
Accrued and other liabilities
$
17,791
$
18,677
As at June 30, 2020 and December 31, 2019, the weighted-average remaining lease term and weighted-average interest rate associated with the Company’s operating leases are as follows:
June 30,
December 31,
2020
2019
Weighted-average remaining lease term (years)
7.8
8.1
Weighted-average discount rate
5.90
%
5.90
%
As at June 30, 2020, the maturities of the Company’s operating lease liabilities are as follows:
Operating Leases
2020 (six months remaining)
$
1,803
2021
3,318
2022
2,811
2023
2,247
2024
2,198
Thereafter
10,177
Total lease payments
$
22,554
Less: interest expense
( 4,763
)
Present value of operating lease liabilities
$
17,791
IMAX Corporation as a Lessor
The Company provides IMAX Theater Systems to customers through long-term lease arrangements that for accounting purposes are classified as sales-type leases. Under these arrangements, in exchange for providing the IMAX Theater System, the Company earns fixed upfront and ongoing consideration. Certain arrangements that are legal sales are also classified as sales-type leases as certain clauses within the arrangements limit transfer of title or provide the Company with conditional rights to the system. The customer’s rights under the Company’s sales-type lease arrangements are described in Note 2(n) in the Company’s 2019 Form 10-K. Under the Company’s sales-type lease arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s sales-type leases are typically non-cancellable for 10 to 20 years with renewal provisions from inception. Except for those sales arrangements that are classified as sales-type leases, the Company’s leases generally do not contain an automatic transfer of title at the end of the lease term . The Company’s sales-type lease arrangements do not contain a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty generally after the first year of the lease until the end of the lease term. The customer is responsible for obtaining insurance coverage for the
19
IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the IMAX Theater System is returned to the Company.
The Company also provides IMAX Theater systems to customers through joint revenue sharing arrangements. Under the traditional form of these arrangements, in exchange for providing the IMAX system under a long-term lease, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront fee or annual minimum payments. The Company has assessed the nature of its joint revenue sharing arrangements and concluded that the arrangements contain an operating lease. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to equipment under joint revenue sharing arrangements does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the IMAX Theater System is returned to the Company.
The Company classifies its lease arrangements at inception of the arrangement and, if required, after a modification of the lease arrangement, to determine whether they are sales-type leases or operating leases.
On April 10, 2020, the FASB staff issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance allows concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. In the second quarter of 2020, the Company adopted the FASB relief guidance and elected to account for any such lease concessions as if no change was made to the underlying contracts. The adoption of this guidance did not have a material effect on the Company’s Condensed Consolidated Financial Statements.
6. Inventories
As at June 30, 2020 and December 31, 2019, inventories consist of the following:
June 30,
December 31,
2020
2019
Raw materials
$
34,139
$
26,538
Work-in-process
5,839
4,608
Finished goods
20,201
11,843
$
60,179
$
42,989
When compared to December 31, 2019, inventories increased by $ 17.2 million due to delays 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 COVID-19 global pandemic.
At June 30, 2020, inventories include finished goods of $ 4.0 million (December 31, 2019 — $ 0.7 million) for which title had passed to the customer, but the criteria for revenue recognition were not met as of the balance sheet date.
During the three and six months ended June 30, 2020, the Company recognized write-downs of $ 0.1 million for excess and obsolete inventory based on current estimates of net realizable value. (2019 — $nil).
20
7. Credit Facility and Other Financing Arrangements
As at June 30, 2020 and December 31, 2019, bank indebtedness includes the following:
June 30,
December 31,
2020
2019
Credit Facility
$
300,000
$
20,000
Working Capital Facility
244
—
Unamortized debt issuance costs
( 2,479
)
( 1,771
)
$
297,765
$
18,229
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); 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; provided, however, that from the effective date of the Amendment until
21
the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the standby fee will be 0.50 % per annum.
The Company incurred fees of approximately $ 1.0 million in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.
As at June 30, 2020 and December 31, 2019, the Company did no t have any letters of credit or advance payment guarantees outstanding under the Credit Facility.
Working Capital Facility
On July 24, 2019, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), one of the Company’s majority-owned subsidiaries in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $ 30.0 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.
Wells Fargo Foreign Exchange Facility
Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. The net settlement loss on its foreign currency forward contracts was $ 0.3 million at June 30, 2020, as the notional value exceeded the fair value of the forward contracts (December 31, 2019 — $ 0.5 million net settlement gain). As at June 30, 2020, the Company has $ 36.0 million in notional value of such arrangements outstanding (December 31, 2019 — $ 36.1 million).
NBC Facility
On October 28, 2019, the Company entered into a $ 5.0 million facility with the National Bank of Canada (the “NBC Facility”) fully insured by Export Development Canada for use solely in conjunction with the issuance of performance guarantees and letters of credit. The Company did no t have any letters of credit or advance payment guarantees outstanding as at June 30, 2020 and December 31, 2019 under the NBC Facility.
8. Commitments, Contingencies and Guarantees
Commitments
In the ordinary course of business, the Company enters into contractual agreements with third parties that include non-cancellable payment obligations, for which it is liable in future periods. These arrangements can include terms binding the Company to minimum payments and/or penalties if it terminates the agreement for any reason other than an event of default as described by the agreement.
Contingencies and guarantees
The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. Management is required to assess the likelihood of any adverse judgments or outcomes related to these legal contingencies, as well as potential ranges of probable or reasonably possible losses. The Company will record a provision for a liability when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The determination of the amount of any liability recorded or disclosed is reviewed at least quarterly based on a careful analysis of each individual exposure with, in some cases, the assistance of outside legal counsel, taking into account the impact of negotiations, settlements, rulings, and other pertinent information related to the case. The amount of liabilities recorded or disclosed for these contingencies may change in the future due to changes in management’s judgments resulting from new developments or changes in settlement strategy. Any resulting adjustment to the liabilities recorded by the Company could have a material adverse effect on its results of operations, cash flows, and financial position in the period or periods in which such changes in judgment occur. The Company believes it has adequate provisions for any such matters.
22
(a) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages before the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) of its December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-City Entertainment (I) PVT Limited (“E-City”). On March 27, 2008, the arbitration panel issued a final award in favor of the Company in the amount of $ 11.3 million, consisting of past and future rents owed to the Company, plus interest and costs, as well as an additional $ 2,512 each day in interest from October 1, 2007 until the date the award is paid . In July 2008, E-City commenced a proceeding in Mumbai, India seeking an order that the ICC award may not be recognized in India and on June 10, 2013, the Bombay High Court ruled that it had jurisdiction over the proceeding filed by E-City. The Company appealed that ruling to the Supreme Court of India, and on March 10, 2017, the Supreme Court set aside the Bombay High Court’s judgement and dismissed E-City’s petition. On March 29, 2017, the Company filed an Execution Application in the Bombay High Court seeking to enforce the ICC award against E-City and several related parties. That matter is currently pending. The Company has also taken steps to enforce the ICC final award outside of India. In December 2011, the Ontario Superior Court of Justice issued an order recognizing the final award and requiring E-City to pay the Company $ 30,000 to cover the costs of the application , and in October 2015, the New York Supreme Court recognized the Canadian judgment and entered it as a New York judgment. The Company intends to continue pursuing its rights and seeking to enforce the award, although no assurances can be given with respect to the ultimate outcome.
(b) On November 11, 2013, Giencourt Investments, S.A. (“Giencourt”) initiated arbitration before the International Centre for Dispute Resolution in Miami, Florida, based on alleged breaches by the Company of its theater agreement and related license agreement with Giencourt. An arbitration hearing for witness testimony was held during the week of December 14, 2015. At the hearing, Giencourt’s expert identified monetary damages of up to approximately $ 10.4 million, which Giencourt sought to recover from the Company. The Company asserted a counterclaim against Giencourt for breach of contract and sought to recover lost profits in excess of $ 24.0 million under the agreements. Subsequently, in December 2015, Giencourt made a motion to the panel seeking to enforce a purported settlement of the matter based on negotiations between Giencourt and the Company. The panel held a final hearing with closing arguments in October 2016. On February 7, 2017, the panel issued a Partial Final Award and on July 21, 2017, the panel issued a Final Award (collectively, the “Award”), which held that the parties had reached a binding settlement, and therefore the panel did not reach the merits of the dispute. The Company strongly disputes that discussions about a potential resolution of this matter amounted to an enforceable settlement. In October 2017, the Company filed a petition to vacate the arbitration award in the United States Court for the Southern District of Florida on various grounds, including that the panel exceeded its jurisdiction, and a hearing was held on June 27, 2019. On September 27, 2019, a Magistrate Judge filed a non-binding recommendation that the Company’s petition be dismissed. On October 14, 2019, the Company filed an objection to that recommendation. The Company’s petition to vacate the arbitration award was denied by the District Judge on January 10, 2020. The Company filed an appeal of this decision on February 7, 2020 with the Eleventh Circuit Court of Appeals, but such appeal was dismissed on May 29, 2020. At this time, the Company is unable to determine the amounts that it may ultimately owe pursuant to the Award, or the timing of any such payments, but believes it has adequate provisions recorded in its Condensed Consolidated Balance Sheets related to the Award. In addition to the above, the Company has initiated a claim against Giencourt in the Ontario Superior Court seeking damages from Giencourt with respect to contractual claims under various terminated agreements between the parties. These proceedings are in preliminary stages, and no assurances can be given with respect to the ultimate outcome of the matter, but any amounts, if awarded to the Company under these proceedings, may reduce the Company’s overall financial obligations to Giencourt.
(c) In addition to the matters described above, the Company is currently involved in other legal proceedings or governmental inquiries which, in the opinion of the Company’s management, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings.
(d) In the normal course of business, the Company enters into agreements that may contain features that meet the definition of a guarantee. A guarantee is a contract (including an indemnity) that contingently requires the Company to make payments (either in cash, financial instruments, other assets, shares of its stock or provision of services) to a third party based on (a) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty, (b) failure of another party to perform under an obligating agreement or (c) failure of another third party to pay its indebtedness when due.
Financial Guarantees
Certain subsidiaries of the Company have provided significant financial guarantees to third parties under the Credit Agreement.
23
Product Warranties
The Company’s accrual for product warranties, which was recorded as part of accrued and other liabilities in the Condensed Consolidated Balance Sheets, was less than $ 0.1 million and $ 0.2 million at June 30, 2020 and December 31, 2019 , respectively.
Director/Officer Indemnifications
The Company’s General By-law contains an indemnification of its directors/officers, former directors/officers and persons who have acted at its request to be a director/officer of an entity in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by the Canada Business Corporations Act , against expenses (including legal fees), judgments, fines and any amounts actually and reasonably incurred by them in connection with any action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Company. In addition, the Company has entered into indemnification agreements with each of its directors in order to effectuate the foregoing. The nature of the indemnification prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been accrued in the Condensed Consolidated Balance Sheets as at June 30, 2020 and December 31, 2019, with respect to this indemnity.
Other Indemnification Agreements
In the normal course of the Company’s operations, the Company provides indemnifications to counterparties in transactions such as: IMAX Theater Systems lease and sale agreements and the supervision of installation or servicing of IMAX Theater Systems; film production, exhibition and distribution agreements; real property lease agreements; and employment agreements. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims that may be suffered by the counterparty as a consequence of the transaction or the Company’s breach or non-performance under these agreements. While the terms of these indemnification agreements vary based upon the contract, they normally extend for the life of the agreements. A small number of agreements do not provide for any limit on the maximum potential amount of indemnification; however, virtually all of the IMAX Theater System lease and sale agreements limit such maximum potential liability to the purchase price of the system. The fact that the maximum potential amount of indemnification required by the Company is not specified in some cases prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, the Company has no t made any significant payments under such indemnifications and no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to the contingent aspect of these indemnities.
9. Condensed Consolidated Statements of Operations Supplemental Information
(a)
Selling Expenses
The Company defers direct selling costs such as sales commissions and other amounts related to its sales and sales-type lease arrangements until the related revenue is recognized. These costs and direct advertising and marketing, which are included in Costs and Expenses Applicable to Revenues – Technology Sales, totaled $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2020, respectively (2019 — $ 0.4 million and $ 0.9 million, respectively).
Film exploitation costs, including advertising and marketing, totaled a recovery of less than $ 0.1 million and expense of $ 2.6 million for the three and six months ended June 30, 2020, respectively (2019 — expense of $ 9.6 million and $ 14.1 million, respectively), and are recorded as incurred in Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services.
Commissions are recognized as Costs and Expenses Applicable to Revenues – Technology Rentals in the month they are earned. These costs totaled less than $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively (2019 — recovery of $ 0.4 million and recovery of $ 0.6 million, respectively). Direct advertising and marketing costs for each theater are charged to Costs and Expenses Applicable to Revenues – Technology Rentals as incurred. These costs totaled less than $ 0.1 million and $ 0.4 million for the three and six months ended June 30, 2020, respectively (2019 — $ 0.7 million and $ 0.9 million, respectively).
24
(b)
Foreign Exchange
Included in Selling, General and Administrative Expenses for the three and six months ended June 30, 2020 is a loss of $ 0.3 million and a loss of $ 1.0 million, respectively (2019 — loss of $ 0.2 million and loss of $ 0.4 million, respectively) for net foreign exchange gains/losses related to the translation of foreign currency denominated monetary assets and liabilities. See Note 16(c) for additional information.
(c)
Collaborative Arrangements
Joint Revenue Sharing Arrangements
In a joint revenue sharing arrangement, the Company receives a portion of a theater’s box office and in certain arrangements a portion of concession revenues and a small upfront or initial payment, in exchange for placing an IMAX Theater System at the theater operator’s venue. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to equipment under joint revenue sharing arrangements generally does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the IMAX Theater System is returned to the Company.
The Company has signed traditional and hybrid joint revenue sharing agreements with 41 exhibitors for a total of 1,237 IMAX Theater Systems, of which 868 theaters were included in the IMAX network as at June 30, 2020, the terms of which are similar in nature, rights and obligations. The accounting policy for the Company’s joint revenue sharing arrangements is disclosed in Note 2(n) of the Company’s 2019 Form 10-K.
Amounts attributable to transactions arising between the Company and its customers under joint revenue sharing arrangements are included in Revenues — Technology Sales and Revenues — Technology Rentals and for the three and six months ended June 30, 2020 amounted to $ 0.1 million and $ 6.9 million, respectively (2019 — $ 27.8 million and $ 48.2 million, respectively).
IMAX DMR
In an IMAX DMR arrangement, the Company transforms conventional motion pictures into the Company’s large screen format, allowing the release of Hollywood content to the global IMAX theater network. In a typical IMAX DMR film arrangement, the Company 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.
For the six months ended June 30, 2020, the majority of IMAX DMR revenue was earned from the exhibition of 14 IMAX DMR films (2019 – 39 ) throughout the IMAX theater network. The accounting policy for the Company’s IMAX DMR arrangements is disclosed in Note 2(n) of the Company’s 2019 Form 10-K.
Amounts attributable to transactions arising between the Company and its customers under IMAX DMR arrangements are included in Revenues – Image Enhancement and Maintenance Services and for the three and six months ended June 30, 2020 amounted to $ 0.6 million and $ 11.2 million, respectively (2019 — $ 39.3 million and $ 67.2 million, respectively).
Co-Produced Film Arrangements
In certain film arrangements, the Company co-produces a film with a third party whereby the third party retains the copyright and rights to the film. In some cases, the Company obtains exclusive theatrical distribution rights to the film. Under these arrangements, both parties contribute funding to the Company’s partly-owned subsidiary for the production and distribution of the film and for associated exploitation costs.
25
As at June 30, 2020, the Company has two significant co-produced film arrangements which represent the VIE total assets balance of $ 7.0 million and liabilities balance of $ 15.5 million and three other co-produced film arrangements, the terms of which are similar. The accounting policies relating to co-produced film arrangements are disclosed in Notes 2(a) and 2(n) of the Company’s 2019 Form 10-K.
For the three and six months ended June 30, 2020, expenses totaling $ 1.2 million and $ 1.4 million, respectively (2019 — less than $ 0.1 million and $ 0.2 million, respectively) attributable to transactions between the Company and other parties involved in the production of the films have been included in Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services.
For the three and six months ended June 30, 2020, revenue of $ 0.1 million and $ 0.1 million, respectively (2019 — $nil and less than $ 0.1 million, respectively) and Costs and Expenses Applicable to Revenues of $nil and $nil, respectively (2019 — $nil and less than $ 0.1 million, respectively) attributable to this collaborative arrangement have been recorded in Revenue – Image Enhancement and Maintenance Services and Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services.
10. Condensed Consolidated Statements of Cash Flows Supplemental Information
(a)
Changes in other operating assets and liabilities as reported in the Condensed Consolidated Statements of Cash Flows are comprised of the following:
Six Months Ended
June 30,
2020
2019
Decrease (increase) in:
Financing receivables
$
776
6,029
Prepaid expenses
( 2,332
)
( 1,188
)
Variable consideration receivable
( 220
)
( 362
)
Other assets
( 4,492
)
( 2,189
)
Increase (decrease) in:
Accounts payable
( 6,716
)
( 9,817
)
Accrued and other liabilities
764
( 4,910
)
$
( 12,220
)
$
( 12,437
)
(b)
Depreciation and amortization are comprised of the following:
Six Months Ended
June 30,
2020
2019
Film assets
$
3,515
$
8,492
Property, plant and equipment:
Joint revenue sharing arrangements
13,178
11,295
Other property, plant and equipment
5,686
5,992
Other intangible assets
3,238
2,952
Other assets
1,266
829
Deferred financing costs
299
244
$
27,182
$
29,804
26
(c)
Write-downs are comprised of the following:
Six Months Ended
June 30,
2020
2019
Film assets (1)
$
4,504
$
—
Other assets (2)
1,151
—
Joint revenue sharing arrangements (3)
929
404
Property, plant and equipment
58
81
Inventories
72
2
Other intangible assets
92
21
$
6,806
$
508
(1)
In the six months ended June 30, 2020, the Company recorded an impairment loss of $ 4.5 million (2019 — $nil) 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.)
(2)
In the six months ended June 30, 2020, the Company recorded a $ 1.2 million (2019 - $ nil ) write-down of other assets, of which $ 1.0 million relates to the write-down of certain content-related assets which became impaired in the period.
(3)
In the six months ended June 30, 2020, the Company recorded charges of $ 0.9 million in Costs and Expenses Applicable to Technology Rentals principally related to the write-down of xenon-based digital systems which were upgraded by customers to laser-based digital systems and taken out of service. In the six months ended June 30, 2019, the Company recorded a charge of $ 0.1 million in Costs and Expenses Applicable to Technology Rentals and $ 0.1 million in Revenues -Technology Rentals upon the upgrade of xenon-based digital systems under joint revenue sharing arrangements to laser-based digital systems.
(d)
Significant non-cash investing activities are comprised of the following:
Six Months Ended
June 30,
2020
2019
Net (decrease) increase in accruals related to:
Investment in joint revenue sharing arrangements
$
( 1,887
)
$
3,651
Acquisition of other intangible assets
( 10
)
13
Purchases of property, plant and equipment
158
( 427
)
$
( 1,739
)
$
3,237
11. Income Taxes
(a)
Income Tax Expense
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
27
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.
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 above.
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 net deferred income tax assets of $ 46.8 million, which is 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. 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.
(b)
Income Tax Effect on Other Comprehensive (Loss) Income
The income tax (expense) benefit included in the Company’s other comprehensive (loss) income are related to the following items:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Unrealized change in cash flow hedging instruments
$
( 354
)
$
( 99
)
$
395
$
( 182
)
Realized change in cash flow hedging instruments upon settlement
( 88
)
( 78
)
( 182
)
( 96
)
Unrecognized actuarial gain on defined benefit plan
—
—
40
—
$
( 442
)
$
( 177
)
$
253
$
( 278
)
28
12. Capital Stock
(a)
Share-Based Compensation
For the three and six months ended June 30, 2020, share-based compensation expense totaled $ 6.5 million and $ 10.7 million, respectively (2019 — $ 7.0 million and $ 11.4 million, respectively) and is reflected in the following accounts in the Condensed Consolidated Statements of Operations:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Cost and expenses applicable to revenues
$
—
$
447
$
400
$
821
Selling, general and administrative expenses
6,467
6,485
10,174
10,388
Research and development
—
95
85
180
$
6,467
$
7,027
$
10,659
$
11,389
There were no share-based compensation expenses allocated to Costs and Expenses Applicable to Revenues or Research and Development in the three months ended June 30, 2020 due to the idling of the Company’s productive capacity and slowdown in business activities during the COVID-19 global pandemic.
The following table summarizes the Company’s share-based compensation expense by each award type:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Stock Options
$
503
$
2,177
$
1,016
$
4,084
Restricted Share Units
4,534
4,132
7,436
6,242
Performance Stock Units
467
—
746
—
IMAX China Stock Options
15
77
101
143
IMAX China Long Term Incentive Plan Restricted Share Units
909
641
1,313
920
IMAX China Long Term Incentive Plan Performance Stock Units
39
—
47
—
$
6,467
$
7,027
$
10,659
$
11,389
For the six months ended June 30, 2020, the above includes expense of $ 0.1 million and $ 0.1 million in the three and six months ended June 30, 2020, respectively (2019 — $ nil and $ nil , respectively) related to restricted share units granted to a certain advisor of the Company.
Stock Option Summary
The following table summarizes the activity under the Company’s Stock Option Plan (“SOP”) and IMAX Amended and Restated Long Term Incentive Plan (“IMAX LTIP”) for the six months ended June 30:
Number of Shares
Weighted Average Exercise
Price Per Share
2020
2019
2020
2019
Stock options outstanding, beginning of period
5,732,209
5,465,046
$
26.82
$
27.63
Granted
—
1,016,882
—
20.66
Exercised
—
( 85,746
)
—
20.15
Forfeited
( 23,633
)
( 103,902
)
22.35
23.70
Expired
( 772,665
)
( 316,325
)
27.03
26.08
Cancelled
( 18,483
)
( 5,196
)
27.97
32.80
Stock options outstanding, end of period
4,917,428
5,970,759
26.80
26.70
Stock options exercisable, end of period
4,313,890
4,104,443
27.32
28.35
Stock options are no longer granted under the Company’s previous approved SOP.
29
Restricted Share Units (“RSU”) Summary
The following table summarizes the activity in respect of RSUs issued under the IMAX LTIP for the six months ended June 30:
Number of Awards
Weighted Average Grant Date
Fair Value Per Share
2020
2019
2020
2019
RSUs outstanding, beginning of period
1,065,347
1,033,871
$
23.17
$
25.70
Granted
1,047,369
618,181
15.36
22.40
Vested and settled
( 383,126
)
( 302,232
)
21.58
26.69
Forfeited
( 39,912
)
( 124,527
)
20.29
23.66
RSUs outstanding, end of period
1,689,678
1,225,293
18.76
23.99
Performance Stock Units Summary
In the first quarter of 2020, the Company expanded its share-based compensation program to include performance stock units (“PSUs”). The Company grants two types of PSU awards, one which vests based on a combination of employee service and the achievement of certain EBITDA-based targets and one which vests based on a combination of employee service and the achievement of certain stock-price targets. These awards vest over a three-year performance period. The fair value of PSUs with EBITDA-based targets is equal to the closing price on date of grant or the average closing price of the Company’s common stock for five days prior to the date of grant. The fair value of PSUs with stock-price targets is determined on the grant date using a Monte Carlo simulation, which is a valuation model that takes into account the likelihood of achieving the stock-price targets embedded in the award (“Monte Carlo Model”). The compensation expense attributable to each type of PSU is recognized on a straight-line basis over the requisite service period.
The fair value determined by the Monte Carlo Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The compensation expense is fixed on the date of grant based on the dollar value granted.
The amount and timing of compensation expense recognized for PSUs with EBITDA-based targets is dependent upon management's assessment of the likelihood and timing of achieving these targets. If, as a result of management’s assessment, it is projected that a greater number of PSUs will vest than previously anticipated, a life-to-date adjustment to increase compensation expense is recorded in the period such determination is made. Conversely, if, as a result of management’s assessment, it is projected that a lower number of PSUs will vest than previously anticipated, a life-to-date adjustment to decrease compensation expense is recorded in the period such determination is made.
Compensation expense is not adjusted for estimated, forfeitures, but is instead adjusted based upon the actual forfeiture of the award.
The following table summarizes the activity in respect of PSUs issued under the IMAX LTIP for the six months ended June 30:
Number of Awards
Weighted Average Grant Date
Fair Value Per Share
2020
2019
2020
2019
Granted
369,260
—
$
15.67
$
—
Forfeited
( 2,526
)
—
14.84
—
PSUs outstanding, end of period
366,734
—
15.68
—
30
Issuer Purchases of Equity Securities
In 2017, the Company’s Board of Directors approved a new $ 200.0 million common stock share repurchase program, which would have expired on June 30, 2020. In June 2020, the Board of Directors approved a 12-month extension of this program which will now expire on June 30, 2021 . The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. There were no common stock repurchases during the three months ended June 30, 2020. During the six months ended June 30, 2020, the Company repurchased 2,484,123 shares of its common stock at an average price of $ 14.72 per share, excluding commissions. During the three and six months ended June 30, 2019, the Company repurchased 87,769 common shares at an average price of $ 19.45 per share, excluding commissions.
In 2019, IMAX China announced that its shareholders granted its Board of Directors a general mandate authorizing the Board, subject to applicable laws, to repurchase shares of IMAX China in an amount not to exceed 10 % of the total number of issued shares as at June 6, 2019 ( 35,605,560 shares). The share repurchase program expired on the date of the 2020 Annual General Meeting of IMAX China on June 11, 2020 . During the 2020 Annual General Meeting, shareholders approved the repurchase of shares of IMAX China not to exceed 10 % of the total number of issued shares as of June 11, 2020 ( 34,848,398 shares). This program will be valid until the 2021 Annual General Meeting of IMAX China. The repurchases may be made in the open market or through other means permitted by applicable laws. IMAX China has no obligation to repurchase its shares and the share repurchase program may be suspended or discontinued by IMAX China at any time. During the three and six months ended June 30, 2020, IMAX China repurchased 425,800 and 906,400 shares of its common stock, respectively, at an average price of HKD 11.63 per share and HKD 13.13 per share, respectively (U.S. $ 1.50 and U.S. $ 1.69 , respectively). During the three and six months ended June 30, 2019, IMAX China repurchased 6,315,900 and 7,025,700 of its common shares, respectively, at an average price of HKD 18.59 per share and HKD 18.68 per share, respectively (U.S. $ 2.37 and U.S. $ 2.38 , respectively).
The total number of shares purchased during the six months ended June 30, 2020 does not include 200,000 common shares (2019 — 400,000 common shares) purchased in the administration of employee share-based compensation plans, at an average price of $ 15.43 per share (2019 — $ 22.98 per share). There were no such purchases made during the three months ended June 30, 2020 and 2019.
As at June 30, 2020, the IMAX LTIP trustee held 21,313 shares (December 31, 2019 — 187,020 shares) purchased for $ 0.3 million (December 31, 2019 — $ 4.0 million) in the open market to be issued upon the settlement of RSUs and certain stock options. The shares held with the trustee are recorded at cost and are reported as a reduction against capital stock on the Condensed Consolidated Balance Sheets.
(b)
Basic and Diluted Weighted Average Shares Outstanding
The following table reconciles the denominator of the basic and diluted weighted average share computations:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period
58,787
61,291
61,176
61,434
Weighted average number of shares repurchased, net of shares
issued during the period
21
40
( 1,563
)
( 80
)
Weighted average number of shares used in computing basic
income per share
58,808
61,331
59,613
61,354
Assumed exercise of stock options, RSUs and PSUs, net of shares
assumed repurchased, if dilutive
—
176
—
171
Weighted average number of shares used in computing diluted
income per share
58,808
61,507
59,613
61,525
For three and six months ended June 30, 2020, the calculation of diluted weighted average shares outstanding excludes 6,973,840 and 6,973,840 shares, respectively (2019 — 6,153,795 and 6,226,887 shares, respectively) of common shares issuable upon the vesting of RSUs and PSUs and the exercise of stock options.
31
13. Revenue from Contracts with Customers
(a) Disaggregated Information About Revenue
The following tables summarize the Company’s revenues by type and reportable segment for the three and six months ended June 30, 2020:
Three Months Ended June 30, 2020
Revenue from
Contracts with Customers
Revenue from
Fixed
Consideration
Variable
Consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
1,278
$
765
$
—
$
—
$
2,043
Joint Revenue Sharing Arrangements, fixed fees
—
—
369
—
369
Other Theater Business (1)
( 309
)
—
—
—
( 309
)
Other sales (2)
505
79
—
—
584
Sub-total
1,474
844
369
—
2,687
Image enhancement and maintenance services
IMAX DMR
—
546
—
—
546
IMAX Maintenance
—
—
—
—
—
Film Post-Production
738
—
—
—
738
Film Distribution
2,250
194
—
—
2,444
Other
—
71
—
—
71
Sub-total
2,988
811
—
—
3,799
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent (3)
—
—
( 137
)
—
( 137
)
Sub-total
—
—
( 137
)
—
( 137
)
Finance income
IMAX Systems
—
—
—
2,506
2,506
Total
$
4,462
$
1,655
$
232
$
2,506
$
8,855
32
Six Months Ended June 30, 2020
Revenue from
Contracts with Customers
Revenue from
Fixed
consideration
Variable
consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
3,521
$
1,662
$
—
$
—
$
5,183
Joint Revenue Sharing Arrangements, fixed fees
—
—
1,139
—
1,139
Other Theater Business
954
—
—
—
954
Other sales (2)
983
90
—
—
1,073
Sub-total
5,458
1,752
1,139
—
8,349
Image enhancement and maintenance services
IMAX DMR
—
11,175
—
—
11,175
IMAX Maintenance
7,370
—
—
—
7,370
Film Post-Production
2,349
—
—
—
2,349
Film Distribution
2,250
1,077
—
—
3,327
Other
—
299
—
—
299
Sub-total
11,969
12,551
—
—
24,520
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
5,834
—
5,834
Sub-total
—
—
5,834
—
5,834
Finance income
IMAX Systems
—
—
—
5,054
5,054
Total
$
17,427
$
14,303
$
6,973
$
5,054
$
43,757
(1)
The Company is reporting negative revenue due to an adjustment to prior period revenue.
(2)
Other sales include New Business Initiatives.
(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 during the period due to the COVID-19 global pandemic, as discussed in Note 2.
33
The following tables summarize the Company’s revenues by type and reportable segment for the three and six months ended June 30, 2019 :
Three Months Ended June 30, 2019
Revenue from
Contracts with Customers
Revenue from
Fixed
Consideration
Variable
Consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
13,074
$
849
$
—
$
—
$
13,923
Joint Revenue Sharing Arrangements, fixed fees
—
—
2,548
—
2,548
Other Theater Business
2,580
—
—
—
2,580
Other sales (1)
500
143
—
—
643
Sub-total
16,154
992
2,548
—
19,694
Image enhancement and maintenance services
IMAX DMR
—
39,293
—
—
39,293
IMAX Maintenance
13,207
—
—
—
13,207
Film Post-production
2,326
—
—
—
2,326
Film Distribution
—
1,275
—
—
1,275
Other (1)
561
—
—
561
Sub-total
15,533
41,129
—
—
56,662
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
25,540
—
25,540
Other (1)
—
2
321
—
323
Sub-total
—
2
25,861
—
25,863
Finance income
IMAX Systems
—
—
—
2,578
2,578
Total
$
31,687
$
42,123
$
28,409
$
2,578
$
104,797
34
Six Months Ended June 30, 2019
Revenue from
Contracts with Customers
Revenue from
Fixed
consideration
Variable
consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
21,238
$
3,030
$
—
$
—
$
24,268
Joint Revenue Sharing Arrangements, fixed fees
—
—
5,087
—
5,087
Other Theater Business
4,206
—
—
—
4,206
Other sales (1)
1,188
145
—
—
1,333
Sub-total
26,632
3,175
5,087
—
34,894
Image enhancement and maintenance services
IMAX DMR
—
67,243
—
—
67,243
IMAX Maintenance
26,158
—
—
—
26,158
Film Post-production
4,273
—
—
—
4,273
Film Distribution
—
1,990
—
—
1,990
Other (1)
1,145
—
—
1,145
Sub-total
30,431
70,378
—
—
100,809
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
43,584
—
43,584
Other (1)
—
26
423
—
449
Sub-total
—
26
44,007
—
44,033
Finance income
IMAX Systems
—
—
—
5,259
5,259
Total
$
57,063
$
73,579
$
49,094
$
5,259
$
184,995
(1) Other sales include New Business Initiatives.
(See Note 2 for information on the current impacts and uncertainties relating to the COVID-19 pandemic, which are impacting the Company’s revenues.)
(b) Deferred Revenue
The Company’s IMAX Theater System sale and lease arrangements include a requirement for it to provide maintenance services over the life of the arrangement, subject to a consumer price index adjustment each year. In circumstances where customers prepay the entire term’s maintenance fee, additional payments are due to the Company for the years after its extended warranty and maintenance obligations expire. Payments upon renewal each year are either prepaid or made in arrears and can vary in frequency from monthly to annually. At June 30, 2020, $ 17.2 million of consideration has been deferred in relation to outstanding maintenance services to be provided on existing maintenance contracts (December 31, 2019 — $ 17.7 million). The maintenance revenue is recognized evenly over the contract term which coincides with the maintenance services being provided. In the event of customer default, any payments made by the customer may be retained by the Company.
In instances where the Company receives consideration prior to satisfying its performance obligations, the recognition of revenue is deferred. The majority of the deferred revenue balance relates to payments received by the Company for IMAX Theater Systems where control of the system has not transferred to the customer. The deferred revenue balance related to an individual theater increases as progress payments are made and is then derecognized when control of the system is transferred to the customer. Recognition dates are variable and depend on numerous factors, including some outside of the Company’s control.
(See Note 2 for information on the current impacts of and uncertainties relating to the COVID-19 pandemic which are impacting Company’s revenues .)
35
14. Segment Reporting
The Company’s Chief Executive Officer (“CEO”) is its Chief Operating Decision Maker (“CODM”), as such term is defined under U.S. GAAP. The CODM, along with other members of management, assess segment performance based on segment revenues and gross margins. Selling, general and administrative expenses, research and development costs, the amortization of intangibles, provisions for (recoveries of) current expected credit losses, certain write-downs, interest income, interest expense and tax (expense) benefit are not allocated to the segments.
The Company has the following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements; (iii) IMAX Systems, (iv) IMAX Maintenance; (v) Other Theater Business; (vi) New Business Initiatives; (vii) Film Distribution; and (viii) Film Post-production. The Company organizes its reportable segments into the following four categories, identified by the nature of the product sold or service provided:
(i)
IMAX Technology Network, which earns revenue based on contingent box office receipts and includes the IMAX DMR segment and contingent rent from the Joint Revenue Sharing Arrangement (“JRSA”) segment;
(ii)
IMAX Technology Sales and Maintenance, which includes results from the IMAX Systems, IMAX Maintenance and Other Theater Business segments, as well as fixed revenues from the JRSA segment;
(iii)
New Business Initiatives, which is a segment that includes activities related to the exploration of new lines of business and new initiatives outside of the Company’s core business; and
(iv)
Film Distribution and Post-production, which includes activities related to the licensing of film content, and the distribution of films primarily for the Company’s institutional theater partners (through the Film Distribution segment) and the provision of film post-production and quality control services (through the Film Post-production segment).
The Company is presenting information at a disaggregated level to provide more relevant information to readers.
Transactions between the IMAX DMR segment and the Film Post-production segment are valued at exchange value. Inter-segment profits are eliminated upon consolidation, as well as for the disclosures below.
36
The following table sets forth the breakdown of revenue and (margin loss) gross margin by category for the three months ended June 30, 2020:
Revenue
(Margin Loss) Gross Margin (3)
2020
2019
2020
2019
IMAX Technology Network
IMAX DMR
$
546
$
39,293
$
( 30
)
$
23,961
Joint revenue sharing arrangements, contingent rent (4)
( 137
)
25,540
( 6,501
)
19,318
409
64,833
( 6,531
)
43,279
IMAX Technology Sales and Maintenance
IMAX Systems (1)
4,549
16,501
2,650
8,019
Joint revenue sharing arrangements, fixed fees
369
2,548
48
870
IMAX Maintenance
—
13,207
( 1,908
)
5,640
Other Theater Business (2)(5)
( 309
)
2,580
( 564
)
841
4,609
34,836
226
15,370
New Business Initiatives
632
478
512
281
Film Distribution and Post-production
Film Distribution
2,444
1,275
( 1,541
)
377
Post-production
738
2,326
145
81
3,182
3,601
( 1,396
)
458
8,832
103,748
( 7,189
)
59,388
Other
23
1,049
( 499
)
165
Total
$
8,855
$
104,797
$
( 7,688
)
$
59,553
The following table sets forth the breakdown of revenue and (margin loss) gross margin by category for six months ended June 30, 2020:
Revenue
(Margin Loss) Gross Margin (3)
2020
2019
2020
2019
IMAX Technology Network
IMAX DMR
$
11,175
$
67,243
$
4,413
$
43,736
Joint revenue sharing arrangements, contingent rent
5,834
43,584
( 8,119
)
31,253
17,009
110,827
( 3,706
)
74,989
IMAX Technology Sales and Maintenance
IMAX Systems (1)
10,237
29,527
5,826
15,071
Joint revenue sharing arrangements, fixed fees
1,139
5,087
227
1,165
IMAX Maintenance
7,370
26,158
( 1,149
)
10,921
Other Theater Business (2)
954
4,206
46
1,316
19,700
64,978
4,950
28,473
New Business Initiatives
1,110
1,312
873
900
Film Distribution and Post-production
Film Distribution
3,327
1,990
( 3,699
)
( 333
)
Post-production
2,349
4,273
368
766
5,676
6,263
( 3,331
)
433
Sub-total
43,495
183,380
( 1,214
)
104,795
Other
262
1,615
( 1,388
)
( 102
)
Total
$
43,757
$
184,995
$
( 2,602
)
$
104,693
(1) Includes initial upfront payments and the present value of fixed minimum payments from sales 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.
37
( 2 )
Principally includes after-market sales of IMAX projection system parts and 3D glasses
( 3 )
IMAX DMR gross margin includes marketing cost of $nil and $ 2.4 million for the three and six months ended June 30, 2020, respectively (2019 — $ 9.5 million and $ 13.4 million, respectively). JRSA gross margin includes advertising, marketing and commission expense of less than $ 0.1 million and $ 0.6 million for the three and six months ended June 30, 2020, respectively (2019 —$ 0.2 million and $ 0.3 million, respectively). IMAX Systems gross margin includes marketing and commission costs of $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2020, respectively, (2019 — $ 0.4 million and $ 0.9 million, respectively). Film Distribution segment gross margin includes marketing expense of less than $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively (2019 — less than $ 0.1 million and $ 0.6 million, respectively).
(4)
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 during the period due to the COVID-19 global pandemic, as discussed in Note 2.
(5)
The Company is reporting negative revenue due to an adjustment to prior period revenue.
Geographic Information
Revenue by geographic area is based on the location of the customer. Revenue related to IMAX DMR is presented based upon the geographic location of the theaters that exhibit the remastered films. IMAX DMR revenue is generated through contractual relationships with studios and other third parties and these may not be in the same geographical location as the theater.
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Revenue
United States
$
3,812
$
35,944
$
16,777
$
60,237
Asia (excluding Greater China)
1,868
9,963
7,728
18,753
Greater China
1,393
32,575
6,662
59,256
Russia & the CIS
658
5,619
2,224
7,307
Western Europe
631
11,933
5,188
20,376
Latin America
108
2,160
1,635
4,813
Canada
12
2,620
943
4,492
Rest of the World
373
3,983
2,600
9,761
Total
$
8,855
$
104,797
$
43,757
$
184,995
No single country in the Rest of the World, Western Europe, Latin America and Asia (excluding Greater China) comprises more than 10% of the Company’s total revenue, except for Japan in the three months ended June 30, 2020 .
15. Employee's Pension and Postretirement Benefits
(a)
Defined Benefit Plan
The Company has an unfunded defined benefit supplemental executive retirement plan (the “SERP”) covering Richard L. Gelfond, its CEO. The accounting for the SERP assumes that Mr. Gelfond will receive a lump sum payment of $ 20.3 million six months after retirement at the end of the current term of his employment agreement (December 31, 2022), although Mr. Gelfond has not informed the Company that he intends to retire at that time.
38
As at June 30, 2020 and December 31, 2019 , the Company’s projected benefit obligation and unfunded status related to the SERP are as follows :
June 30,
December 31,
2020
2019
Projected benefit obligation:
Obligation, beginning of period
$
18,840
$
17,977
Prior Service cost
—
456
Interest cost
189
564
Actuarial gain
—
( 157
)
Obligation, end of period and unfunded status
$
19,029
$
18,840
The accumulated benefit obligation for the SERP was $ 19.0 million at June 30, 2020 (December 31, 2019 —$ 18.8 million). For the three and six months ended June 30, 2020, the Company recorded interest costs of $ 0.1 million and $ 0.2 million, respectively, (2019 — $ 0.1 million and $ 0.3 million, respectively) related to the SERP. The Company expects to recognize interest costs of $ 0.2 million related to the SERP during the remainder of 2020. No contributions are expected to be made for the SERP during the remainder of 2020.
(b)
Defined Contribution Pension Plan
The Company also maintains defined contribution plans for its employees, including its executive officers. The Company makes contributions to these plans on behalf of employees in an amount up to 5 % of their base salary subject to certain prescribed maximums. During the three and six months ended June 30, 2020, the Company contributed and recorded expense of $ 0.2 million and $ 0.5 million, respectively, (2019 — $ 0.3 million and $ 0.6 million, respectively) to its Canadian defined contribution plan and $ 0.1 million and $ 0.4 million, respectively, (2019 — $ 0.1 million and $ 0.3 million, respectively) to its defined contribution employee plan under Section 401(k) of the U.S. Internal Revenue Code.
(c)
Postretirement Benefits – Executives
The Company has an unfunded postretirement plan for Mr. Gelfond and Bradley J. Wechsler, Chairman of the Company’s Board of Directors. The plan provides that the Company will maintain health benefits for Messrs. Gelfond and Wechsler until they become eligible for Medicare and, thereafter, the Company will provide Medicare supplement coverage as selected by Messrs. Gelfond and Wechsler. As at June 30, 2020, the Company’s postretirement benefits obligation under this plan is $ 0.6 million (December 31, 2019 — $ 0.7 million). For the three and six months ended June 30, 2020, the Company has recorded expense of less than $ 0.1 million and less than $ 0.1 million, respectively (2019 — less than $ 0.1 million and less than $ 0.1 million, respectively) related to this plan.
(d)
Postretirement Benefits – Canadian Employees
The Company has an unfunded postretirement plan for its Canadian employees meeting specific eligibility requirements. The Company will provide eligible participants, upon retirement, with health and welfare benefits. As at June 30, 2020, the Company’s postretirement benefits obligation under this plan is $ 1.5 million (December 31, 2019 — $ 1.6 million). For the three and six months ended June 30, 2020, the Company has recorded expense of less than $ 0.1 million and $ 0.1 million, respectively (2019 — less than $ 0.1 million and less than $ 0.1 million, respectively) related to this plan.
(e)
Deferred Compensation Benefit Plan
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 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 on the Consolidated Statement of Operations. As at June 30, 2020, the Company had a funded benefit obligation recorded of $ 3.6 million (December 31, 2019 — $ 3.6 million). The Company did no t recognize any additional expenses in the three and six months ended June 30, 2020 and 2019 .
39
1 6 . Financial Instruments
(a)
Cash and Cash Equivalents
The Company maintains cash with various major financial institutions. The Company’s cash is invested with highly rated financial institutions.
(b)
Fair Value Measurements
The carrying values of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due within one year approximate fair values due to the short-term maturity of these instruments. The Company’s other financial instruments are comprised of the following:
As at June 30, 2020
As at December 31, 2019
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
Cash and cash equivalents (1)
$
318,986
$
318,986
$
109,484
$
109,484
Equity securities (3)
13,192
13,192
15,685
15,685
Level 2
Net financed sales receivables (2)
$
108,081
$
108,430
$
112,432
$
111,441
Net investment in sales-type leases (2)
15,784
15,516
15,606
15,309
Convertible loan receivable (2)
—
—
1,500
1,500
Equity securities (1)
1,000
1,000
1,000
1,000
Foreign exchange contracts — designated forwards (3)
( 318
)
( 318
)
530
530
Foreign exchange contracts — non-designated forwards (3)
27
27
—
—
Bank indebtedness - under the Working Capital Facility (1)
( 244
)
( 244
)
—
—
Bank indebtedness - under the Credit Facility (1)
( 300,000
)
( 300,000
)
( 20,000
)
( 20,000
)
(1)
Recorded at cost, which approximates fair value.
(2)
Estimated based on discounting future cash flows at currently available interest rates with comparable terms.
(3)
Value determined using quoted prices in active markets.
When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. There were no significant transfers in or out of the Company’s Level 3 assets during the three and six months ended June 30, 2020 and 2019.
(c)
Foreign Exchange Risk Management
The Company is exposed to market risk from changes in foreign currency rates. A majority of the Company’s revenues is denominated in U.S. dollars while a substantial portion of its costs and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the Company is periodically converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In China and Japan, the Company has ongoing operating expenses related to its operations in Chinese Renminbi and Japanese yen, respectively. Net cash flows are converted to and from U.S. dollars through the spot market. The Company also has cash receipts under leases denominated in Chinese Renminbi, Japanese yen, Canadian dollars and Euros which are converted to U.S. dollars through the spot market. In addition, because IMAX films generate box office in 81 different countries, unfavourable exchange rates between applicable local currencies and the U.S. dollar affect the Company’s reported gross box-office and revenues, further impacting the Company’s results of operations. The Company’s policy is to not use any financial instruments for trading or other speculative purposes.
The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. Certain of these foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of the FASB ASC at inception, and continue to meet hedge effectiveness tests at June 30, 2020 (the “Foreign Currency Hedges”), with settlement dates throughout 2020 and 2021 . Foreign currency derivatives are recognized and measured in the Condensed Consolidated Balance Sheets 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
40
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 O ther C omprehensive I ncome and reclassified to the C ondensed C onsolidated St atements of O perations 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 O ther C omprehensive I ncome and reclassified to Inventories in the Condensed Consolidated B alance S heet s when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the Condensed C onsolidated S tatement of O perations.
On April 28, 2020, the FASB staff issued a question-and-answer document (Q&A) to respond to frequently asked questions about the disruptive effects of COVID-19 on cash flow hedge accounting. FASB Accounting Standards Codification Topic 815, Derivative and Hedging, provides guidance on when to discontinue cash flow hedge accounting and when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings. The Q&A document addresses how the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic should be considered when applying cash flow hedge accounting under Topic 815. The Company has considered the Q&A document when applying cash hedge flow accounting under Topic 815. The guidance did not have a material impact to the Company’s Condensed Consolidated Financial Statements.
The following tabular disclosures reflect the impact that derivative instruments and hedging activities have on the Company’s Condensed Consolidated Financial Statements:
Notional value of foreign exchange contracts:
June 30,
December 31,
2020
2019
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards
$
32,437
36,052
Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards
3,584
—
$
36,021
$
36,052
Fair value of derivatives in foreign exchange contracts:
June 30,
December 31,
Balance Sheet Location
2020
2019
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards
Other assets
$
245
$
602
Accrued and other liabilities
( 563
)
( 72
)
Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards
Other assets
57
—
Accrued and other liabilities
( 30
)
—
$
( 291
)
$
530
41
Derivatives in Foreign Currency Hedging relationships are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Foreign exchange contracts
Derivative Gain (Loss)
— Forwards
Recognized in OCI
(Effective Portion)
$
1,334
$
297
$
( 1,526
)
$
365
Location of Derivative Loss
Reclassified from AOCI
Three Months Ended June 30,
Six months ended June 30,
(Effective Portion)
2020
2019
2020
2019
Foreign exchange contracts
Selling, general and
— Forwards
administrative expenses
$
( 328
)
$
( 355
)
$
( 669
)
( 661
)
Property, plant and equipment
—
( 19
)
—
( 32
)
Inventory
( 9
)
—
$
( 26
)
—
$
( 337
)
$
( 374
)
$
( 695
)
$
( 693
)
Three Months Ended June 30,
Six months ended June 30,
2020
2019
2020
2019
Foreign exchange contracts
Derivative Gain (Loss) Recognized In
— Forwards
and Out of OCI
$
—
$
2
$
( 88
)
$
2
Non Designated Derivatives in Foreign Currency relationships are as follows:
Three Months Ended June 30,
Six months ended June 30,
Location of Derivative Gain
2020
2019
2020
2019
Foreign exchange contracts
Selling, general and
— Forwards
administrative expenses
$
27
$
—
$
27
—
$
27
$
—
$
27
$
—
The Company's estimated net amount of the existing losses as at June 30, 2020 is $ 0.4 million, which is expected to be reclassified to earnings within the next twelve months.
(d)
Investments in Equity Securities
As at June 30, 2020, the Condensed Consolidated Balance Sheets includes $ 13.2 million (December 31, 2019 — $ 15.7 million) of investments in equity securities.
On January 17, 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, as an investor entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) (as the issuer) and Morgan Stanley Asia Limited (as a sponsor, underwriter and the underwriters’ representative). Pursuant to this agreement, IMAX China (Hong Kong), Limited agreed to invest $ 15.2 million to subscribe for a certain number of shares of Maoyan at the final offer price pursuant to the global offering of the share capital of Maoyan, and this investment would be subject to a lock-up period of six months following the date of the global offering. On February 4, 2019, Maoyan completed its global offering, upon which, IMAX China (Hong Kong), Limited became a less than 1 % shareholder in Maoyan. This investment is classified as an equity security, with a readily determinable market value through the Hong Kong Stock Exchange. The changes in fair value are recorded in gain (loss) in fair value of equity investment line item in the Company’s Condensed Consolidated Statement of Operations. As at June 30, 2020, the value of the Company’s investment in Maoyan was $ 12.1 million (December 31, 2019 — $ 14.6 million). For the three and six months ended June 30, 2020, the Company has recorded a net unrealized gain of $ 2.0 million and loss of $ 2.5 million, respectively ( 2019— loss of $ 4.5 million and $ 2.1 million, respectively).
The Company has an investment of $ 1.1 million (December 31, 2019 — $ 1.0 million) in the shares of an exchange traded fund. This investment is classified as an equity investment.
42
As at June 30, 2020 , the Company held investments in the preferred shares of enterprises which meet the criteria for classification as an equity security under FASB ASC 325, carried at historical cost, net of impairment charges. The carrying value of these equity security investments was $ 1.0 million at June 30, 2020 ( December 31, 2019 — $ 1.0 million ) and is recorded in Other Assets.
17. Non-Controlling Interests
(a)
IMAX China Non-Controlling Interest
The Company indirectly owns approximately 69.81 % of IMAX China Holding, Inc. (“IMAX China”), whose shares trade on the Hong Kong Stock Exchange. IMAX China is a consolidated subsidiary of the Company. The balance of the non-controlling interest in IMAX China as at June 30, 2020 is $ 74.7 million. The net loss attributable to the non-controlling interest in IMAX China for the three and six months ended June 30, 2020 is $ 2.8 million and $ 12.5 million, respectively (2019 — net income of $ 2.7 million and $ 7.0 million, respectively).
(b)
Other Non-Controlling Interest
The Company’s Original Film Fund was established in 2014 to co-finance a portfolio of 10 original large-format films. The initial investment in the Original Film Fund was committed by a third party in the amount of $ 25.0 million, with the possibility of contributing additional funds. The Company has contributed $ 9.0 million to the Original Film Fund since 2014 and has reached its maximum contribution. As at June 30, 2020, the Original Film Fund has invested $ 22.3 million toward the development of original films. The related production, financing and distribution agreement includes put and call rights relating to change of control of the rights, title and interest in the co-financed pictures.
The following table summarizes the movement of the non-controlling interest in temporary equity, in the Company’s subsidiary for the six months ended June 30, 2020:
Balance as at December 31, 2019
$
5,908
Net loss
( 1,671
)
Balance as at June 30, 2020
$
4,237
18. Exit costs, restructuring charges and associated impairments
In 2018, the Company performed a strategic review of its business and decided to exit from certain non-core businesses or initiatives, which included closing its VR locations. In addition, as part of management’s efforts to decrease costs, the Company reduced certain functions and realigned resources. During the six months ended June 30, 2019, the Company recognized charges of $ 0.9 million associated with these actions in its Condensed Consolidated Statements of Operations, consisting of restructuring charges and costs to exit leases. Restructuring charges relate to the Company’s corporate unit and are comprised of employee severance costs including benefits and share-based compensation, costs of consolidating facilities and contract termination costs.
43
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.